Vijay Kumar Gaba: BUdget 2023

Showing posts with label BUdget 2023. Show all posts

Wednesday, February 1, 2023

An investor’s prelude to the union Budget FY24

An informal survey of about 40 market participants, conducted in the past 4 days, indicates that unlike the previous budgets presented by the finance minister Ms. Nirmala Sitharaman, the market’s expectations from the budget to be presented today might be negligible.

In fact, most participants appear to be praying that the finance minister shall skip the investment and capital markets from her budget provisions altogether. No change in capital gains taxation is all they would wish for.

One veteran portfolio manager summarized the broader market sentiment in one simple sentence - “The boat is in rough waters. All that I could wish for is that FM does not rock it at this time.”

I would read the budget presented by the finance minister later today and assimilate the market’s reaction to it, keeping this in mind.

How to read the budget?

The budget should be read and analysed by investors, as they would read and analyse the annual report of a company they are invested in.

If we consider India as a company - annual budget would be the annual account for the current year and forecast for the next year; and budget presentation in the Parliament and subsequent press conference would be the conference call with various stakeholders.

An investor who wants to invest in this company would want to objectively analyze:

(i) The past performance of the company in terms of growth;

(ii) The credibility of the management in terms of professionalism, integrity, execution and delivery on promises;

(iii) The future prospects in terms of growth, competitiveness, financial stability, cost of capital, price stability, etc.; and

(iv) The relative positioning in terms of expected returns, access to markets, regulatory flexibility, costs (taxation etc.).

Past performance

The Indian economy has faced a variety of internal and external challenges in the past 6-7 years that have hindered acceleration of economic growth, despite a number of positive policy stimulants. Demonetization, Covid-19 pandemic and Russia-Ukraine War could be listed as the three major events that contributed to the slowdown in momentum of growth. High inflation due to broken supply chains and the consequent monetary policy tightening were notable collaterals that impacted the growth materially.

Implementation of Bankruptcy Code and RERA, nationwide roll-out of GST, widespread adoption of digital payments, schemes to encourage domestic manufacturing (production Linked Incentive or PLI) with the objective of import substitution and/or export promotion, some major infrastructure development initiatives like National Logistic Policy, multiple greenfield expressways, etc.; initiatives to improve carbon footprint, especially through clean fuel etc. are few of the growth accelerators that have not yielded the desired results as yet due to the growth blocking events.

It is expected that in the next two years the strong headwinds created by these challenges might subside and we may see growth momentum accelerating. In the next 23 months (end of 2024) we may witness delivery of many healthy projects that shall further accelerate the economic growth and development process of India. These projects include the much awaited dedicated Freight Corridors, Mumbai Trans Harbor Link, Delhi-Mumbai Expressway, Ganga Expressway, Navi Mumbai and NOIDA international airports, Mumbai metro etc. Completion and operationalization of these key infrastructure projects shall also catalyze significant follow up industrial and real estate capex in the private sector; while creating scope for another round of large infrastructure building capex in the public/private/joint sector.

The past performance in terms of economic growth has not been remarkable. However, there is a case to not let the past performance overwhelm the sentiment and expectations for the mid-term (next 5-6yrs).

The latest Economic Survey claims that the economy has fully recovered from the impact of the pandemic and war and is poised to grow at an accelerated speed.

Governance capability

The governance quality and execution track record of the incumbent government has not been unblemished in the past few years. There have been instances of superior execution, as in case of vaccination, food security and bio fuel etc., expressway construction; whereas in many other cases execution has lagged – specially in case of disinvestment, GST reforms, education policy, direct tax code, judicial reforms etc.

Future prospect

In FY23, the Indian economy is expected to grow by 7%, primarily driven by private consumption and public capex. With inflation showing definite signs of easing and settling within the RBI’s tolerance range (4-6%), monetary conditions may ease in FY24. The bank and corporate balance sheets have been materially repaired and financial conditions are now stable. Both the consumer and business confidence are improving. With buoyancy in tax collection sustaining and Covid-19 stimulus unwinding, the fiscal conditions may improve, further enhancing the scope for public investments in capacity building.

The changes in the global order that are leading the shift in global supply chains, could also favor the economies like India that have a robust political system, stable financial system and supportive economic infrastructure in place.

