Budget 2021: Benefit for Apollo Hospitals, SBI, Ultratech Cement, Ambuja Cement, JSPL? Credit Suisse highlights government spending

Strong growth and high deficit expectation provide room to spend in FY22. Continuing down the pro-cyclical path, where weak government spending hurt growth in Q2 FY21 and is adding to it in the recovery, the fiscal boost to growth can continue into FY22. 16-17% nominal GDP growth now appears likely, which, given the largely steady tax to GDP ratio over the past decade, may deliver similar growth in tax collections.

If so, at a consensus expectation of 5.6% fiscal deficit, spending can grow 20-21% YoY. Given the large share of non-discretionary expenditure (interest, salaries, pensions, defense, subsidies and state transfers), it would imply Rs 4.2 tn higher spending over FY20 (Rs 3.1 tn over FY21BE) on residual heads, with expenditure to GDP 15.4%, the highest in a decade.

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Ability to spend to drive budget assumptions: 13% growth, 5.2% deficit possible:

While the government appears to be willing to spend now, as it believes the growth multiplier would be higher in an economy without Covid-19 restrictions, Rs 4.2 tn of extra spending may be difficult to execute, in our view. It may choose to be conservative on GDP growth assumptions (say 13%), and also target a lower deficit (5.2%), which would imply 13% total expenditure growth. In this scenario, spending on residual heads could be 40% higher than in FY20, but the absolute increase is a more reasonable Rs 2.5 tn.

Fiscal focus on healthcare and housing; banking reform; lower borrowing:

The pandemic exposed weaknesses in India’s healthcare system. Combined with the start of the 15th Finance Commission period, India may see a jump in healthcare spending (positive for hospital and diagnostics stocks: Apollo Hospitals). Additional spend on urban housing can boost urban low-skilled jobs: lack of policy tools to support the urban poor is another lacuna that needs attention. If so, it would help cement (Ultratech Cement, Ambuja Cement) and steel (JSPL). To address shortage of financial system capacity the government may also undertake financial reforms (e.g. bank investment company: positive for PSU Banks like SBI). Even as borrowing plans are lower than market forecasts, conservative fiscal assumptions also mean positive surprises through the year: yields may stay lower than consensus expectations.