The Sensex is close to hitting 50k, having gone up almost 20 per cent in the past 12 months and almost doubled from its March lows. While this would not have been expected a few months ago, at the peak of the Covid-19 crisis, the market has been on a tear amid a V-shaped rebound in the economy and global liquidity. However, returns from here on would depend a lot on earnings, which I would expect to broadbase, so the performance of the broader markets might get better than the frontline index. Also, I expect the momentum in the market to continue as the earnings upgrade cycle may continue for some more time.
The Indian stock market is hitting an all-time high and if one were to look fundamentally, on an earnings basis, it is trading close to one of its highest valuations ever. India is trading at one of the highest premium when compared with global as well as emerging market indices. This implies market participants’ very positive view on the Indian economy. We have already seen forecasts of more than 20 per cent compound annual growth rate (CAGR) for Nifty 50 companies.
In India, Budget is overhyped. While a lot of reforms are expected to be announced every year, Budgets fall short of expectations most of the times. By their very nature, Budgets are more about presenting income-expenditure account than announcing and implementing reforms. Budgets, however, do give a peek into the government’s thinking process about its reforms agenda. And the expectations from Budget this year are not very different; it is already being touted as a growth-oriented Budget.
There have been multiple announcements during this year. Some of the key ones are:
a) PLI scheme: This is the most important scheme. Given that the scheme has a closing date and is focused on creating scale, the chances of this being successful are much higher. Handset and Pharma PLI (production-linked incentive) guidelines have already been announced. Another big sector where PLI can have a significant impact on the economy is automobile. Once clarity emerges on all sectors, we can see this adding to the country’s overall gross value added (GVA) in next three to five years. It should also help on the trade deficit front as the bulk of production is expected to be exported.
b) Support to sectors through credit guarantee: This is another area where the government has been able to support sectors without having to dole out a significant amount from its own pocket as the impact of this on the fisc would be only to the extent of credit loss, and that too over a few years.
c) Fertiliser subsidy: Clearing off fertiliser subsidy is also a stimulus to the economy. We are going into this Budget in an abnormal situation, given the disruptions due to Covid which have impacted tax inflows. However, tax collections are normalizing; that gives an opportunity to spend. Covid also provides a window for more structural changes, one can look at following areas:
Spending towards capital and job creation: Covid has increased the level of economic difference in the population as the rich have been able to save without losing much income, but the poor — more so urban poor — have been hit badly. September-quarter corporate results are an example of this. Large companies have cut costs and increased profits which is not great news for the urban poor. But the solution could be not in giving them freebies but providing them with the opportunity. This can happen if the government decides to spend more and make it attractive for corporate entities to spend in job-creating sectors like infrastructure, manufacturing and real estate. There has been some start with the PLI scheme announced.
Divestment and stake sale in PSUs: Going into a budget with stock markets on all-time high and public issuances being grabbed like hotcake, the government should try to push divestments and sell stake aggressively. However, the market is also telling the government that selling PSU stocks without structural reforms is not easy even in this super-hot market. Qualified institutional placement (QIP) of shares for three public-sector banks barely scraped through and that also with help from some other public-sector undertakings (PSUs). This was at a time when initial public offerings of private companies were getting oversubscribed a few hundred times. Hence, this should make the government understand that reforms in the PSU space are very important if they want to partially sell their stake in the market. Else the government will have to decide on letting go of its stake fully without putting many conditions.
The author is head of research at Motilal Oswal Asset Management Company