Two things that may keep the growth acceleration under check are (a) global economic slowdown impacting the export demand and keeping the current account under pressure; and (b) the cost of funds (interest rates) staying at elevated levels.

The latest economic survey forecasts the real economy to grow at a pace of 6.5% (nominal growth of 11%) in FY24.

Relative positioning

The relative positioning of India in terms of economic growth potential appears very strong at this point in time. However, insofar as the financial markets are concerned, the conditions are not so favourable. The relative valuations are expensive and global investor positioning still overweight as compared to peers like China. We may therefore continue to see selling pressure from global investors for some more time. Nonetheless, for domestic investors the risk reward appears marginally positive in equities and very good in bonds.

Key themes

1. Inflation and rates peaking, liquidity improving

2. Fiscal conditions improving

3. Capex story slowly materializing

4. Current account under stress, but external balance comfortable

5. Financial condition stable

Tuesday, January 31, 2023

Budget 2023: No negative would be the best positive

The union budget presented on 1^st February 2022 was widely hailed as growth supportive. Almost all experts and commentators opined that ~14.5% in budget capex would catalyze a new wave of infrastructure and industrial development and growth in the country. The finance minister highlighted the following four pillars of growth as the basis of her budget proposals.

1. Accelerated development of world class infrastructure (PM Gati Shakti)

2. Using digital capabilities for delivering inclusive development

3. Productivity Enhancement & Investment, Sunrise Opportunities, Energy Transition, and Climate Action

4. Crowding in private investment through enabling policy environment

Most strategists projected high growth for the infrastructure and capital goods sectors in the wake of great emphasis placed on capex by the finance minister.

However, collective wisdom of the markets did not concur with the enthusiasm of the finance minister and a majority of experts, as the funds allocations in the budget did not match the promise. The benchmark Nifty50 corrected over 5% in the five weeks following the presentation of the budget.

After one year, on the eve of another budget, the benchmark Nifty is almost the same level as it was a year ago. The promise of high growth made in the budget has been belied. Industrial growth (especially manufacturing growth) has collapsed in FY23. The latest NSO estimates peg FY23e industrial growth at 4.1% and manufacturing growth at a dismal 1.6%. Construction sector has also witnessed deceleration. Investment (Gross fixed capital formation) growth has declined to 11.5%.

In recent months some signs have emerged that indicate that the much awaited capex cycle might be just beginning to materialize and we might see some tangible outcome in the next couple of years. The budget for FY24 is therefore important in the sense that nothing is proposed in the budget which negatively impacts the nascent capex recovery in the private sector (also see Time for delivery is nearing). However, given the fiscal, economic and political constraints I shall not be expecting any material positives from the budget.

Some key highlights of the market performance since 2022 budget presentations are as follows:

· Benchmark Nifty (1%) is almost unchanged since the last budget.

· Small cap (-17%) have underperformed majorly. Midcap )-0.5%) have been almost unchanged since the last budget.

· PSU Bank (~28%), FMCG (~21%), Metals (~16%) and Auto (~11%) have been the top outperforming sectors.

· Media (-17%), Realty (-16%), IT Services (-14%) and Energy (-7%) have been the top underperforming sectors.

· Infra (-1%) and Services (-3%) did not do much in the past one year.

Friday, January 27, 2023

Brokerages preview of Budget 2023

Stabilization is the key (Yes Bank)

This Budget would have the daunting task of progressing towards consolidation after the covid related fiscal push. On the other hand, an eye needs to be kept on the economic growth in an atmosphere of slowing global growth and tightening domestic financial conditions. On a strategic level, the broad reforms process should continue with outlays earmarked for rural development, boosting manufacturing, employment generation, and capacity building through infrastructure. Despite this being the last Budget before general elections, we do not anticipate much in terms of tax dole outs for the masses.

For FY24E we anticipate the Budget deficit to increase to INR 17.8 tn, GFD/GDP to print at 5.9% (after attaining the 6.4% target for FY23BE). Net and gross borrowings are likely to increase in FY24E to INR 11.7 tn and 15.4 tn respectively. Despite RBI pausing after another 25bps hike in February 2023, we see a scope for yields to rise in H1FY24 towards 7.60-7.75% as centre targets to front-load borrowings in H1.

