A non-combative budget

Union budget of India for FY22 rode on zero expectations and strong negative perceptions across the market, despite shouldering a heavy liability of “the best budget in 100 years” (later salvaged by the Prime Minister), thanks to rumour filled chat groups and social media across India. The impact of Covid on FY21 which won’t be forgotten atleast till the next pandemic (maybe another century going by the trend), has led to many speculations on additional Wealth tax, Covid cess and few other theories on the State moving towards total socialism. Authorities generally test waters with the general public on certain decisions, even before they are tabled in front of the cabinet for approval. One such leak through IRS officers may have included Covid cess. The relative trend in the financial markets weeks ahead of the budget clearly sent a shockwave to the government on how a new tax (or loot) will be viewed, especially in these sensitive times when the economy just started shrugging off 2020 as a bad dream. Added to that, highest factory output in 3 months and record high GST receipts in Jan 2021 compelled the government to ensure it isn’t getting into any misadventure at this time.

Finance Minister chose the best way out of this conundrum by:

• Maintaining Status quo on tax slabs,
• Stagnating the borrowing figures for FY22 without going overboard,
• Aggressive CAPEX projection for FY22,
• Moderate disinvestment plan,
• Modernization of certain archaic institutional practices/procedures to cut costs

If there’s ever a term called risk-free budget, then FY22 Union budget of India fits the bill and will remain a benchmark (smart budget that dodged the expectation of an aggressive reform-orientated budget).

Creation of a Bad bank: Experts have been asking India to emulate the Sovereign bad bank concept adopted by Malaysia (read: Danaharta) for a couple of years now. The infrastructure and financial services boom between 2002 to 2012, started showing cracks over the last 2 years with a surge in bad loans. GNPAs as at September 2020 stood at 7.5%, though some challenge this figure to be way higher. RBI’s recently released FSR predicted this number to shoot-up beyond 13.5% with PSU banks claiming market leadership in bad loans (as has been the trend with government owned institutions). Finance Minister finally announced a an ARC and management company (within the principles of an asset management company) to aggregate these bad loans (not to be confused with stressed assets which is an umbrella term for NPAs, restructured loans and written-off assets) from financial institutions at a discount during the very initial stages where banks feel there could be no clear cut resolution to the problem. The Asset management company that will be owned by the government then manages these assets and hopes to recover its investment and maybe even profit to support other assets that have to be totally written off the books. However, there’s still no clarity on the framework pertaining to such transfers, managers of this yet to named ARC / AMC (hopefully not another bureaucrat) and more importantly how it gets integrated with the IBC process without further complicating it.

Expansion of Keynesianism: It’s a time tested and logical method to prop up an ailing economy by increasing the aggregate investment (especially by the government) thus increasing the aggregate output, generating employment and encouraging private sector within the country. The government has increased its CAPEX commitment for this year by 34% (YoY) to $75Bn with an additional $27Bn reserved for States. Major chunk of this still doesn’t go into productive segments like education, while infrastructure (especially roads, ports etc.) and healthcare have been given a quantum push.

Disinvestment plan: The government played extremely safe here. The best way to achieve disinvestment plan is by setting a higher target. The disinvestment target has been set at about 1.75 lakh crores (or $24Bn) which is more of a modest number while it could have still been kept at over 2.0 lakh crores. This plan includes IPO of LIC (that is if the actuarial process gets done by say Oct-Nov), sale of 2 PSU banks, a PSU insurer and a bunch of other PSEs. Of this entire target, close to 1.0 lakh crores (or $14Bn) are expected straight out of LIC’s IPO if managed properly.

Status quo borrowing plan: The FM has been a bit careful with the $164Bn borrowing plan, to avoid riling up credit rating agencies. However, this number is sure to push up overall yields and thus borrowing costs of corporates unless RBI’s policies are lenient and hybrid. Suggestions of printing currency can be toxic and inflationary when combined with the aggressive capex plan of the government for FY22. Irrespective of the above, the Sovereign rating is likely to get corrected this year below the Investment grade for the first time since 2002 (let’s hope not), due to the government’s guidance of a 9.5% fiscal deficit for FY22. This is a huge deviation (unavoidable deviation unless there’s more thrust on asset monetization, reforms and disinvestment) from the FRBM act. The projected borrowing plan doesn’t include the off-balance sheet borrowings of the government (like Food corporation of India to dole out food subsidies).

Muted reforms: Barring the FDI limit increase in the Insurance sector there’s hardly any room for structural reforms in the budget. Few digital initiatives like faceless dispute appellate tribunal for small ticket tax disputes and a digital census is sure to bring logistical and manpower costs down. However, the start-up ecosystem has been grappling for more, including rationalizing LTCG with that of the listed companies, overseas listing window and other tax incentives. Financial sector reforms were missing as well, without which bad loans are expected to rinse and repeat across the public sector.