On 1 February 2021, India’s Finance Minister, Nirmala Sitharaman, announced the Union Budget for the financial year ended 31 March 2022. The initial reaction to the budget was very positive, with the market up 4.0% ¹ on the day, as analysts made note of increased infrastructure spending, which we believe will help drive India’s recovery to growth.

The government has reiterated (and even raised) its commitment to infrastructure spending in order to drive growth at this crucial juncture. It has emphasised capex in key sectors such as roads, railways, health and defence. On consumption-related spends, as we have indicated in previous notes, we see the government shifting from the demand side to the supply side, reducing the number of subsidies it is giving out and turning instead to means such as direct benefit transfers.

This year’s budget has garnered some praise due to its improved transparency and disclosure on how such spends will be funded. There is expected to be a significant contribution to funds from privatisation of government assets, some of which are already progressing (for instance, Air India and Bharat Petroleum). Notably, the government is not increasing taxes, which we think is a positive not just for Indian corporates but also growth in general.

On the flipside, the government’s fiscal deficit will increase, although we think this is still firmly under control. India’s fiscal deficit, according to the Finance Ministry’s own numbers, is expected to peak at 9.5% of GDP in the current financial year, before falling back down to 6.8% in the financial year ended 31 March 2022². This compares favourably with the IMF’s assessment of emerging market (EM) economies, which are expected to have an aggregate deficit of 10.3% in 2020 and 8.6% in 2021³. We think this was in line with rating agencies’ expectations, and that they will look on India’s budget favourably as long as its GDP growth recovery remains strong and debt to GDP shows a declining trend.

India has already experienced a V-shaped recovery after strict Covid lockdowns last year, and we are very positive on the growth trajectory from here. The government expects GDP growth for the year starting 1 April 2021 to be 11.0%, which translates to a nominal growth of 15.4%⁴. We note that India is yet to feel the full positive impact of substantial government reforms that have been enacted over the last few years, and it is also expected to benefit from a manufacturing sourcing shift away from China. With these tailwinds, we believe that the actual growth for company earnings could be even higher.

We think key beneficiaries of the budget and general economic environment include public sector banks, industrials, pharmaceutical and manufacturing companies, with a positive second-order effect on consumer companies as overall growth returns. The only uncertainty at the moment appears to be the ability to deal with any further mutations of the Covid virus and any implications thereof.

¹Bloomberg, MSCI India in INR on 1 February 2021

²India Union Budget, 1 February 2021

³IMF Fiscal Monitor Update, January 2021

⁴State of the Economy in 2020-21: A Macro View, Ministry of Finance