The fiscal balancing act (Emkay Equity Research)

The upcoming Union Budget will require policymakers to ensure the fiscal impulse is maximized to improve potential growth, while signaling adherence to medium-term fiscal sustainability. This will require continued financial sector reforms, better resource allocation, and funding by aggressive asset sales via functional infrastructure monetization, disinvestment, and strategic sales, among others.

We project FY24E GFD/GDP at 5.8% after 6.4% in FY23E, implying net and gross borrowing at whopping Rs12trn and Rs15.1trn, respectively, adjusted for Covid-GST comp. loans. The scope for a blatant populist budget looks bleak amid moderating tax revenue, high committed revex, and market loans.

On the revenue side, lower tax buoyancy could be partly countered by higher RBI dividend and still healthy assumption of divestment proceeds. We watch for possible changes to capital gains tax structure and new personal tax regime, extension of concessional 15% tax rate for new manufacturing units, and higher import tariffs on PLI-related products.

Expenditure focus is likely to be on rural, welfare, infrastructure, PLIs, and energy transition. Capex spend will remain significantly higher than pre-pandemic (2.9% of GDP), especially amid larger fiscal multiplier on employment and growth and still-lacking private capex.

Steady as she goes (Axis Capital)

FY24 budget on 1 February 2023 is likely to be a mundane reading showing good fiscal progress in FY23 (6.1% of GDP fiscal deficit vs. 6.4% budget) and plans to further lower the deficit in FY24 (5.7% of GDP) by rationalizing subsidies. The central government is likely to conserve resources, targeting low double-digit growth in allocation to capex, rural development, social services so that outcomes don’t suffer due to cost inflation.

Central government’s fiscal deficit is likely to fall further to 5.7% and will be on track to achieve 4.5% of GDP by FY26. The 0.4% of GDP fiscal consolidation is supported by INR 1.5 trillion drop in food and fertilizer subsidies due to merging of food subsidy under PMGKAY with NFSA and correction in global fertilizer prices. This outcome along with modest tax buoyancy (12% YoY growth) should give the government space to target low double digit spending growth in rural development and capex.

Key expectations in the budget

· Tinkering with personal income tax slab to provide relief on real disposable income.

· Expand scope of Production Linked Incentive (PLI) schemes and green hydrogen.

· Bump-up allocation for rural development and social welfare to ensure outcomes don’t suffer due to cost inflation.

· Target double digit capex with increase in capital allocation to new DFI and special long-term loan to states for capex.

· Increase scope of asset monetization pipeline.

Capex focus to stay but rural thrust also likely (Nirmal Bang Institutional Equities)

· We expect fiscal consolidation to be gradual and are building in a fiscal deficit of 6.2% of GDP in FY24 vs. 6.4% of GDP in FY23.

· While we do not entirely rule out the government factoring in a slightly lower fiscal deficit of 5.9-6% of GDP for FY24, we believe that under-estimation of revenue expenditure or aggressive revenue estimates may not be palatable for markets.

· However, we also note that in recent years, the government has erred on the side of caution with its revenue estimates. We are factoring in tax revenue growth of 11.5% for FY24, just a tad higher than our nominal GDP growth of 10.5%.

· We expect the focus on government capex to stay and factor in 15% growth in FY24. We believe that Railways and Roads will be the largest beneficiaries of incremental government capex.

· Overall, we factor in revenue expenditure growth of ~7.5% in FY24 over the revised estimates for FY23. Ahead of Lok Sabha elections in CY24 and given the recent rural distress, we expect higher allocation to rural schemes with focus on rural infrastructure development. This will partially offset lower fertiliser subsidies and some moderation in food subsidies.

· We expect higher payouts under various government schemes to ease the burden of inflation for the ‘Bottom of the Pyramid’ strata. This may include higher payouts under the PM Kisan Yojana announced in the budget or during the course of FY24.

· We expect the budget to remain focused on improving India’s competitiveness as a manufacturing hub and reducing logistics costs. Incentives for industry are likely to be oriented towards encouraging investments in clean and green technologies.

· We are penciling in net borrowing of ~Rs12.1tn and gross borrowing of Rs16.5tn in FY24, which along with the inflation focus of RBI will keep bond yields range-bound at ~7.3% in the near term.

