BUDGET 2021 To Focus On Growth

BUDGET 2021 To Focus On Growth

The Union Budget is one of the biggest events for the stock market every year. Investors keenly look forward to the announcements made by the finance minister to understand which sectors are being prioritized by the government. Active investors can make tactical portfolio allocation keeping in mind the budget announcements and often investors profit from the pre-budget rally. But do markets always inch higher before the budget and do markets provide extraordinary returns postbudget? What is the market telling you right now? Yogesh Supekar highlights how the markets have performed pre and post-budget over the past decade even as Geyatee Deshpande highlights which sector stocks have shown a tendency to do well around the budget

The budget session starts on January 29 and the announcements will be done on February 1. The sessions will be keenly watched by investors since the related announcements would help understand which sector gets how much support and growth impetus from the government. The Union Budget is one of the most important events for the markets and the budget this year may set the tone for the markets in 2021. It is already touted as ‘budget of the century’ by the finance minister herself. The fact is that it is going to be one of the most difficult budgets, coming in the wake of the pandemic that has hit the economy hard. Almost all of the sectors have some expectations from the finance minister. Some sectors want the GST laws to be less draconian; the MSME has demanded that the limit of the collateral-free loans be extended; the steel sector wants that the custom duty be relaxed on select products that are used as raw material; the housing sector definitely would like to see some tax sops in order to boost demand; the NRIs are expecting some tax sops from the government; and so on. Meanwhile, the wish list of common man is not short as well when it comes to expectations from the budget. 

Praveer Sinha
CEO and MD, Tata Power

"The unit cost of solar power recorded a new low in 2020. While this is good news for mainstreaming clean energy in India, there is a lot of catching up to do on the generation or supply side. One of the key focus areas of this budget for the power sector can be to provide mid to long-term fiscal incentives to expand our manufacturing base and push harder for more local manufacturing of solar panels and other components that are today dominated by imports. The pandemic has pushed us back on new projects. India installed only 1.73 GW of new solar capacity over nine months to September 2020 or around 68 per cent less than the 5.84 GW installed in the same period in 2019. So, if we are to achieve the 175 GW of renewable energy capacity over the next two years (from around 90 GW now), we have a lot of catching up to do. Doubling renewable energy should be the broad theme in the upcoming budget for the power sector.”

Expectations From The Budget 2021

Prasanna Rao
Co-Founder & CEO, Arya

"With the passage of the three farm bills in FY2020, the focus of the Govt has to be on the development of Agriculture Infrastructure which is critical for successful take-off of these marketing reforms. We hope for: (A) Inclusion of Onlending by Banks to Agri Fintech Startup NBFCs under PSL for all categories of loans otherwise classified as agriculture in PSL, (B) Subsidies and benefits under Agri Infrastructure Fund and other government schemes to be extended to setting up of flexible and in-demand storage solutions including Hermetic Storage solutions and (C) Agri-NBFCs to be allowed borrowing through the ECB route”

Vinay Khattar
Head, Edelweiss Professional Investor Research 

'The post-pandemic budget will be a special one due to unprecedented slippage on the fiscal front. We expect FY21 fiscal deficit to be upwards of 7 per cent. It will be interesting to watch the path that the finance minister would choose for FY22 and beyond. While expectation of support to stressed sectors and rural economy remains intact, overall FY22 expenditure growth is unlikely to beat long-term average of 13 per cent by a significant margin. With the finance minister already indicating that “100 years of India wouldn’t have seen a budget being made post-pandemic like this”, we feel that unless there are some radical reforms and big-bang announcements to help India bounce back from the recession, the market may not be enthused.

We expect some consolidation in the recent rally post-budget. We also believe that post the recent farmers’ agitation the Union Budget 2021 would see an increased focus on agriculture and related sectors so that the stance of the government being pro-farmer is made loud and clear. Apart from the Union Budget, developments in the power transition in the US to Joe Biden will be critical to watch at. The month before the budget is known to see an increased volatility with IVs being about 20 per cent on an average ahead of the budget. Thus, we advise traders to remain long on volatility in the run-up to the budget. Stock-specific moves will be dictated by the ongoing earnings’ season. The right strategy will be to focus on earnings and trade stocks which positively surprise on expectations.”

Sagar S Kaigaonkar
Partner, S G Kaigaonkar Jewellers and Co-Director, Indian Bullion Jewellers Association, Mumbai

"We expect import duty to come down as it has gone from 1 per cent to 13 per cent in the last seven years. We also want GST rates to be reduced to 1 per cent from 3 per cent as gold prices are high and going even higher. Gold to Indians is like a bank in their own hand. Whenever there is a major calamity, the Indian markets are always saved due to the habit of Indians saving money and investing in gold as compared to other countries. The recent pandemic is one such example.” 

