Is the post-Budget market rally sustainable?

In December 2020, as many brokerages came out with fresh targets of 50,000 and 55,000 for the S&P BSE Sensex, we had highlighted the gaps in economic growth and the corporate earnings revival needed to get to that Sensex level.

Nevertheless, come January 2021, the Sensex did push its way to a 50,000 peak before beginning to pull back by falling close to 10 percent in a matter of days. On February 1, an unexpectedly simple, transparent and growth-focused budget pushed stock prices up sharply. The benchmark indices rallied as much as 5 percent in a single day as a reaction to the Budget announcements. This happened despite the worsening macro footprint for FY21 and a larger-than-expected fiscal deficit estimate for FY22.

The equity market rally did seem to be hope fueled in the absence of any concrete evidence towards infrastructure spending, capital allocation and capacity utilization. This changes if the Budget proposals are executed as laid out. The capital expenditure budget estimate by the Government for FY22, at Rs 5.54 lakh crore, is 26 percent higher than the real expenditure made so far in FY21. This points to a boost in capital spending by the Government and is being done without raising direct taxes on citizens.

The much talked about and needed fiscal push for growth has come in Budget 2021 and that too without strings attached.

The Budget set out to propose raising resources for such expenditure through much needed reforms such as privatization of banks and even a listing of the country’s large life insurance company, LIC. Government borrowings are also set to increase; but if a bulk of it remains within the domestic market, then there is little impact on the currency and this can help keep macro fundamentals in place.

Also, small changes such as taxing interest for EPF contributions above Rs 2.5 lakhs will also aid Government finances.

More than the numbers, the signaling was clear and focused on reviving growth. The assumption is that all these actions will get implemented in continued low interest rate cycle and thus aid corporate profitability and also consumption.

All these put together now change the outlook for India’s GDP growth, making it more visible and sustainable – fueling stock market gains for FY 22 and for the current calendar year.

Brace yourselves for further upgrades in Sensex and Nifty targets for 2021.

There is no progress or success achieved without risks. One outright risk is the reoccurrence of high infection rate relating to COVID-19 in India. The Indian population has so far managed this health crisis well and the infection statistics show high recovery rate and relatively low fatality. With the availability of the vaccine, things are looking even more promising.

However, given the severity of the COVID’s reoccurrence in Europe and the US, one can’t get too complacent and rule out a similar fate for our country too. It is a risk that remains, however thin the chances may be.

Next, there is always a risk that execution of the budget proposals doesn’t materialize as expected. There is a sense of urgency for economic revival and unless this translates into quick action on infrastructure spending led growth, we can fall short of expectations too.

There is also the imminent threat of hyperinflation given the focus on spending and consumption, while presumably leaving interest rates low.

The threat of agitations and political unrest, resulting in business disruptions, cannot be entirely ruled out.

Overall, the ride is set to change if execution is achieved. The intent has been made clear and stock markets as usual are flying high on the expectation of perfect execution. For the moment, you have to ride this flight because even if some of the budgeted expenditure does come through in the manner presented, we are likely to see a trickle down in benefit to individual workers and corporate contractors alike. Eventually, a boost to income on all fronts is the expectation and that can drive consumption, leading to a virtuous cycle that will hopefully lead to sustained economic growth at faster pace. This is precisely what the stock market is cheering.