Trade-off between capex and consolidation (BoB Caps)

The government has reiterated its commitment to India’s fiscal glide path which targets a 4.5% fiscal deficit by FY26. We thus expect a lower figure in the FY24 budget estimate (BE) vs. the 6.4% deficit in FY23BE. Additionally, for India to become a US$ 5tn+ economy from the current ~US$ 3tn, continued momentum in the investment cycle is vital. Therefore, we believe the capex support seen in the past two budgets will continue. The FY23BE of Rs 7.5tn capex is likely to be met and should see a bump up of 10-15% to Rs 8.5tn-9tn in FY24BE, with outlays in the usual sectors of roads, highways, defence and railways. We believe the production-linked incentive (PLI) scheme could be extended to newer sectors, while affordable housing would also stay in focus.

· Fiscal normalisation post Covid expected to remain a core theme of the FY24 budget; fiscal glide path likely to be maintained.

· Budget could stay geared towards improving living standards of the poor while continuing to build necessary infrastructure.

· In line with past trends, we do not expect the budget to spark a significant move in the stock market.

A tightrope walk between fiscal and elections (Philips capital)

FY24 Union Budget is likely to be a tightrope walk, considering its fiscal guidance, and the 2024 union elections. We estimate fiscal deficit for FY24 at 5.8-6.0% and FY23 at 6.2%. Muted nominal GDP growth (due to global slowdown and low deflator) will constrain tax revenue and government spending, compared to the strong pace in the last couple of years. Thus, the government’s innovation will be tested – to deliver an effective budget, encompassing capex, rural, social, policy incentives, subsidies, and tax/growth buoyancy. In case the government adopts an easy approach to the fiscal path, across-the-board expansion can be expected and delivered.

In the upcoming budget, we anticipate continued focus on PLI incentives (for new sectors), Atmanirbhar Bharat (to enhance manufacturing, exports, while managing imports), sustainability (supply/demand push towards renewable energy and alternative technologies), and infrastructure expansion (defence, railways, ports, logistics, and roads). The government wants to encourage the adoption of the new income-tax regime, thus incentivization is likely. Fiscal support to rural India will continue (adjusting for food and fertiliser subsidy); we will be watching for any meaningful stimulus (low probability considering fiscal constraints).

Fiscal deficit for FY22 should be lower than budgeted at 6.2% vs. 6.4% BE, helped by higher nominal GDP growth, tax buoyancy, and expenditure management; non-tax revenue will fall short due to low RBI dividend and disinvestment. Higher food/fertiliser/petroleum subsidy will result in revenue expenditure surpassing BE. Capex targets will be largely met. For FY23, we expect muted revenue expenditure (4-5%) growth, and decent capex growth at 7-8%. Lower-than-FY23 subsidies will generate scope for other rural and social expenditure. Our tax growth estimate is muted (5-6%) due to high base and low inflation and growth momentum. We are not very upbeat on non-tax revenue either. FY24 fiscal deficit at 5.8% offers limited scope of spending enhancement, while 6% fiscal deficit can aid expansion, catering to varied sections in an election year.

Wednesday, January 25, 2023

Letter to the finance minister

Honb’le Minister,

In the Dvapara Yuga, an epic war was fought between the forces of righteousness (Pandava) and unscrupulousness (Kaurava) , popularly known as the War of Mahabharata. In the 18 days long war, many important battles were fought. In one such battle on the 13^th day of the war, brave Pandav Prince Abhimanyu, son of Arjuna, was killed by the top Kaurav generals.

Jayadratha, the king of Sindhu State, and son-in-law of Kaurav king Dthrutrashtra, played the most critical role in this battle. Jayadratha had a boon from Lord Shiva that for one day in a great war he will be able to check the advance of the entire opponent army, except Arjuna. In this particular battle in Mahabharata war, he used that boon to stop the entire Pandava army from helping Abhimanyu, who was ambushed by senior Kaurava generals and killed. Arjuna was tactfully distracted from the main battlefield. The next day, Arjuna avenged the death of his son, by beheading Jayadratha.

The point in narrating this story is that 1^st February is the day that belongs to you. Like Jayadratha you have a boon that on that day you could choose to help Indian people, ignore them or aggravate their miseries. You also have the power to choose who you want to help, ignore or inflict pain upon. Even though, GST and latest finance commission recommendations have diminished your powers that could be exercised on 1^st February (Budget Day); nonetheless you still have significant powers to make provisions and fund programs that could materially impact the life of marginal people. It is therefore up to you, whether you choose to be driven by short term political considerations and be afraid of the market reactions; or choose to strengthen the core of India's socio-economy structure by incentivizing savers, small entrepreneurs, exporters, and the people engaged in the farm sector.

