Budget 2022 | Prashant Jain: Budget shows surge in investment combined with move towards fiscal consolidation: Prashant Jain

“The current year should be good as private demand is weak, but the real challenge will probably come in the next fiscal year when hopefully demand for private capex should pick up. Hopefully India will also be included in global bond indices and that should help over the next couple of years,” said Prashant JainCIO, HDFCAMC, talk to ET NOW after the 2022 budget is tabled.

Has the investment surge finally arrived for businesses?
This is clearly a growth oriented budget and there is a push towards investment, infrastructure, logistics and ease of doing business and at the same time we are moving steadily down the path of budget consolidation .

Above all, we are now witnessing increasing stability in taxation and Finance Minister Nirmala Sitharaman also stated this in her speech. The government is committed to a stable tax system, to the ease of paying taxes, and no news on that front is again a reiteration of that.

I think this is good as it will improve the investment climate in the country and finally the government has also taken care to help more SMEs and MSMEs especially the hospitality sector which has been hit very hard by Covid. Net-net is a very good budget that strikes the right balance.

You have to be aware of the fact that interest rates will go up. This budget, if any, will hit inflation and with higher oil prices and with the government announcing a budget target of 6.4%, it could also impact the bond market. When would the markets say spending is okay, but inflation will also be created? Are we getting there?
That’s a fair point. In India, much of the energy and commodity inflation is imported inflation. So to that extent, not much can be done, not just in India but even globally. The world has been underinvested in the energy space for several years and this is one of the main reasons why we are experiencing high energy prices.

But at least at this point, demand for credit is extremely weak and we have seen credit growth in India lagging for several quarters and even in December there was a slight uptick. But the latest reading is still back at 8%.

The current year should be good because private demand is weak, but the real challenge will probably come in the next fiscal year when, hopefully, demand for private capex should pick up. Hopefully India would also be included in global bond indices and that should help over the next two years.

That is why I come back to the central question that over time it is essential for us to continue to moderate the budget deficit, but we have a nice window of one to two years during which we should make good progress in this direction.

What is the risk of such a configuration where the government is ready to spend while ignoring inflation? They haven’t made it a very popular type of budget despite the fast approaching state elections. They want India Inc to take risks and is that what they bet on?
In my view, the economic outlook is pretty good, except there is weak demand in some pockets due to the urban service sector employing quite a number of low to middle income households that have been affected. Hopefully this will return as the impact of Covid fades.

Infra capex is clearly on the rise. Industrial investment, private investment will pick up because corporate debt is at a 10-year low and profits to GDP, which fell to a record high two years ago, are now recovering strongly, the banks’ liquidity is good, the CD ratio is quite good and they are ready to lend.

The economic outlook is therefore quite good. If so, there are risks to capital markets, as the record low cost of capital we have seen, particularly outside of India, cannot be taken for granted, but it could impact some excessive pockets of valuations, as growing companies benefit when the cost of capital falls.

So I think there should be some moderation in those pockets of the markets, but luckily for us those pockets represent a fairly small share of market rates. So net-net, I would be quite constructive on the economy. I’m pretty constructive on earnings growth. I would be a bit more moderate in my expectations of capital markets because the markets are fairly priced and we should moderate our return expectations because the cost of capital globally will rise further and it may rise as well moderately even in India. Although the markets are pricing in elements of this, I don’t think it’s likely to be fully integrated.

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