Monthly Archives: February 2021

Butterfly Effect

Butterfly Effect

In 1961, when Edward Lorenz (Mathematician and Meteorologist) was working on atmospheric forecasts, he was amazed to find that a minute change from 6 decimals to 3 decimals in the historical data, generated a completely different forecast of the weather. Slight change in the input can cause a large variation in the output. He titled this phenomenon, “Does the Flap of a Butterfly’s Wings in Brazil Set off a Tornado in Texas?”

Before budget, many expected an increase in taxes in some form: either a “Covid Cess” or increase in Income tax or an increase in capital gains tax. However, the Finance Minister surprised with hardly any increase in taxes and taking a higher fiscal deficit target of 6.8% for FY22.

In simple words, one may have a question. ‘Why everyone is praising this budget when there is no tax benefits?”. The answer lies in ‘Butterfly Effect’. No one realized the effect of 1991’s budget on the very same day but it created strong ripples for long term growth. This year’s budget has similar effect which may not be visible today but has huge impact on future.

The intent is clear: the government is looking to spend on capital expenditure to accelerate economic growth. The non-occurrence as per expectation may seem like a marginal change overall, but it has a profound impact in changing the narrative. This is a very pro-investment narrative. The efforts to improve ease of doing business and the incentives provided to businesses have a significant impact on the business confidence in the economy.

The budget improves growth estimates and earnings visibility for many sectors and companies. These companies, sector and themes are likely to see their valuations rerated upwards. Investors, who are patient and have a long-term view will be the ones who gain from this Butterfly Effect.