It may be pertinent to note that this would be your last full budget before the next general election. You may choose to avail this opportunity to make it as memorable as 1991 Manmohan Singh’s revolutionary budget; 1996 P Chidambaram’s dream budget; or waste it for some short term considerations.

In particular, I would suggest the following measures be taken in the budget:

(1) Interest income of upto Rs. One lac, from small savings, bank deposits and corporate deposits etc. for individual depositors be fully exempted from tax.

(2) Maximum marginal rate of taxation for the salaried taxpayers with no ESOP, Housing and Transport benefits, be fixed at 25% with section 80 exemptions or 20% without exemptions.

(3) A comprehensive review of farm subsidies and taxation of farm income may be done. The new regime may include provisions like — The farmers may be assured a minimum level of household income equivalent to minimum industrial wages in the respective states for two adults per farmer household. Farmer households holding less than one hectare of land may be assured minimum remuneration for one adult per household. Agriculture income in excess of Rs10lakh per annum per household may be taxed at the rate of 20% for farmers availing subsidized inputs like seeds, fertilizer, power and water etc. One food processing mill per village set up in cooperative mode may be given 100% capital subsidy and GST subvention for 5yrs.

(4) Export basket of India should be widened. Significant incentives may be introduced to encourage export of goods and services that are yet not exported or exported in very small measures. Also, incentives may be provided for incremental export to the geographies that account for less than 1% of India’s total export.

(5) Large corporations may be incentivized to invest in and/or collaborate with their MSME vendors. Full capital gain exemption after 5years on the equity invested in their vendors; 150% deduction on the amount spent on training and technology transfer to vendors; ownership of IPR developed together to MSME; common environmental, civic and other regulatory clearances for the ancillary units set up in close vicinity; etc.

Needless to say, these are just a few indicative suggestions. There is so much more that could be done to accelerate the growth of the Indian economy and make it much more inclusive and sustainable.

Yours truly.

Friday, January 20, 2023

Some notable research snippets of the week

Logistic sector (Jefferies Equity Research)

Formalisation of the logistics sector is a multi-year theme that should play out. We adjust our numbers for lower international cargo volume growth seen in 3QFY23, but believe that follow-ups to the National Logistics’ Policy (NLP), continuing GST driven organised players’ share gain, Dedicated Freight Corridor (DFC) traffic increase, Concor privatisation should play out in 2023.

NLP targets dropping logistics costs to less than 10% of GDP from the current 14-15% with initiatives including 1) Integration of Digital System (IDS) 2) Unified Logistics Interface Platform (ULIP) 3) Ease of Logistics (ELOG) and 4) Network Planning Group (NPG) and System Improvement Group (SIG). Under the IDS, thirty different systems of seven departments will be integrated and will include data of the road transport, railways, customs, aviation and commerce departments. We believe results will take time but systematically the government will reduce red tape and put in processes that ensure organised sector gains share vs the unorganised disproportionately.

Public sector banks (Motilal Oswal Investment Services)

Over the past few years, PSBs have focused on strengthening their balance sheets and consequently the GNPA/NNPA ratio for PSBs improved sharply to 6.5%/1.8% in Sep’22 from the peak of 14.6%/8.0% in FY18, respectively. PCR over similar period also improved markedly to ~72% from 45% in FY18. With the NPA cycle being largely over and no large ticket corporate accounts under stress we expect PSB’s asset quality to strengthen further over the coming quarters. Further, SMA book across top seven PSBs stands modest at 19-50bp that augurs well for incremental slippages. This will keep the credit cost benign and support overall profitability.

Margin trajectories for PSBs have revived and expanded ~8-31bp over 2QFY23 for top seven PSB’s. We, however, note that bulk of the loans for PSBs is linked to MCLR (6-12m tenure), which will drive the lagged re-pricing even as MCLR rates rise gradually. We note that against a 225bp rise in repo rate, MCLR rates across these PSBs have risen 85-100bp (barring SBIN at 130bp) thus leaving room for further expansion.

