INVESTORS HAVE LITTLE TO COMPLAIN
The government shows its intent to continue with reforms
As I write this article, markets in India are euphoric, up more than 4.5 per cent. The biggest positive surprise for the markets has been no attempt to raise taxes by the government. Markets were expecting at the minimum some type of surcharge on the more affluent. While a big positive, the flip side of no tax has been no increase in total expenditure (less than 1 per cent) by the government, despite budgeting nominal gross domestic product (GDP) growth of 14.4 per cent for FY22. The government will not keep spending to support the economy. The Finance Minister (FM) has basically budgeted for 22 per cent increase in direct taxes and the goods and services tax (should be achievable) and this combined with disinvestment receipts rising to ~1.75 trillion (from ~32,000 crore achieved in FY21) has been entirely used to lower the fiscal deficit by ~3.4 trillion. This is obviously a big bet on growth and revenue buoyancy, but a bet worth making in my view. In fact, the nominal GDP growth assumption of 14.4 per cent for FY22 is likely to be exceeded, with positive outcomes on revenues.
Within the construct of no increase in total expenditure, there has been a 26 per cent growth in gross budgetary support for capital expenditure to ~5.54 trillion (increase in capex of ~1.15 trillion). This capex increase and rise in interest payments of ~1.16 trillion has been funded entirely by a dramatic reduction in subsidies, which are supposed to decline by ~2.6 trillion in FY22 as we roll back some of the emergency Covid support measures.
Instead of trying to raise taxes, and accelerate the fiscal correction, which would have hurt animal spirits and sentiment, the FM has put us on a glide path of gradual fiscal consolidation linked to revenue buoyancy and growth. This approach makes sense and gives us the chance to grow out of our fiscal hole. It is refreshing that the government has not gotten boxed in by the artificial constraints of the Fiscal Responsibility and
Budget Management
Act or the fear of rating agencies.
On the structural side, there were some clear positives. The government has now fully embraced privatisation.
There is no longer any shyness. There is also a clear realisation that we cannot keep squeezing the same 20 million taxpayers for more and more revenues and the government has to monetise assets. There were many announcements in this regard, from PGCIL and the NHAI putting ~12,000 crore of assets into Invits, to other PSUS such as GAIL or AAI and the railways also using the Invit structure to unlock value and recycle capital. There also seems to be a real focus on trying to monetise the large land holdings of the government. This will all require very good execution.
For the financial system, the announcement of privatisation of two public sector unit (PSU) banks and one general insurer is path-breaking. It shows that despite the difficulties with the farm law reform, the government is not shy to push ahead with other difficult reforms. If India is to grow at 7-8 per cent real, our financial system has to be able to support 14-15 per cent credit growth. The PSU banks in their current avatar cannot support this growth. Privatisation and consolidation is the only way forward. This realisation seems to have finally dawned. The setting up of a government owned asset reconstruction company to buy bad debt from the PSU banks will unclog their balance sheets and allow lending to restart, and allow actual NPA sales to happen given the nature of ownership.
The raising of the foreign direct investment cap in insurance to 74 per cent, was overdue and will help the sector to attract new capital and grow. Insurance will be a key provider of long-term capital for infrastructure. It has to be allowed to grow and attract as much capital as possible.
The setting up of a new infrastructure-focused development finance institution with an initial capitalisation of ~20,000 crore and a plan to take its balance sheet to ~5 trillion in three years is aggressive but much needed. Again execution the is key.
The consolidation of most financial market regulations under one code should ensure simplicity and consistency in laws. There seems to be a strong focus on the REIT and Invit structures. Foreign portfolio investors have been allowed to buy debt issued by these entities and there has been simplification in their tax deducted at source rules. There is an attempt to create a permanent institutional framework to support the corporate bond market and ensure they do not freeze like we saw post the IL&FS fiasco.
There seems to be another scheme of ~3 trillion to revamp the power distribution sector. One can only hope it is more effective than its predecessors.
We see further simplification on taxation with the period allowed to reopen a tax assessment reduced to three years.
Quite a lot of structural measures in the Budget. The bond market may be a little worried given the net market borrowing requirement of ~9. 6 trillion and almost ~4 trillion from the small savings pool. Big numbers, considering that the original Budget for FY21 had a net market borrowing of only ~5.35 trillion. Yields are up by 16 basis points. However, we have been able to support a market borrowing programme of ~12.73 trillion this year, with small savings contributing ~4.8 trillion. The Reserve Bank of India should be able to calm the debt markets. The rupee thankfully was stable.
Net-net a good Budget. Markets are relieved. The government is making a big bet on growth, monetisation of assets and has shown its willingness to continue to reform. Equity investors have little to complain.
For the financial system, the announcement of privatisation of two PSU banks and one general insurer is path-breaking. It shows that despite the difficulties with the farm law reforms, the government is not shy to push ahead with other difficult reforms