The government chose to defer fiscal consolidation and has targeted a budget deficit of 6.4 percent. Giving growth priority over fiscal consolidation is the need of the hour. We may see some murmurs from rating agencies but the markets will not wait for their pronouncements. The government will find it challenging to rein in the deficit in next year’s budget as well, which will be the penultimate year before the general elections.
Market players were looking for a reprieve on taxation to foreign investors settling sovereign bond purchases on Euroclear to speed up the inclusion of sovereign debt in global indexes. That inclusion of Government securities in global bond indices would have increased the share of FPIs (foreign portfolio investors) in specified securities and thus in total government debt.
The inclusion would have led to significant flows and the market was factoring this in. Till the time of writing this, it seems that no such provision is part of this budget. I am expecting the Rupee to head back towards 76 a dollar.
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India is among the last of the large emerging markets that is not in global bond indices. This will have to wait a little longer now. It is obvious that this higher borrowing will lead to higher yields and a weaker currency. Indian bond yields have started hardening, and I think this weakness will accentuate till the RBI steps in to restore order.
Cryptocurrency bubble pricked
This budget will be known as a seminal event in the debate on crypto’s use as a currency. The Finance Minister has not minced words while criticising crypto currencies. The RBI will issue a digital currency and everything else will be deemed as a virtual asset. The government will tax profits on those assets at 30 percent. This announcement of a tax at 30 percent on digital assets, coupled with the government launching its own digital currency, is an indication that it intends to discourage cryptos.
Aside from placing earnings from cryptocurrencies and non-fungible tokens (NFTs) in the highest tax band, losses from their sale cannot be offset against other income, delivering another disincentive to trading and investment in digital assets. There will be TDS on payment made in relation to transfer of a virtual digital asset at the rate of 1 percent of such consideration, above a monetary threshold.
This will be a severe blow to crypto traders and I feel this budget will be remembered as a budget that finally put to rest the debate that the government will ever consider any non-RBI issued crypto as a currency.
‘Crowding-in’ the capex
The government has significantly upped the allocation to capex. The Rs 7.5 lakh crore figure is a significant step up, though if you look at the fineprint, you will realise the budget number together with the off-budget capex number is not that exciting after all. Nevertheless, this capital expenditure will boost economic growth and create some jobs. Private sector capital expenditure is the need of the hour and there are plenty of challenges that need to be resolved before it picks up.
Back to tracking corporate performance
The quarterly results season is in full swing and large corporates listed on bourses are likely to show significant growth this quarter and in the year ahead as well. In an environment where rates are headed higher, currency lower and global liquidity is on the wane, expect valuation multiples to take a beating.
Lower multiples may not help stock prices be as bubbly as they have been over the last few quarters. Stock prices are a slave to earnings, and as earnings grow they will pull stock prices higher, albeit at a much lower clip. This year look for stocks that can deliver superior earnings growth rather than just play for the expansion of valuation multiples.
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