We believe that PSBs are on track to undergo complete earnings normalization, aided by lower credit costs. We expect average credit cost of top seven PSBs to moderate to 1.2% by FY25 from 3.3% over FY18–21. Overall, we forecast top seven PSBs under our coverage to report a PAT of INR1.3t in FY25 v/s a loss of INR594b in FY18. Thus, we expect 29% earnings CAGR over FY22–25 and estimate these PSBs’ RoA/RoE to improve to 0.9%/14.2% in FY25, respectively.

We note that the current RoA despite a lower treasury income forecast stands significantly lower than the average seen over FY04-13. Our current credit cost estimate too stands 14-35bp higher than the 10-year average for most banks barring BoB, BoI and SBIN. Thus, the quality of earnings also has improved which will enable PSBs to sustain ~1% RoA and possibly improve further to 1.1%-1.2%.

We continue to believe that sustained and consistent performance on delivering healthy return ratios can result in further re-rating of the stocks. We note that while the improvement in RoE’s has been encouraging, a sharp moderation in NNPA ratio has resulted in a much higher increase in ABVs. Thus, ABV for top seven PSB’s is likely to grow at 12-23% range over FY22-25E v/s 14-19% for top private banks. Valuations thus appear attractive considering the growth/profitability outlook.

WPI at 22months low (BoB Capital)

WPI inflation slipped down to 5% in Dec’22 from 5.8% in Nov’22. This was led by moderation in food (0.7% from 2.2%) and manufactured product inflation (3.4% from 3.6%). However, fuel inflation inched up (18.1% from 17.4% in Nov’22). Within food, prices of fruits and vegetables, especially tomato pulled down the prices. However, there is an uptick in cereal inflation. Improvement in rabi sowing bodes well for wheat prices. Core WPI softened to 2-year low of 3.2% in Dec’22 from 3.5% in Nov’22 owing to the dip in manufactured inflation. Going ahead, we expect further easing in WPI inflation on account of base effect in H1FY24.

Banks: New provisioning norms (Kotak Institutional Equities)

The RBI has placed a discussion paper which would ask banks to shift to Expected Credit Loss (ECL) based provisions from the current norm of building provisions after an occurrence of default. Provisions have to be built on the basis of self-designed models that capture the regulatory guidance and would have to be approved by the regulator. Banks shall measure ECL of an applicable financial instrument by classifying the loans in three stages (Stages 1, 2 and 3). It would have to look at (1) probability of default by evaluating a range of possible outcomes, (2) time-value of money, and (3) past events, current conditions and forecasts of future economic conditions. There is no timeline for the implementation, but the regulator is likely to give a (1) one-year transitioning period from the time of final implementation to place the necessary infrastructure and (2) a one-time five-year adjustment period to capture the initial cost of transmission. This would be captured through a relaxation in the CET-1 calculation.

The initial reading suggests that the RBI probably wanted banks to complete their provisions from the previous corporate NPL cycle before migrating into a new regime. We are seeing provisions come off sharply and are likely to reach historical lows that we saw in FY2004 in FY2024-25. A five-year transitioning period of the initial migration costs should make it comfortable for most banks. The previous cycle (2004-22) saw credit costs at 200 bps annually, with the cycle showing higher provisions for FY2014-20. The challenge: quality of the data is not sufficient to build these models.

A key challenge is the data that goes behind these assumptions. Estimating default probabilities or losses requires rich data sets that capture various cycles. We have had two long credit cycles in India in the past three decades. Both these cycles were characterized by large defaults in the corporate sector. The first cycle (1994-2002) was mostly with public banks, while the next cycle had the impact visible in a few large private banks. The retail cycle was probably tested once during Covid and the regulatory dispensation provided at that time masks the probable performance post default. While ECL is the best way forward, we need to acknowledge that we are also moving with less quality of data as well.

Electricals & Durables: Better days ahead after last year of pain (Axis capital)

Just when the industry was seeing a silver lining in the clouds (after multiple waves of Covid-19), the Russia-Ukraine war outbreak in Feb’22 led to global spike in commodities, which impacted margins for the sector over the last 4 quarters. The storm clouds have receded somewhat now through a mix of fall in commodity prices, price hikes, cost cutting and industry consolidation. Hence, we are more constructive on the sector given double-digit growth opportunity over next 5 years still exists.

China reopening boosts copper outlook (ING Bank)

Beijing has released a raft of policy measures in recent weeks which have increased confidence that the economy is stabilising, improving the outlook for industrial metals, including copper. For almost two decades, China’s property sector growth and the country’s rapid urbanisation have been the key driver of growth for copper demand.

