Budget 2022 | India has embarked on a ‘Golden Decade’ of high investment, consumption, growth

Rahul Saraf

The year 2021 saw more than 50 percent jump in deal volumes, aggregate deal value, and fees for investment banking in India. A whopping $77 billion FDI inflows were an all-time high, and about 1,000 deals were closed in the VC-PE space. Public equity markets saw a record capital raise of $37 billion, and international bond markets, an additional $21 billion. With significant domestic consolidation, the highest ever M&A volumes were recorded at $105 billion, and accelerated strengthening of the startup and digital ecosystem with 43 new unicorns created — last year was the most eventful for the street in over a decade.

Supported by GDP growth, favourable demographic inflection, and consistency of government policy, India has embarked upon a ‘Golden Decade’ journey of high investment, consumption, and growth.

The Finance Bill 2022 is a firm step forward in this journey, giving India and India Inc. continued direction. Besides building higher private sector and investor confidence, creating a conducive climate for sustained capital expenditure, it also fosters increased entrepreneurship. Bottom-up growth incentives are expected to create more jobs, and more demand over time. Given the quantum of investment required, public spending will increase significantly, albeit in the medium term. However, this is hopefully only to give a big kick start to the cycle, after which the private sector is expected to take the lead.

The year 2022 has begun with volatile public markets; major global markets are witnessing a sell-off amidst concerns of rising interest rates and geopolitical instability. Indian markets have held up relatively well in spite of foreign portfolio Investors sell-off ($2.2 billion in January alone), showcasing the strength of both growing domestic flows and high growth prospects. Public equity markets are expected to remain conducive to higher-quality companies (over $12 billion in IPOs are lined up over the next four months). The key to a successful year will be to remain in the position of preparedness, i.e., to tap into favourable debt or equity markets (public or private) at short notice.

Budget 2022 may not have had any ‘tadka’ note, but was very focused on responsible capital expenditure (infrastructure and manufacturing). It also stayed the course by continuing to embrace progressive new-age businesses especially within agri-tech, health-tech, ed-tech, electrification, and clean energy. These sectors should see large capital investments, funded by large corporates as well as startups, which will be further invigorated by significant private capital raises.

With larger G-Sec issuances by the government to meet the fiscal deficit, interest rates are likely to harden but that should not deter India Inc.’s plans, as long as there is enough liquidity in the system. There could be near-term impact on the pricing of InVits, which is extremely important to support multi-year investment in infrastructure. Impact on REITs may be neutral as leasing and rental growth likely to come back strongly as pandemic recedes.

The government’s focus on higher capital expenditure and providing manufacturing impetus (via production linked incentives, industrial parks, simplifying registrations) should provide direct benefit to industrials, and corporate bank credit growth — which in turn should allow for increased access to both private and public capital markets by corporates/ banks/NBFCs. Companies will also actively review their capital structure. Besides equity, they will look to raise longer tenure debt, access bond markets, reduce overall leverage, and flirt with equity-linked trades.

By underscoring the importance of our own digital currency, and 5G ecosystems, the Budget ensures that the digital economy remains centre stage. Digital efficiencies will continue to foster innovation and entrepreneurship, and fuel an even larger volume of private placement this year. This is notwithstanding the recent meltdown in public market valuations of digital companies, which must be seen in the context of strong valuation and business growth over the last couple of years, and not just over the past six months.

The disinvestment budget is not as aggressive as the previous Finance Bill. After the Air India sale and proposed LIC IPO, the focus this year is likely to be on the National Monetisation Pipeline. The NHAI and the PGCIL have created successful precedents here through InVit issuances.

There are areas that still need to be addressed: one, clarity on international direct listing; two, on the national hydrogen policy; three, on a framework for India-listed SPACs; and four, on tax structure amendments for inclusion of Indian bonds in the global index. I am sure the government is giving due consideration to these and we may see some announcements in due course.

Aided by the Finance Bill, I expect deal activity being more broad-based than just digital, to include EV, mobility, healthcare, logistics, and new energy themes. On M&A, Corporate India has a healthier balance sheet and higher confidence level supported by the Budget, and should continue to drive local sector consolidations.

With such promising domestic growth potential, I expect outbound M&A activity to be mostly limited to the acquisition of technology, or specific capabilities/resources. Global corporations will calibrate their India entry/consolidation, and some may even exit, depending upon their HQ and stakeholder priorities.

The exposure to global market vagaries, geopolitical events, a continuing pandemic, and volatile valuations could lead to bumps along the way.

Overall, Budget 2022 is focused and transparent with the government staying the course. I expect 2022 to be a busy year, with consolidation, and thoughtful deal-making.

Rahul Saraf, Head Of Investment Banking, Citi India. Views are personal, and do not represent the stand of this publication.