Growth, growth and more growth is the underlying mantra for the season. As we approach Budget 2021, the Indian economy has been in a recovery mode post Covid-19's negative impact. Various sectors have been recovering and PMIs have been moving up smartly.
With this growth background, investors were hoping for a budget that would raise resources without raising taxes. That is what the finance minister has delivered. No increase in taxes, no introduction of covid-cess, no super-rich tax, no changes in capital gains tax, no estate duty/ wealth tax and no major increase in indirect taxes.
Economic growth is planned to be funded through a variety of options such as larger market borrowings, disinvestments in non-core companies as well as in large companies such as the LIC and Air India, monetisation of government operational assets, monetisation of government land, privatisation of two public sector banks and one public sector general insurance company, and the new agricultural infrastructure cess. With a 35 per cent increase in capital expenditure to Rs.5.54 lakh crore, the focus is undoubtedly on growth.
The government’s borrowing programme has also increased substantially. From a gross borrowing of Rs 7.8 lakh crore budgeted in the financial year 2020-21, the revised estimate for the same period is at Rs 12.8 lakh crore (including an additional Rs 80,000 crore in two months of FY21). The borrowing target for FY22 is at Rs 12 lakh crore. The net tax revenue is budgeted to increase by 15 per cent on the back of an expected 14.4 per cent nominal GDP growth in FY22.
On the other hand, the total expenditure for FY22RE at Rs 34.83 lakh crore is flat as compared to the FY21RE of Rs 34.50 lakh crore. This flat expenditure plan for FY22 is likely to bring down the fiscal deficit number from 9.5 per cent in FY21RE to 6.8 per cent of the GDP in FY22BE. Interest burden is estimated to increase by 17 per cent in FY22.
It will be crucial for the government and for the RBI to ensure that this does not result in an upward pressure on interest rates and that they are able to smoothen the borrowing programme. If mismanaged, it could result in increasing the deposit and cost of capital.
The government has also laid down a path to the much-awaited 'bad bank' concept by creating a platform to aggregate all public sector banks' NPAs and have an asset reconstruction and management company for subsequent sell downs. Continued benefits to affordable housing and benefits to healthcare, MSME, farmers, rental housing, infrastructure, REITS, InVITS and further opening of the insurance sector to foreign investors are some of the areas of focus.
Monetisation of assets, including government land, should find interest among many local and foreign investors. Formation of a financial institution for infrastructure financing with an initial capital of Rs 20,000 crore and a lending target of Rs 5 lakh crore in three years can provide a much required fillip.
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Equity markets have witnessed a sharp jump and the debt markets yields have increased only by 12-15 basis points, despite the higher borrowing calendar. While the capital markets have shown massive confidence in the budget, growth will need to be felt at the grassroot levels for the euphoria to sustain. The new avenues for funding will need to come through and provide the intended capital for economic growth.
This visionary budget will need to be backed with consistent and surgical precision execution of the intended reforms. Ensuring that resources are raised without a delay will be the real key to guarantee that growth triumphs over the problems that can emerge due to increased borrowings.
(The author is chief investment officer-listed investments at Waterfield Advisors. He was previously with BNP Paribas as head of investment services.)