China will return to “normal” growth soon as Beijing steps up support for households and businesses, Guo Shuqing, party secretary of the People’s Bank of China, told state media recently. The world’s biggest consumer of copper is expected to quickly rebound because of the country’s optimised Covid response and after its economic policies continue to take effect, Guo said.

In its most recent move, China is planning to allow some property firms to add leverage by easing borrowing caps and pushing back the grace period for meeting debt targets. The move would relax the strict “three red lines” policy which had contributed to a historic property downturn, hitting demand for industrial metals. The easing would add to a raft of policy moves issued since November to bolster the ailing property sector, which accounts for around a quarter of the country’s economy.

Credit Offtake Moderates on Base Effect, Deposit Growth Stays Slow (CARE Ratings)

· Credit offtake rose by 14.9% year on year (y-o-y), for the fortnight ended December 30, 2022. The growth has been driven by a healthy rise in NBFCs, retail credit, and working capital demand driven by inflation and capex.

· Deposits saw a slower growth at 9.2% y-o-y compared to credit growth for the fortnight ended December 30, 2022. The short-term Weighted Average Call Rate (WACR) has increased to 6.36% as of December 30, 2022, from 3.33% as of December 31, 2021. Further, deposit rates have already risen and are expected to go up even further due to rising policy rates, intense competition between banks for sourcing deposits to meet strong credit demand, widening gap credit & deposit growth, and lower liquidity in the market. Over the last couple of years, (i.e., from March 27, 2020) credit offtake has almost reached the Covid-induced lag, rising by 29.6% in absolute terms compared to 30.7% of deposit rates.

· The credit growth has continued to be in double digits and has been broad-based across the segments and is likely to remain strong in FY23. Meanwhile, this reduction would have to be monitored in the coming fortnights to determine if the credit offtake has peaked and is returning to a lower growth rate.

OMCs: Low oil and strong refining ease pain (Kotak Institutional Equities)

We believe as oil demand recovers, oil markets will get progressively tighter in 2023. We moderate our FY2023 oil price assumption to US$95/bbl (earlier US$105/bbl). We assume oil price of US$90/bbl for FY2024/2025E, and US$80/bbl for LT (earlier US$90/bbl for FY2024, US$80/bbl for LT).

OMCs: Concern on under-recoveries ease; full compensation looks unlikely With lower oil prices, strong refining margins (particularly middle distillates), and exports tax (OMCs negotiate lower refinery transfer price, and effectively pass on some marketing losses to refiners), the worries on marketing losses are now lower. Also, with weakness in gasoline cracks, OMCs now have over-recoveries on petrol. Compared to nearly Rs1.1 tn under-recoveries in 1HFY23, we estimate only ~Rs150 bn under-recoveries in 2HFY23E.

In our view, unlike the past when OMCs were near-fully compensated for fuel under-recoveries, the compensation will be much lower. As such, with petrol/diesel officially deregulated and OMCs having freedom to price, the compensation is difficult. For past LPG losses (June-2020 to June-2022), government had given one time compensation of Rs220b in 1HFY23. Recently, the media has reported that OMCs are seeking further compensation of Rs500 bn. For our forecasts, we do not assume any further compensation.

Preview of Union Budget 2023 (Axis Capital)

FY23 performance: Total receipts is likely to be higher than budget by INR 3.3 trillion due to strong nominal growth and tax buoyancy on the back of consumption recovery. However, this gain in receipts is fully spoken for via higher food and fertilizer subsidies of INR 1 trillion each. The government’s cash outgo in the recently announced supplementary grants is also ~INR 3.3 trillion. We expect fiscal deficit in FY23 to slow to 6.1% of GDP from 6.7% in FY22 and 6.4% budget target.

FY24 budget expectations: Central government’s fiscal deficit is likely to fall further to 5.7% and will be on track to achieve 4.5% of GDP by FY26. The 0.4% of GDP fiscal consolidation is supported by INR 1.5 trillion drop in food and fertilizer subsidies due to merging of food subsidy under PMGKAY with NFSA and correction in global fertilizer prices. This outcome along with modest tax buoyancy (12% YoY growth) should give the government space to target low double digit spending growth in rural development and capex.