Deepak Jasani
Head of Retail Research, HDFC Securities

"The finance minister has raised expectations from the forthcoming budget by planning a ‘never before’ budget. While direct and indirect taxes may not offer much scope to innovate or bring path-breaking reforms (except those related to capital markets), the main focus could be on boosting manufacturing through schemes like PLI and create jobs. The main aim could be to be a counter to China in terms of manufacturing capabilities and scale. Defence and health infrastructure as themes could remain in focus. Both consumer and capex spending could be given a boost to kick-start quick recovery. One only hopes that the budget does not bring new levies (pandemic tax) to bridge the shortfall and fund the spend going forward. The PSU sector could be in focus for pushing them to perform in a marketlike manner.

This could be done by giving their managers more freedom, linking their pay to performance or stock price movement, making targets based on RoE and RoCE, etc. This will help improve their performance and lead to better realisation upon divesting stakes in them. The usual sectors could be in focus i.e. infrastructure, agriculture, employment generation, manufacturing, PSU, realty, etc. If the markets do not correct sufficiently before the budget then they would do that post the budget irrespective of what comes in the budget. However, if the markets correct reasonably well ahead of the budget, then we could have some expectation build-up ahead of the budget and then some more upsides post-budget. Only if the budget is path-breaking in terms of policies (government spending, divestment, revenue raising or capital market-friendly) this upward movement can sustain beyond a point.”

Interview

Vinit Bolinjkar, Head of Research, Ventura Securities

“Healthcare Infrastructure is Expected to Get a Boost”

Which sectors may do well running into the budget session?

The following sectors will be under focus:

Infrastructure : In the upcoming budget, we are expecting fund-raising and further investments in the infrastructure sector, which is the backbone of key economic and business indicators. The focus is expected to be on national highways, railway freight corridors, rural road connectivity, national gas grid, water transmission and affordable housing. Global investors are bullish on India, and with the intent to capitalize this opportunity the government could raise funds through overseas bonds.

Healthcare : Healthcare infrastructure is also expected to get a boost. The primary focus would be on the expansion of nursing homes, healthcare centres and training institutions. This will improve basic healthcare infrastructure in the hinterland and provide job opportunities for health workers. Such high investment in infrastructure will significantly improve the demand for cement and steel, and improve the business prospects for both the sectors. The demand for natural gas is expected to grow at a CAGR of over 10 per cent in the coming years driven by the commencement of fertiliser plants, expansion in city gas distribution (CGD) operations and adoption of natural gas as fuel over coal by industries.

Natural Gas : Domestic natural gas production is also expected to increase after the commencement of production from KG basin fields of ONGC and RIL-BP. To reduce the tax burden on this sector and to improve its adoption, we are expecting it to come under GST in the upcoming budget, which will replace the plethora of indirect taxes both at central and state level, and also simplify the compliance process.

Agriculture : We expect a higher allocation towards the entire agriculture value chain, which includes crop protection, irrigation infrastructure, soil health, warehousing, cold storage, etc. This is positive for fertilizers, pesticides and irrigation solution providers. The government may miss its target of doubling farmers’ income by 2022 due to pandemic impact on the economy, but structural reforms could definitely provide long-term benefits to the farmers.

Rajesh Aggarwal,
Managing Director, Insecticide India Ltd 

Our Request is Investment for Technology Development to Reduce Dependency on Imports

What are your expectations from the current budget for your sector?

As we always say, if the farmers and agriculture sector is given some special package, it will help our sector as well by increasing their purchasing power. We also request to provide some relaxation on GST on pesticides from 18 per cent to 5 per cent for the benefit of farmers to protect their crops. Up to 5 per cent GST is levied on fertilizers, seeds etc. while high GST of 18 per cent is imposed on pesticides. This is transferred to farmers and restricts them from using pesticides, which may result in damage to their crops. Our next request is investment for technology development to reduce dependency on imports, just like the pharmaceutical sector. This will help India bolster its formulations as well as capabilities to manufacture technical grade pesticides (active ingredients), key intermediates and chemicals required to do so and boost the ‘Make in India’

What is your outlook on Indian pesticide industry?

Indian population is increasing and the per capita size of land decreasing; thus the use of agro chemicals in India has to improve further and its market will increase – there is no doubt about this. Apart from an increase in domestic consumption, there is a huge opportunity in the export market which can be exploited if proper strategies and sophisticated technologies are adopted by the Indian companies. The industry is seeing various strategic alliances between the major players regarding research and development to come up with new molecules. Since high upfront cost of developing molecules is often a barrier, joining hands enables the market players to remain cost-competitive. The competition will be slowly intensified, as increasing awareness will generate the demand; we are hopeful that the Indian market will see increased penetration of crop protection products in the years to come, which will lead to higher yields.

While managing all the expectations of the industry, the finance minister is also expected to allocate higher amount to the defence industry. But with all such considerations weighing heavy on the government, the big question is how will the required funds be raised? Indeed, market participants will be keen to watch ‘the borrowings of the government’. The most important quantitative figure that will be watched by the market participants will be the fiscal deficit. It is expected that the government would take a different stance in this budget when compared to its strategy in the past few years.

