Unlike what is usually associated with the Indian Budget, the one announced this year contained nothing dramatic or path-breaking and had little that concerned the common man directly. But at the same time, it was growth and investment-oriented with a reformist approach. It did disappoint many vis-à-vis their expectations, but the best thing was that the Government avoided including any populist measures, notwithstanding that we have many State elections coming up.
FISCAL MATH – The deficit for FY 22 is exceeded by 0.1% and pegged at 6.9% of GDP vs. an estimate of 6.8%, despite robust revenue collections. This overshoot is due to higher expenditure. But this may still come down due to increased tax collections. But the estimate for FY 23 is kept at 6.4% of GDP which looks achievable due to higher tax collections that will accrue due to higher nominal GDP which is projected at 11%. This is despite higher budget allocation at the Central level by an additional 3.5 trillion. But importantly, the budget also allows States to run a deficit of 4% vs. 3% mandated by the Finance Commission, besides allocating 1 lakh crores as a 50-year interest-free loan over and above the normal borrowings. Allowing states to spend more is very positive as they contribute two-thirds of the CAPEX. The budgeted deficit may be easily met as the revenue estimates look quite conservative considering the projected growth.
HIGHER GOVERNMENT BORROWINGS - The borrowing numbers at Rs. 14.95 lakh crores are higher than even the highest estimate among market participants. It’s not been offset with any announcement regarding overseas trading of Indian bonds or bond index inclusion. 69% of the fiscal deficit is expected to be funded with market borrowing, which is higher than in recent years. Reliance on small savings borrowing is pegged at Rs. 4.25 lakh crores vs. Rs. 5.91 lakh crores in FY 22. The borrowing program will be very challenging for the market in a year when RBI is expected to raise rates and curtail excess liquidity. It is not, therefore, surprising that the bond markets sold off with yield on 10 years rising more than 20 basis points from the low of the day. Part of the borrowing is envisaged through the issuance of Green Bonds as borrowing for green infrastructure. It is not clear how these Bonds will be made more attractive to invest in.
GDP AND REVENUE PROJECTIONS - Nominal GDP for FY 23 has been projected at 11.1%. The economic survey had indicated growth of 8.00 to 8.5%. Assuming inflation at even 4-5%, the nominal GDP growth should have been above 12%. Accordingly, even the revenue projections have a touch of conservatism. Thus, we feel the deficit target of 6.4% for FY23 will be easily met unless we have a big overshoot in expenditure. HIGHER CAPEX – Budget’s clear emphasis on expanding capital expenditure is a welcome directional change particularly since a larger portion of 45.2% of fiscal deficit is being devoted to capital expenditure (Rs. 7.5 lakh crores), with higher allocations for roads and railways, but lower for financial services. At a two-decade high it spells a welcome structural change in government expenditure in favour of capital expenditures. Further, the central government’s efforts to nudge states through incentives have aided in contributing to the recovery in CAPEX spending by states. This is clearly pro-growth and pro employment. The approach seems to be to support and incentivise supply-side capacity creation for sustainable growth over a longer period of time. Revenue expenditure has been contained with lower subsidies for fertilizer and food as well as for the MGNREGA scheme.
DISINVESTMENT - Disinvestment targets have been revised down (perhaps getting more realistic). Budget estimates Rs. 780 billion for FY 22 against an earlier estimate of 1.75 trillion, while for the next year it is estimated at 650 billion rupees. Though the Finance Minister stated that the LIC IPO will happen soon, one can conclude that the size of the proceeds from the same is going to be much less, though the valuation of LIC is yet to reach the final conclusion. It leads us to think that this IPO will be split between two fiscal years. Smaller IPO this FY means that related FX flows will be lower which will be easily absorbed by RBI without any major appreciation pressure.
OTHER MEASURES TO BOOST GROWTH AND INVESTMENTS - Concessional tax rate of 15% for domestic manufacturing companies commencing manufacturing or production by 31 March 2023 extended to 31 March 2024. Profit-linked tax exemption for eligible start-ups extended by another year. Start-ups incorporated up to 31 March 2023 will now be eligible. Several changes to duty rates aligned to the “Make-in-India” and “Atmanirbhar Bharat” policies have been made. Proposal to phase out concessional rates in capital goods and project imports gradually; moderate tariff of 7.5% made applicable.
Focus on promoting digital economy & fintech, technology-enabled development, energy transition, and climate action. SEZ Act to be replaced by new legislation to enable states to become partners in ‘Development of Enterprise and Service Hubs’.
TAXES - There have only been minor changes in the taxes, like capping surcharge on LTCG at 15%, tax relief for differently enabled persons, the establishment of faceless customs, removal of some of the age-old duties and exemptions, simplification of custom rate and tariff structure particularly for sectors like textiles, chemicals, and metals. Further, more rationalizations have been introduced to encourage domestic production. For the gems and jewelry sector which has contributed to a big surge in exports, customs duty has been cut on cut and polished diamond and gemstones, besides implementing a simplified regulatory framework to facilitate the export of jewelry through e-commerce. Income from virtual digital assets (including cryptocurrencies) will be taxed at 30% with only the cost of acquisition being allowed a deduction. Gifts of virtual digital assets will be a benefit taxable in the hands of the recipient. TDS at 1% introduced for virtual digital assets transactions.
IMPLICATIONS FOR MARKETS - Higher borrowings and uncertainty about the timing of including India bonds in the Global Bond Index are negative for the money market and yields will see upward pressure. However, as foreigners’ holding of Indian Bonds is far less now, we may not see a big forex outflow due to the same. On the other hand, further higher yields above 7% will bring inflows from them once RBI normalizes the policy. India’s monetary policy is likely to tighten in the coming months as RBI responds to sustained higher inflation and global tightening trend. However, in its place, the higher fiscal from the Government is expected to support the economy. The budget has assumed crude oil prices at 70-75 per barrel, which looks very optimistic. As per current trends, oil is likely to be pegged at a much higher level and that has negative implications for the trade and Current Account with attendant pressure on Rupee. Emphasis on growth in the budget will boost the corporate sector and possibly re-rate the earnings growth. This is likely to bring back the FII investments in selected sectors. Besides, long-term growth prospects being cemented will continue to attract direct investment in Indian corporate. Disinvestment targets have been moderated, but there is the likelihood of outperformance. However, globally tightening financial conditions will adversely affect the carry flows. Thus USDINR is likely to move in the range between 73.50 and 76.50 with Central Bank’s presence at extremes preventing undue volatility.
Jayaram Krishnamurthy, Co-Founder & COO, Almus Risk Consulting.