The Budget this year received a historic welcome from the stock market which saw one of the highest Budget-day gains. Indian benchmark equity indices broke their six-day losing streak. The benchmark equity indices registered their biggest Budget-day gains (in absolute terms), settling around 5% higher following Finance Minister Nirmala Sitharaman’s presentation of the Budget. While the Sensex registered the best Budget-day gains since 1997, IndusInd Bank, ICICI Bank, Bajaj Finserv, State Bank of India (SBI), Larsen & Toubro, and HDFC were the biggest gainers on Budget day, demonstrating the market’s appreciation for the bold schemes proposed by the government.
A major, potentially game-changing aspect of the Budget is the heightened focus on infrastructure investment. The government has placed its bets on the multiplier effect of increasing spending on infrastructure projects, as it will create growth and employment, restore incomes, and boost consumption.
National Infrastructure Pipeline and enhanced capital expenditure
An enhancement of capital expenditure to ₹5.56 lakh crore in the next fiscal year in the Budget, in addition to the creation of institutions and monetising assets, indicate an intensified effort towards the National Infrastructure Pipeline (NIP).
The NIP has been expanded from 6,835 projects in December 2019 to 7,400 in 2021, with projects worth ₹1.10 lakh crore already completed. With an aim to be completed by 2025, the programme requires a joint effort from the government and the financial sector. To aid this, the government has set up a Development Financial Institution (DFI) known as the National Bank for Financing Infrastructure and Development. The DFI, with a capital base of ₹20,000 crore and a lending target of ₹5 lakh crore in three years, will augment funding for real estate and infrastructure sectors.
An expected sharp rise in capital expenditure in this fiscal year is also attributed to the proposed monetisation of public infrastructure assets, including national highways, power grids, freight corridors of railways, airports, and oil and gas pipelines. Capital expenditure as a proportion of GDP is likely to rise from 1.7% in FY20 to 2.3% in FY21, and further to 2.5% in FY22. This would be a 17-year-high figure and indicates immense medium-term growth prospects.
Some of the stocks that are particularly expected to benefit from the Budget are outlined below.
Announcements of new capital expenditure plans, a key measure of government and private spending in capacity building, continued to grow in the December quarter after grinding to a near halt at the beginning of the fiscal year.
New project spending announced in the December quarter rose by 10.29% from the preceding three months, according to data from Projects Today, which monitors such activity. In all, 2,085 new projects, entailing a total investment of ₹2.76 lakh crore, were announced in the fiscal’s third quarter. Total investment had doubled sequentially in the second quarter, albeit on a smaller base.
Buoyant corporate earnings
The infrastructure push, along with the vaccine roll-out, is likely to further boost corporate earnings soon.
Hemang Jani, head of equity strategy, broking, and distribution at Motilal Oswal Financial Services, has stated that the markets in 2021 have been at an all-time high, showing immense resilience due to an abundance of liquidity, quick and positive developments on the vaccine front, as well as signs of economic recovery.
The Sensex hit new lifetime highs and the Nifty breached the 14,500-mark in early January of 2021 on hopes of a good performance in the ongoing Q3 earnings season.
The gains only seemed to rise with the latest Budget supporting all essential sectors of the economy and the proposed monumental increase in government spending. On Friday, the Sensex closed at 50,731.63 points, while the Nifty closed at 14,924.25 points. According to the brokerage, the Nifty is expected to remain in a structural bull phase with an upside target of 16,200 that is implied by the three year’s consolidation breakout (12,200-8,000).
The government’s bold push towards infrastructure has indicated its commitment to growth in the medium- and long-term. This also means that downstream industries such as cement, sand, metal, etc. will benefit greatly. These sectors drive the growth of the manufacturing sector in the country and provide employment to millions.
As private players have been unable to adequately invest in infrastructure due to the crisis, the government has reinvigorated its efforts and indicated its commitment to playing an active role in India’s growth pipeline.
Most construction companies have an order book to sales ratio of over 3.5x, indicating high earnings visibility. Overall, a strong corporate earnings cycle is expected for this industry for at least three-four financial years as both the centre and the states resort to infrastructure spending to revive the economy and boost productivity.
Strong corporate earnings in infrastructure-associated industries like steel and cement indicate an already strong momentum of infrastructure spending of state and central project authorities.
Q1FY21 was significantly impacted due to the country-wise and local lockdowns, resulting in movement restrictions and supply chain woes for both cement and steel businesses. However, a clear V-shaped recovery is visible in the top lines of all leading players in Q2FY21 and Q3FY21, which can be attributed to strong infrastructure construction activity across the country. In fact, corporate earning guidance for FY22 and FY23 looks extremely bullish for all economy-linked industries such as engineering, metals, cement, capital goods, and construction materials.
The moral of the story, then, is that heightened infrastructure spending, as envisaged by the Budget, is likely to help an overall growth in key parts of corporate India, which in turn will contribute to the V-shaped recovery of the Indian economy.
Some signs of this recovery were already visible even before the Budget.
GST collection at an all-time high
The Goods and Services Tax (GST) revenues in January 2021 have been the highest since the introduction of GST, clearly displaying economic recovery, and have almost touched the ₹1.2 lakh crore mark, exceeding December 2019’s record collection of ₹1.15 lakh crore. In line with the trend of recovery in GST revenues over the past five months, the revenues for the month of January 2021 are 8% higher than the GST revenues in the same month last year, which was more than ₹1.1 lakh crore.
The Budget has taken steps to further smoothen the GST structure, proposing a review of over 400 archaic exemptions and removing anomalies like inverted duty structures. This review will be conducted extensively, and a revised, distortion-free, customs duty structure will be put in place from October 1.
Topping these measures is one of the biggest infrastructure thrusts ever in the country, which is likely to redefine the contours of urbanisation, and provide a strong stable base for India’s rapid recovery from the pandemic and cement its position as one of the fastest-growing economies in the world.
Views are personal. The writer is a senior researcher at Invest India, the national investment promotion agency.