India’s benchmark indices the Sensex and Nifty have both scaled all-time highs in recent times, with the Sensex touching mount 50k and Nifty peaking at 14,700. The markets have since taken a breather but Budget 2021 is being looked at with great expectations.

 

The announcement of the Finance Minister that Budget 2021 is going to be one of its kind has pushed expectations higher. So, what are the key elements to look for in Budget 2021 and how will that affect the markets?

 

Fiscal deficit: There is an expectation of the fiscal deficit narrowed down to 5.5 percent of the GDP in FY22. The GDP shrunk below 23.9 percent in the April-June period and another 7.5 percent in the July-September quarter. The focus is expected to remain on growth and revival of economic activity in FY22 rather than on the fiscal issue. Markets will be lifted by the growth focus. Therefore, the bigger focus remains on an increase in spending rather than reining in the fiscal deficit, in what is now seen as an extraordinary time for global economies.

 

LTCG and STT: A big expectation from the markets is that the government will exempt tax on LTCG or long-term capital gains arising out of the sale of listed equity shares. There are also hopes that the Securities Transaction Tax or STT and the Commodity Transaction Tax will be lowered. Doing away with LTCG or at least increasing the threshold for exemptions is likely to come as a relief for the investor. Markets may react positively to this development.

 

Product-linked incentive scheme: The one big thrust that the markets expect from the budget is in the manufacturing sector. A boost for manufacturing creates jobs and kickstarts economic activity. A key element of this manufacturing thrust is the product-linked incentive (PLI) scheme. The PLI scheme is already in place under the Atmanirbhar package announced in 2020 for mobile manufacturing, bulk drugs and medical device production with over a Rs 51,000 crore outlay for five years. The number of sectors was extended further, with an outlay of nearly Rs 1.5 lakh crore. There is hope that this scheme will be extended to sectors such as consumer durables to drive earnings. Markets also hope for greater clarity around the PLI scheme around sectors such as the automotive industry.

 

Infrastructure: This is an area that offers not just employment but also triggers economic revival and the capex cycle. The Confederation of Indian Industry (CII) in its pre-Budget memorandum notes that according to data, the government has incurred a capital expenditure of about 40.3 percent of the Budget target for the year, as compared to 55.5 percent at the same time last year. This allows scope for a greater push for infrastructure projects, including the notification of the National Infrastructure Pipeline (NIP) which is ready for implementation. Any move to boost infrastructure will be seen positively by the markets, as there is also hope that infra boost will bring in foreign investments.

 

Defence: The government is likely to boost allocation for the defence sector, with a focus on indigenous research and development. The embargo on 101 defence items banned for imports by India in 2020 is indicative of the Atmanirbhar theme of India’s policies and will find reflection in the Budget as well. The markets will watch this sector closely as any hike in allocation from the Rs 4.71 lakh crore will push economic activity.

 

Healthcare: This is a key area to look for, particularly in the wake of the vivid-19 pandemic. The pharma sector also expects incentives for greater R&D, particularly against the backdrop of vaccine development. More vaccines bring in confidence and increase economic activities. Any increase in healthcare allocation will lift market spirits.

 

Other areas

 

The markets have expectations of recapitalisation of PSUs and a bad bank that can absorb bad loans. If this happens, the market sentiment will be a positive one. Also, the markets are looking closely at any incentives that will boost the badly hit sectors such as hospitality and tourism industries. The real estate industry is expecting tax rebates and waivers to enhance liquidity. Also, the sector is seeking a GST waiver for under-construction homes. Any such waiver will bring in greater liquidity and push buying interest.

Conclusion

Vaccine rollouts and a dip in coronavirus cases are signalling a revival of the economy. The market has already reacted positively to these developments, apart from a boost in foreign institutional funds and RBI measures to ensure liquidity. The stock market has seen a sustained recovery from the lows of March 2020. The markets will take note of Budget 2021 announcements closely and react positively to moves aimed at growth and economic revival.