PSU divestment, LIC IPO, fiscal deficit: How brokerages read Budget 2021

 Budget 2021 marks a clear change in the Modi government's stance from fiscal conservatism to growth orientation, notes analysts at Jefferies

Markets have been on fire after Finance Minister Nirmala Sitharaman presented Budget proposals for fiscal 2021-22 (FY22) with the S&P BSE Sensex surging over 3,300 points in just two sessions. Most brokerages have given a thumbs-up to the proposals, calling them ‘pro-growth’ that will entail a Capex-driven revival of Covid-19 impacted Indian economy, even though fiscal deficit and the borrowing program of the government for the next financial year came in a tad higher-than-expectation.

Divestment of select public sector banks (PSBs) and one general insurance company, initial public offer (IPO) of Life Insurance Corporation (LIC), Air India, tax rationalization of dividends of foreign portfolio investors (FPIs), and bringing them at par with treaty rates coupled with no new taxes for investment in capital markets are some of the proposals that have propped up markets.

Here’s how leading brokerages have interpreted FM Sitharaman’s ‘never before’ Budget 2021.
Nomura
The government’s decision to accelerate spending, a volte-face from its earlier strategy, reflects its view of higher multiplier effects during the unlock phase and higher growth as a pre-condition for debt sustainability. Revised targets suggest government spending will be frontloaded and rise by 55-60 percent y-o-y in the final quarter of FY21 (January - March 2021). At the margin, we believe rating agencies may view the budget as slightly more negative, given their focus on medium-term fiscal finances. Of the two rating agencies with a negative outlook for India, we believe the budget may have increased the probability of a downgrade from Fitch.

Jefferies
The budget marks a clear change in the government’s stance from fiscal conservatism to growth orientation. The fiscal deficit for FY22 is pegged at 6.8 percent of GDP, about 150 basis points (bps) higher than street expectations. Higher expenditure is geared towards Capex. The government seems committed to reforms like strategic disinvestment including state-owned banks, higher FDI in insurance, etc. Our view on cyclical recovery gets a further push. Overweight on banks, property, industrials, and materials.