Market expected brickbats; the FM gave bouquets

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Every Budget has to be assessed in its context. A Covid-struck economy staging a V-shaped recovery needed a bold and imaginative Budget to keep the recovery going. FM Nirmala Sitaraman delivered precisely such a Budget and even went beyond expectations by initiating privatization in right earnest. The proposal to privatize two nationalized banks and one general insurance company is a clear message that privatization is on top of the Government’s agenda. Raising the FDI limit in insurance from 49 percent to 74 percent is a step in the right direction. The proposed Asset Reconstruction and Management Company, the so-called Bad Bank, will help clean up the banks’ balance sheets. India’s financial sector is headed for much better times.

Sustainable growth with social justice

The budget crafted on six pillars — health and wellbeing, infrastructure, inclusive development, human capital, innovation and R&D, and maximum governance — is a visionary document for sustainable growth with social justice. It learns from the global experience that growth is delivered by the animal spirits of entrepreneurs in a vibrant market economy and that growth is the best anti-poverty program. The strategy of public action for inclusive growth continues.

No news is good news

The 5 percent thumps up given by the Sensex to the budget stems from the conspicuous absence of new tax proposals and the reform-growth-orientation of the budget. There were rumours that the government may consider raising more money through STT and LTCG since the stock market gained from the pandemic. Whispers on higher tax on the affluent and a wealth tax were doing the rounds. But the government did the right thing in rejecting this thought process and decided to focus, instead, on raising money from the buoyant stock market through disinvestment and privatization. The disinvestment target of Rs 175000 crores can be comfortably achieved in this bullish market. The challenge, however, is in implementation.

Debt financing is a concern

Even though absence of new tax proposals is a big relief, there is a concern on huge reliance on financing the expenditure through borrowing. The fiscal deficit at 9.5 percent of GDP for FY2021 has come worse than expected and the FD target for FY 22 at 6.8 percent is on the higher side. But, it is to be appreciated that this is a transparent fiscal deficit that includes the off-budget borrowings of entities like the FCI. Also, it is a relief that Rs 5.54 lakh crores of the proposed expenditure is capital expenditure. Bond yields are likely to rise, going forward.

The proposal to launch a single Securities Market Code, encompassing the SEBI Act, 1992, Depositories Act, 1996, Securities Contracts (Regulation) Act, 1956, and The Government Securities Act, 2007 has the potential to simplify regulation and make it more investor-friendly. But, details are awaited.

Investment Strategy

The present global liquidity construct and the historically low interest rate regime support the ongoing bull market. So, investors are advised to remain invested, particularly in sectors like private sector banking, (public sector banking stocks will give trading opportunities) IT, pharma, automobiles, infra and segments of FMCG. Continue with SIPs. It is also important to remember the fact that valuations are high and some presently unknown factors may cause sharp corrections in the market.

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