If we could draw a parallel between Finance Minister Nirmala Sitharaman’s Budget speech and the Indian team’s recent bravado during its historic victory against Australia last month, it is this: The government first took the blows—through the pandemic—like Cheteshwar Pujara did Down Under and then stormed towards growth and success in a Rishabh Pant-type of innings.
Investors have cheered the FY22 Budget in no emphatic manner. The Sensex index closed up by five percent or 2,314 points at 48,600, breaking six consecutive days of a fall.
The fall in recent days was reflective of not just profit taking. There was a tangible concern that the government could spring some nasty surprises through the Budget, in the form of a pandemic cess or even further tweaking in capital gains tax. None of that came.
Further with the benchmark indices having fallen nearly 8 percent in just six trading days meant that the bounce back was also fast and furious. The strongest cheer came in the form of the fact that the government is emphatically starting to talk about growth.
“The government has taken everyone by surprise. It has indicated a loosening of purses and going for expansion. There is a very clear thrust towards growth,” says Ashish Gumashta, managing director and CEO of Julius Baer India.
There was almost no let-up in the investor buying through the day. What started with a near-400 points opening push for indices quickly continued to improve as Sitharaman spoke about the capex push for the infrastructure sector, a Bad Bank to address poor asset quality, FDI hike in insurance and the increase in India’s health care budget. Halfway through her speech, the markets were up by nearly 800 points as she outlined an aggressive disinvestment programme.
Towards the end of the speech, there was no let off and no increase in direct taxes for individuals meant that there would be less pressure on individuals whose jobs and income had taken a beating in 2020 due to the pandemic-induced lockdowns.
"Hats off to the finance minister for sticking to her promise of a Budget that will be remembered for 100 years. A Budget with no changes in direct taxes will certainly be remembered for years to come,” says Krishna Kumar Karwa, managing director of Emkay Global Financial Services.
“Equity market will be enthused with no tinkering in capital gains taxes or securities transaction tax (STT) or any form of Covid tax. The proposals to privatise two public sector banks and one general insurance company are noteworthy as is the increase in FDI limit in insurance,” he adds.
The much-awaited proposal to set up a development financial institution (DFI) should boost capex in the coming years. Karwa says the revival in the economy seen in the last four to five months will be further enhanced with these Budget proposals.
As with all previous governments, the key will be execution of these announcements, particularly the disinvestment programme and quick monetisation of operating infrastructure assets. The positioning of the Reserve Bank of India will need to be watched in the coming days, with the monetary policy committee scheduled to meet this week. The concern over inflation will start to grow for the central bank.
In the interim, one can hope that global concerns over the pandemic and its economic impact lessen in the coming days. The government’s actions will mean that investor interest will be renewed in old-world manufacturing, power and cyclical commodity-based corporates. The market is fairly priced, Gumashta says, so there may not be too much upside from here in the very short term. This will start to change as some of the medium-to-long-term reforms relating to the Bad Bank and privatisation of banks start to kick in.