On the right flight path
The stance of the Budget is in line with the Economic Survey’s recommendation in using its balance sheet as a counter-cyclical lever to address the economic loss due to the pandemic. Continuing high direct spending is augmented by multiple reforms and other measures to quickly get back to a sustained high growth path. Overall, the Budget is a fine balance between prudent spending to maximise an immediate effect on demand and incentives to attract both domestic and foreign capital.
High-frequency indicators indicate a quicker recovery. However, while GDP recovery has been quick, it is still uneven with parts of the services sector. Sustaining this into high potential growth, necessary for absorbing the growing labour force will have required continued policy support, particularly a continuing fiscal stimulus, as is indeed evident across the world.
The Budget is growth-oriented with focus on stimulating the economy in the near term through double digit increase in capex. The growth upshot from the spending push in the budget can be quite large with the economic survey showing that policy stimulus tends to have higher multiplier effects during a downturn. We shouldn’t be surprised by upward revision to GDP growth expectations. Crucially, the public sector spending push is seen as a win-win with studies apparently showing no evidence of crowding out of the private sector in emerging markets. The argument made is that stronger growth outlook would stave off debt sustainability concerns, attract capital into the country and maintain sanguine liquidity conditions in domestic money markets.
What has surprised markets is the sharp upward revision to expenditure in FY21, 13 per cent growth in BE versus 28 per cent year-on-year (YOY) in RE when in fact actual achievement Aprildecember is just 8 per cent growth in total central government expenditure. We believe this could be due to subsuming Food Corporation of India debt into fiscal which explains higher deficit on record and much higher financing of the fiscal deficit by National Savings Scheme. Overall expenditure in FY22 has been kept broadly unchanged (+1 per cent with revenue expenditure falling (-2.7 per cent) due to unwinding of pandemic relief measures under heads such as MGNREGA while commensurately bumping up capex spending. Overall, capex spending by the central government plus public sector enterprises is pegged to rise 4.8 per cent in FY22.
The finance minister’s speech boosted sentiments through announcement of anticipated reforms like infrastructure funding through a new Development Finance Institution, ‘bad bank’-type structure for resolution of stressed assets, allowing higher FDI in insurance and commitment to privatisation of public sector enterprises. The finance minister’s statement that the centre would incentivise states to divest their public sector enterprises speaks to the intent of the government to improve capital allocation.
The government is banking on improvement in tax buoyancy with corporate and income taxes expected to grow at about 22 per cent YOY in FY22. Central excise is expected to fall by 7 per cent. This should accommodate fuel excise cuts in the future to cushion against anticipated crude price increases. Overall revenue growth assumptions are a touch optimistic when seen against 14.4 per cent nominal growth assumption in FY22. However, given that growth itself has potential upsides these revenue assumptions could be within reach.
The budget promises to have both policy engines, monetary and fiscal, firing in union. However, 2021 could prove to be an especially complicated year for the Reserve Bank of India (RBI). Firms are likely to regain pricing power and pass on rising input costs with growth finding traction. Meanwhile, the RBI would be hoping for vaccines to fully restore supply chains to PRE-COVID levels thereby easing price pressures.
THE FM’S SPEECH BOOSTED SENTIMENTS THROUGH ANNOUNCEMENT OF ANTICIPATED REFORMS LIKE INFRA FUNDING THROUGH A NEW DFI, ‘BAD BANK’-TYPE STRUCTURE FOR RESOLUTION OF STRESSED ASSETS, ALLOWING HIGHER FDI IN INSURANCE AND COMMITMENT TO PRIVATISATION OF PUBLIC SECTOR ENTERPRISES