Budget 2022: What Top Brokerages Made Of Nirmala Sitharaman’s Proposals

Finance Minister Nirmala Sitharaman increased capex spending target by 35% for FY23 even as allocations to schemes like rural jobs guarantee and subsidies have been reduced. And the Budget 2022 pegged the fiscal deficit for the next fiscal at 6.4%, while factoring in higher-than-expected borrowings. The minister didn’t propose any changes in personal income tax rates.

Here’s what analysts have to say about the Budget 2022...

• A modest rise in infra capex; thrust on digitalization; infra allocation for core segments (except rail, Jal Shakti, renewables, and affordable housing) is modest.

• The conventional approach of adding gross budgetary support and internal and external budgetary resources does not lead to the appropriate trends to assess the potential for public capex.

• Post around 36% year-on-year growth in infra spends for FY22 (RE), the FY23 (BE) increase is relatively modest at around 10%. Views the development as positive for engineering, procurement and construction names like KEC Ltd. Larsen & Toubro Ltd. and VA Tech Wabag Ltd.

• The modest increase of 1% in allocation for roads is disappointing despite the thrust on expressway construction in the budget speech. The development is particularly disappointing for companies like PNC Infratech Ltd., Dilip Buildcon Ltd., and KNR Construction Ltd.

• The thrust on indigenization in which 65% is reserved for domestic companies, will likely be beneficial for Larsen & Toubro Ltd., in its view.

• The inclusion of data centres, green energy battery storage under the infrastructure list is a positive, along with 5G rollout for digitalization plays. Providing infra status to these activities, along with battery storage and also PLI for design-led manufacturing, places digitalization names like Siemens, Honeywell, and ABB.

• Nomura’s thesis has been that the 5G rollout should enable the spread of industrial edge computing and the proliferation of data centres.

• Increased focus on renewables requires smart grid solutions, which should benefit Siemens in particular, on complete offerings in the space.

• Large capex, large borrowing, implementation key.

• The central government announced a higher-than-expected fiscal deficit for FY22 and FY23.

• The focus of the budget is largely on capex, including funds for state capex, and the spending targets look achievable

• The states will once again be allowed to run a higher-than-normal fiscal deficit of 4% of GDP in FY23, of which 0.5% will be conditional on power sector reforms. Our estimates suggest that on aggregate, the states have been well under this limit in FY22.

• The FY23 gross market borrowing could be lower than the Rs 15 lakh crore estimated in the budget, led by a lower repayment bill, and a lower-than-expected fiscal deficit in FY22, and more carry-over of cash to FY23.

• Though lower than budgeted, the overall borrowing will still likely be elevated, leading to bond market pressure.

• The capex number, although high, is doable, once the Air India sundry expenses is removed.

• Tax revenue may come in higher than budgeted. Tax revenues have grown 44% year-on-year in the first three quarters of the year. A 15% contraction in Q4 seems unlikely despite the Omicron wave slowing activity.

• The fall in tax buoyancy from 1.4 in FY22 to 0.9 in FY23 is reasonable as lower oil taxes for the full year kick in. At Rs 65,000 crore, privatization receipts are lower than what markets were expecting but reasonable.

• The capex is meant to rise by a large 0.4% of GDP in FY23. Normally this would have been a rather large increase for the central government to implement, but this time a bulk of it will be funds made available to states in the form of interest-free loans. As such the increase seems possible to get done.

• The nominal GDP growth assumption of 11.1% is lower than our estimate of 12.3%. A higher-than-budgeted nominal GDP number could statistically push the fiscal deficit ratio lower.

• Much fiscal space to spend, but productive and efficient spending needs time. There is room to spend, with tax to GDP 1% higher, market fiscal deficit expectations 3 percentage points higher.

• With higher interest costs and GDP 5-10% below pre-pandemic path boost expenditure to GDP by 1.5 percentage points, the government is using this to clear arrears and move off-budget spending to on-budget. The rest accruing as cash. Using some of these resources to spur state spending is a good idea, but execution a bigger issue for states.

• The budget’s fiscal arithmetic appears overly conservative. As expected, tax to GDP expected to fall in FY23, but even the implied Q4 taxes for FY22RE are too low.

• Expenditure growth for Q4 FY22 also looks ambitious; some revenue spending is just transfers and can happen. Large part of capex growth and interest free loan to states and off-budget spending brought in; adjusted capex growth is only about 12%.

• Continues to prefer domestic cyclicals to global cyclicals.

• Government still struggling to spend in FY22, and this challenge should persist in FY23. The 2.5% of GDP (and rising) government cash with the RBI are funds already paid for (higher yields), and a stimulus if eventually spent; the other option is the government having to cut borrowing targets, lowering yields.

• Government focus remains on productive spending and appears to be unwilling to raise subsidies.

• The budget is preparing the ground for a virtuous circle of faster growth and lower deficits.

• “Do no harm” budget was aimed at accelerating capex-led growth without rocking the boat, which is currently cruising along smoothly.

• Given the strong revenue performance this year, we expect the final outcome to be a deficit of only 5.5% of GDP in FY22, providing a much better platform for FY23 as well. 

• Robust public investment will indeed crowd-in more private investment, setting off an investment-led and export-supported virtuous circle.

• Raises real GDP growth forecast for FY23 to 9%, with the near-total vaccination of the adult population reducing disruptions to the economy next year.

• The fiscal deficit in FY23 will likely shrink to 5% of GDP, and the consequently much lower-than-expected government borrowing requirement will spur the acceleration of private investment by allowing bond yields to remain lower than they otherwise would be amid rising policy rates.

• Budget has carried forward the growth momentum by increased capital expenditure while maintaining financial prudence.

• There is focus on infra development, digital and emerging technologies to propel equitable growth.

• Actual allocation including off-budget support has been increased in Infra, but a lot of emphasis is on getting resources through infra divestment and PPP mode across segments and 6x increase in funding to states under 50 year zero interest bonds.

• No changes in taxes on individuals has come as a disappointment in view of high inflation, so there is no direct push to consumption in the budget.

• It is a growth-oriented and bold budget given a not-so-conducive environment with rising crude prices, global inflation, geopolitical uncertainty, supply chain disruptions and hawkish stance of federal reserve.

• Such an environment can increase inflation and pressurize currency even as the government is targeting growth by playing on the front foot.

• 2022 will be a stock pickers market and easy money making is over.

• Budget attempts to strike an equilibrium between immunizing the economy’s recovery momentum in the aftermath of the pandemic-led slowdown and avoiding excessive deviation from the fiscal consolidation path.

• Integrating transportation modes, smoothening of supply-chain management and infrastructure development should provide a good boost to long-term growth.

• An increase in the capital expenditure outlay and spending proposition indicates a good quality of spending, a key positive for enhancing productivity and investment.

• SEZ reforms could encourage ease of doing business and promote investments.

• Not enough efforts have been taken to stimulate demand which seems to be faltering.

• Various factors that play on demand have been completely given a pass.

• Steps to support household capex through tax incentives among other measures in the housing sector could have encouraged both the construction and housing infrastructure as well as ancillary sectors.

• Not enough steps have been taken to encourage smaller firms and corporates to access the credit markets beyond the banking system.

• No structural measures have been announced to deepen debt markets and improve access to risk capital.

• Disinvestment targets stand lower, and with less tax buoyancy built-in, this hints at potential pressure on market borrowing.

• Stake sale of Life Insurance Corporation of India is likely to be critical for the government.