Today was Finance Minister Nirmala Sitharaman’s second pandemic Budget, which calls for a bigger spend to fire up growth in Asia’s third-largest economy, as it prepares for a recovery from the pandemic.
Please read below to understand the impact of this proposed budget on your investments portfolio:
Impact on Equity Market: The Proposed
Interim Budget focused on ‘quality’ expenditure and increased the overall capital expenditure by 35% in key sectors like Infra, housing, defence, agriculture, etc. which is expected to have a multiplier effect on the economy. Further, with no other negative surprises, the proposed budget seems to be positive for equity investors. Further, the focus on spending more would create employment opportunities and help in kick-starting the investment cycle which in turn would help to strengthen the economic growth.
Also, since the focus is more on capital expenditure and privatization, this may be well received by international investors.
We continue to believe that investors should maintain a 35% – 40% allocation in the domestic equity market as concerns around higher valuations of the Indian equity market, rising inflationary scenarios, and oil prices continue to persist.
Impact on Debt Market:
On account of the increased capital expenditure plan, bond yields rose sharply in response to the proposed higher than expected gross market borrowing numbers of the Union government. Markets were hopeful of some roadmap towards India bond inclusion into global bond indices and also some clarity on taxation status for Foreign Portfolio Investors. However, on both these counts, the budget disappointed the markets.
Further, the expected fiscal deficit in FY22 is higher than earlier budgeted at 6.9% (vs. a budget of 6.8%) and 6,40% of GDP for FY23 vs market consensus of ~6%.
We believe that the returns from debt funds will have a negative impact and the next Monetary Policy Meeting scheduled on 9th Feb 2022 will be an important event for bond market investors.
We are holding our strategy of investing approx. 40% of the portfolio is a mix of corporate deposits, floating rate funds, medium duration funds with a fixed maturity strategy, and liquid funds. Further, investors should invest their money with at least 3 years of investment horizon and be ready to see a low return in their fixed income part of the portfolio in the interim.
Impact on Real Estate Market:
Two important proposals have been discussed for the real estate market.
- The budget has offered some relief for investors of assets like property, unlisted shares, artifacts, etc. by capping the surcharge at 15%. At present, on the gains from these assets, the surcharge is based on the income slab of the taxpayer. E.g. It is 25% for incomes from Rs. 2 crores to Rs. 5 crores and 37% for incomes above Rs. 5 crores. This pushes up the effective tax on the capital gains from these assets to as much as 25-27.4% compared to 11.5% payable on gains from equity funds and stocks. Rationalization of surcharge rate on long-term capital gains will encourage investments in capital assets from investors with income above Rs. 2 crores, as the surcharge on lower than Rs. 2 crores income is already at 15%.
- The proposal of Rs. 48,000 crore outlay for helping build low-cost houses in both rural and urban regions across the country is expected to boost the affordable housing and ancillary industries. The government is planning to build 80 lakh affordable homes to be built by 2023.
We believe that the above-mentioned first point is likely to bring some demand in higher-value real estate, and the 2nd point is likely to keep the prices range-bound for low-cost houses with the proposed supply. From an investment point, we continue to believe that REITs / InvITs are a good option to be in the portfolio with a 10% – 15% allocation.
