The stock markets were expecting a Big Bang Budget on 01-February 2022. However, the budget maintained status quo on most items of immediate interest to investors and traders like capital gains tax, STT, dividend tax, capital market reforms, personal income tax rates, exemptions etc. If investors were looking for instant gratification in the Union Budget, there was not much of it. However, scratch the surface and you find a very prosaic but a very long-haul budget in the works. The recovery from the COVID lows needs a perspective 10-year plan with the supporting ecosystem for secular growth in the economy and market valuations. That is exactly what the Budget 2022 has tried to provide.

MACRO THEMES THAT EMERGED FROM THE UNION BUDGET 2022

It always begins with the macros, so here are some macro themes that emerge from the Union Budget 2022.

• Fiscal deficit for FY22 is likely to overshoot by 10 bps to 6.9% due to disinvestment shortfall. The good news is that the fiscal deficit for FY23 has been pegged 50 bps lower at 6.4%, while the revenue deficit has also been pegged 90 bps lower.
• Disinvestment targets have been downsized to Rs.78,000 crore for FY22 and Rs.65,000 crore for FY23. Revenue focus is going to move out of disinvestments and leave the IPO market for private sector fund raising.
• There is a big thrust on domestic manufacturing. Budget announced an allocation of Rs.19,500 crore for solar sector PLI and a 68% share of defence capex to be allocated for local manufacturers against 58% last year.
• A significant 35% increase in capital expenditure from Rs.5.5 trillion to Rs.7.5 trillion in FY23. More significantly, this higher capex will be funded by lower MGNREGA allocation, cuts in fertilizer subsidy and food subsidies.
• Cryptos and digital assets will not be banned but brough into the mainstream. Virtual digital asset sales to be taxed at 30%, without set off. Audit trail to be ensured via TDS on sale. RBI to launch digital rupee in India this year.
• On the agriculture front, year 2022-23 will be Year of the Millet, hinting at calibrated crop diversification. Budget also tries to integrate Indian agriculture sector with new age start-up ideas including aggressive use of drones and modern technology.

With too much noise, the Budget 2022 has tried some smart tweaks at a macro level. Hopefully, it sends the right signals and catalyses the right triggers in the economy.

FOCUSSED TAX TWEAKS IN THE UNION BUDGET 2022-23

There were no sweeping concessions or “More money in the hands of masses” story in the Budget. However, some focussed announcements have been made. Here is a gist of some key tax related announcements in the budget.

• Budget introduces of “Updated Returns”. Assessees can file Updated Return for any income missed out to be declared. This can be done by paying additional tax within 2 years from end of assessment year. It will reduce unnecessary notices and litigation.
• With nearly 2 years lost to COVID, the concessional tax regime for start-ups has been extended by one more year up to 31-March 2023. Manufacturing can now be started by 31-March 2024 so COVID postponements don’t lead to loss of incentives.
• Clarification on taxation of virtual digital assets at flat 30%. There will be no incidental expense set off and any loss arising cannot be set off against any other income, other than gains from virtual digital assets. All gifted virtual assets will be treated as income in the hands of the recipient and there will be 1% TDS on consideration for audit trail.
• Budget 2022 has limited surcharge on capital gains tax to 15% of tax amount so the effective tax on equity capital gains tax cannot exceed 11.5%.

It would be unfair to say that the Budget 2022 did nothing on the direct tax front. There have been appropriate tweaks and the tax on virtual digital assets and cryptos should be an interesting area.

HOW THE BUDGET 2022 IMPACTS SECTORS AND STOCKS?

There were a number of sectors that gained and obviously some that lost from the Union Budget. But, more importantly, there was an underlying theme in the budget in that it wanted to give a clear encouragement to the sunrise industries. We shall look at these sunrise sectors first as that is the big theme of Budget 2022. Some big gainers include Electrical Vehicles, EV infrastructure, EV ecosystem, telecom, data centres, solar equipment and defence. Let us start with the sunrise segments first and the Budget 2022 impact.

Battery manufacturers

Budget 2022 has tried to promote clean transport. Government will put out a full-fledged battery swapping policy for electrical vehicles to help EVs become popular. This will be positive for auto companies with a strong EV franchise. But the bigger beneficiary will be the forwards looking battery makers. Keep an eye on Exide and Amara Raja.

Solar Modules and Panels

Budget 2022 has allocated Rs.19,500 crore in the form of production linked incentives (PLI) for manufacture of solar modules, solar panels and other support systems for solar energy. Some of the companies to benefit from this move would be focused solar plays like Adani Enterprises, NTPC and Tata Power.

Data centres and 5G launch

Budget 2022 almost confirmed launch of 5G services in India during FY23. This 5G has big implications for telecom services and for new digital initiatives. Also, data centres have been accorded infrastructure status with concomitant benefits. These moves are likely to provide a boost to stocks like Bharti Airtel, Tata Communications and Tejas Networks.

Indian defence manufacturers

In a big move, the government set aside 68% of its defence capex budget for domestic order farming to Indian defence companies. This is up 1000 bps yoy. Indian defence equipment manufacturers could soon see overflowing order books. This is likely to benefit companies like Paras Defence, L&T, Bharat Forge, MTAR, Data Patterns in a substantial way.

The above four were the sunrise sectors that will directly benefit from the Budget 2022. However, the benefits will also extend to other sectors as captured below.

• Customs duty tweaks could help select chemical companies. Budget 2022 cut customs duty on acetic acid and methanol; critical inputs for specialty chemicals. Cuts in acetic acid duty will benefit Alkyl Amines, Balaji Amines and Atul. Gujarat Alkalis and Meghmani will benefit from the cuts in methanol customs duties.
• Ethanol is king once again. Sugar companies with strong ethanol franchises stand to gain from Budget 2022. That is because, the Budget has imposed a penal duty of Rs.2 per litre on fuel that is non-blended. This will encourage OMCs to sell blended fuel and make the distiller and ethanol investments of sugar companies more productive. Beneficiaries will include Dalmia Bharat Sugar and Balrampur Chini in the sugar space.
• Finally, the budget also has a small investment twist to it, benefiting cement, construction and steel companies. Cement and construction will gain from the plan to lay 25,000 KM of fresh highways this year. They will also benefit from the big push to affordable housing and mass transit systems etc. The steel industry has a different story in Budget 2022. The steel longs business which manufactures has attracted interest on account of the Rs.60,000 crore allocation to supply piped tap water to 3.8 crore additional households. Most large steel players active in longs will benefit.

To sum it up, Budget 2022 may not be a big bang budget in the strict sense of the term. However, it has overall been a budget favourable to industry and tried to introduce more accountability on the macro front. It is a good beginning on the long road to post-COVID recovery.