The Narendra Modi government has been conservative and has not been expansionary enough to propel growth in the economy. However, this time around the situation is such that the government may be forced to adopt expansionary measures to help support economic growth. All eyes will be on the finance minister’s commitment to bringing about the much required turnaround. Meanwhile, the RBI’s decision was exemplary in the course of this critical pandemic-driven period. Will the finance minister continue to support the markets and the economy by taking bold decisions? That’s the question uppermost in the minds of the investors.

There is a broad consensus building up that this time around the economic growth will be focused and the measures will be announced in such a way that the economy growth rate inches close to 10 per cent. Amidst all this buzz investors and traders will want to know how best to separate the wheat from the chaff and understand what strategy needs to be adopted to make money in the markets. It is interesting to note how the markets have reacted in the near budget announcements.

Budgets and Market Performance

In the last 12 years, which includes five years of UPA II and seven years of the Narendra Modi-led government, we find that the Sensex has given positive returns on only two occasions while on 10 occasions the Sensex has yielded negative returns one month before the budget. On an average, the Sensex has given negative 1.7 per cent returns if we consider the data for the past 12 years. However, what is interesting to note is that the Sensex has generated positive 2.04 per cent returns on an average over a three-month period post the budget in over 12 years.



If we focus on the market performance of the past seven years the Sensex has, on an average, delivered negative 0.27 per cent returns while the Sensex has generated 1.49 per cent returns in three months before the budget in the same period. The Sensex, however, has been able to generate negative 0.33 per cent returns three months post-budget if we consider the average performance in the past seven years.

If we take a look at the table above, we find that the PSU stocks, and especially the PSU bank stocks, have a tendency to outperform the markets just before the budget. However, the rally in the PSU stocks and the PSU banks tends to fizzle out after the budget. Contrary to perception, the agriculture sector-related stocks have shown a tendency to outperform as the budget nears. Another sector tends to outperform the markets consistently as the budget draws near is realty.

We can see on an average that the realty stocks have delivered more than 6 per cent returns just one month before the budget if we consider the data since the budget of 2009 budget, while Sensex has given negative 1.78 per cent returns in the similar period. Nifty PSU Banks in a similar period has yielded more than 7 per cent returns on an average while NIFTY PSE has been impressive by clocking an average return of just over 6 per cent since 2009, a month before the budget.

Conclusion

While the budget is one of the most coveted events for the equity markets, investors should look beyond the budget and stick to quality stocks with fundamentals and earning visibility. Any temptation to buy stocks keeping budget announcements in view should be avoided as it is tantamount to speculation. Already the markets are trading at all-time highs and scaling new highs in almost every new session. Such an extraordinary rally in equity prices should be treated with utmost caution and one must be extremely careful while deploying fresh monies in the market.

We expect the budget to stick to basics with increase in spending allotted to the defence sector. The allocation will definitely increase for the infrastructure sector as well as it helps the government to address both economic growth and the issue of unemployment. Apart from the infrastructure sector, the housing sector may be in the limelight again in this budget and hence the realty sector stocks and the housing finance companies may be find themselves the centre of attention both in the pre and post-budget periods. There is a good chance that the finance minister may increase the FDI limit in the insurance sector and hence the insurance companies will be in limelight throughout the year.

Focus will also be on energy and lighting in the budget. Clean energy stocks could be in focus post-budget and investors should research for opportunities in this space. Hospitalrelated stocks may also be in focus in 2021. All in all, in spite of the frothy valuations and the markets being in the overbought zone, the best may be yet come in 2021. The FPIs have pumped in more than `1.6 lakh crore in Indian equities in 2020 and the trend of FPIs investing in India is expected to continue in 2021 as well given the weakness in USD and relatively higher growth in the emerging markets and in India. The global stimulus to fight the pandemic is close to USD 10 trillion and this liquidity is not going to vanish suddenly. Unless there is another black swan event, the markets may not crash to levels we have seen in 2008 or even early 2020. Market correction however is a possibility.

The economy is expected to bounce back sharply and investors should not be surprised to see a 15-18 per cent nominal GDP growth in FY22. This may happen due to low base of FY21. The strong corporate earnings in Q2 FY21 are a confidence-booster for the bulls. The fact that the revenues fell by merely 10 per cent from the pre-pandemic levels reflects the fact that the situation may not be as bad as initially assumed. The policy response from the RBI has been timely and accurate so far. The support has been bold and without any hesitation from the RBI. Investors may expect similar kind of support on the fiscal side.

Long-term investors can focus on the original portfolio strategy without making any substantial changes owing to the budget. It is expected that the defensive stocks will once again do well this year after a stellar performance in 2020. In 2021, the IT and pharmaceutical stocks are expected to build on their gains made in 2020. Investors can focus on quality defensives for outperformance along with cyclical stocks in automotive and automotive ancillaries for outperformance. Even though the current budget is coined as “growth ki vaccine”, the defensives may tend to outperform looking at the overall market valuations and the sharp run-up in stock prices across the sectors.

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