Mr. Rajeev Radhakrishnan – CIO – Fixed Income, SBI Mutual Fund on Union Budget 2021

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The focus of the Budget has been clearly on ensuring a sustainable revival of growth with an enhanced focused on capital expenditure. Towards this objective, the government has budgeted for a higher fiscal deficit target of 6.8%of GDP for the coming financial year. Revenue buoyancy assumption of 1.15 shows a relatively conservative assumption and the divestment target has been pegged at Rs 1.75 trillion. At the same time, the budget has made efforts to shift the NSSF borrowings of FCI into the budget, which fairly reflects the actual fiscal numbers. Some of the other significant takeaways include the policy announcement to privatize 2 PSU banks and the setting up of asset reconstruction company to takeover and manage stressed assets from banks.

Debt sustainability within the Indian context as enunciated in the Economic survey depends predominantly on sustaining a higher growth rate. Towards this , the focus on growth revival through a larger fiscal outlay can’t be faulted. However, this definitely complicates the RBI task of managing the government borrowing program. Given the context of the expected normalization of liquidity, an upward shift in the curve is unavoidable. In this context, continuation of market intervention operations would determine the new trading band for sovereign securities.

This is a market friendly budget with respect to equity markets at first glance. The equity markets have run up on valuations and it is kind of imperative that earnings growth catches up. To that extent, the loosening of purse strings as a counter cyclical measure, increase in planned capex and the neutrality on direct taxes are meaningful positives that provide greater confidence on earnings growth mean reverting back to high double digits.

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