Daily Market Update Feb 2

unnamed Daily Market Update Feb 2

Nirmala Sitharaman presented a brave budget letting the fiscal deficit shoot up nearly 250 bps ahead of market expectations. The FM pegged the fiscal deficit for FY21 at 9.5% and the fiscal deficit for FY22 at 6.8%. In addition, the budget also laid out a long term chart of fiscal deficit tapering to 4.5% by fiscal 2026. That gives the Indian economy a full 5 years to use the levers of fiscal policy to boost economic growth. The budget has also decided to initiate amendments to the FRBM Act and seek exemption as a special case. The budget has also exhorted rating agencies not to fret over the quantum of fiscal deficit.

The Budget 2021 has initiated some very bold reforms that were long overdue. For example, it has given a go ahead to the idea of a Bad Bank to take over the toxic assets of banks and hive off through a pass-through structure. The budget has also conceptualized a DFI dedicated to the infrastructure space which would build its book to Rs.500,000 crore in 3 years. In a rather bold move, the budget has gone beyond disinvestment and committed to privatize most companies not in the very strategically important sectors. The privatization boost will include 2 large PSU banks and 1 general insurance company, apart from the LIC IPO. The budget will also push through the idea of a super regulator by merging the capital market related provisions of the SEBI Act, Depositories Act and Securities Contract Regulation Act.

Craftsman Automation, a manufacturer of auto components, has got SEBI approval to launch its IPO. The IPO will consist of a fresh issue of Rs.150 crore. In addition, the promoters and early shareholders will also offer 45.21 lakh shares as part of the offer for sale or OFS. The promoters, Srinivasan Ravi and K Gomatheshwaran, as well as IFC and Marina III will be offloading part of their holdings in the OFS. Srinivasan Ravi is the predominant shareholder in the company with a 52.83% stake. The funds raised through the fresh issue will be used for repayment and pre-payment of some of the debt in the books.

The finance minister may have sent a very subtle message to the farmers, who have been rather firm on their refusal to withdraw the agitation unless the Farm Bills were scrapped. The government had offered 18 months time to reassess, but the farmers were not willing to accept that. The budget has made an interesting announcement to digitally connect 1000 APMCs via the electronic national market or E-NAM. This means that the government is serious about investing in APMCs and their continuance will also mean that the minimum selling price or MSP formula should also continue. Confirmation is awaited.

On a day when the Sensex gained 2,314 points post the budget, the notional gains were obviously big. On Monday alone, the markets made investors richer by Rs.634,000 crore as the markets spurted by the bold budget despite a sharply higher fiscal deficit. Bank Nifty led the gains as the capital allocation and the bad bank idea appealed to investors. The budget also made a much bigger allocation to healthcare, which has also been a major positive for the market sentiments. In addition, moves like a big push to privatization, monetization of government assets and FDI in insurance were seen as boldly reformist.

In a rather far-reaching move, the budget announced that people who contribute more than Rs.2.50 lakhs per year to provident fund will not be eligible for tax exemption on the interest component. This will be a positive move for the debt markets in the sense that the distortion of post-tax yields will not happen anymore. The provident fund is an expensive liability for the government as it pays 8% assured returns on the PF and at the same time, it also loses out on tax revenues. However, the study by the government has shown that only 1% of the Indian population contributes more than this threshold and hence the large masses will not be affected by this move. This could be seen as a gradual precursor where other small savings that offered this tax plus returns arbitrage will gradually see reduced benefits.

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