Union Budget 2022 and Impact on Capital Markets

Budget 2022 may not have been a Big Bang budget for the capital markets like some of the budgets in the past. However, if you go by the market reaction to the budget, it indicated optimism and positivity. The Nifty and Sensex had gained over 1.5% in early trades. However, post the budget, it lost most of the gains after a sharp spike in bond yields. Towards the end of the day, markets reconciled to the fact that this could be a structural budget story.

Was it really a structural market rally triggering budget?

It is hard to classify the budget with any particular nomenclature at this point of time. However, it is more than just being a typical George Bernard Shaw budget that attempts to equate the earning capacity and the yearning capacity. On the other hand, the Budget 2022 has partially been an economist’s budget and partially a philosopher’s budget. Which it looks as the first step towards triggering secular growth in the economy and markets.

Let us leave aside the markets for some time and just look at some of the underlying themes of the budget. Firstly, there is a big focus on reigning in the fiscal deficit even if it means taking unpopular steps like cutting subsidies. Secondly, this is a true-blue Make in India budget with intense focus on domestic manufacture of defence equipment, solar equipment, digital products etc.

Thirdly, the government has subtly shifted the pattern of its spending form too much of revenue spending to a lot of capital spending. This is likely to be long term accretive. Above all, it has taken care of the MSME segment, which is the backbone of exports and jobs.

A structural reduction in fiscal deficit

Fiscal deficit for FY22 may have scaled higher by 10 bps to 6.9% but that was more due to the shortfall in disinvestment receipts. However, fiscal deficit for FY23 has been scaled down to 6.4% even with negligible contribution from disinvestments.

There are two things that are happening. Government is willing to cut down on too much of subsidies and doles with the pandemic now done and dusted. Secondly, more of the outlays are going to be capital expenditure in nature with the onus on states. Structural reduction in fiscal deficit is always a positive as it induces foreign portfolio investors to commit investments to India.

MSME Focus + Make in India is a potent combination

The MSME segment accounts for a bulk of the jobs creation and export generation in India. One thing the budget has done to ease the life of MSME is to extend the emergency credit line guarantee scheme (ECLGS) by one more year to March 2023. Out of the Rs.5 trillion allocation under ECLGS, the additional Rs.50,000 crore will be for hospitality sector with positive implications for the services sector. 

In addition, the Budget 2022 has earmarked 68% of Defence capex for domestic procurement against 58% last year. That is a 10 bps increase. The Defence R&D will also be opened up to start-ups, private sector and academia with 25% of R&D budgets set aside. This is likely to be a big boost to domestic defence stocks as the private sector also gets incentives to take up design and development of military platforms.

Less disinvestments, less crowding out of IPOs

The bad news is that the disinvestments are likely to be tepid in the coming year. For instance, the government projected disinvestment of Rs.78,000 crore for FY22 against the original target of Rs.175,000 crore. It has also projected a small Rs.65,000 crore for FY23. We are either looking at a much smaller LIC IPO in this year or at a lower valuation.

The FY23 divestment target is going to be dominated by BPCL. Otherwise, disinvestments would be largely tepid in FY23. The good news is that there will be less of crowding out risk by the mega PSU issues. Hopefully, that should come as a boost to the mega private IPOs planned.

Which stocks got impacted on Budget day?

Here is a quick take on some of the budget-relevant stocks. Defence stocks gained 5% after the budgeted to increase local sourcing. The Union Budget has set aside 68% of Defence capex for local manufacturers, which opens up a huge vista for players like MTAR, Paras Defence, L&T, M&M, Bharat Forge etc.

Not surprisingly, sugar stocks rallied after the budget proposed additional excise duty of Rs.2 per litre on unblended fuel. This is likely to encourage ethanol blending of fuel and will be positive for sugar companies. More so for sugar companies with aggressive capacity expansion plans in ethanol.

Metal stocks also gained on two fronts. Firstly, the big infrastructure investment helped. Secondly, the aggressive water scheme for 3.8 crore households is also a boost for metal stocks as it leads to a surge in demand for pipes.

PSU banks were disappointed but it was stock markets all the way on Budget day.