The big surprise in the Union Budget is the government’s willingness to gamble on the budget deficit. Not since Pranab Mukherjee’s 2009 budget, have we seen such an aggressive budget. The difference, however, is that whilst Mr. Mukherjee ramped up the UPA government's revenue expenditure (especially on NREGA), the NDA government has stepped up capex.
The big thrust in this year’s budget is for infrastructure development. The National Infrastructure Pipeline (NIP) is targeted to undertake a total of 7,400 projects this year and a Development Financial Institute (DFI) will be set up with Rs 20,000 crore capitalisation and lending capabilities of 5 trillion over the next three years. This is definitely a big boost for infrastructure projects in the country. In total, government capex for financial year 2021-22 (FY22) is estimated at Rs 5.54 trillion--up from Rs 4.39 trillion in FY21, a steep rise which will aid in boosting the economy.
The fiscal deficit is estimated at 6.8 per cent of gross domestic product (GDP) in FY22. Whilst this number is higher-than-expected, it will help boost FY22 GDP growth. The downside, however, is that the extensive government borrowing required this year and next year could force the reserve Bank of India (RBI) to tighten monetary policy sooner than the stock market would like. Whilst some fear that the global rating agencies could take a dim view of India’s fiscal expansionism, by focusing on capex focused spend, the Finance Minister has made it very hard for the rating agencies to take adverse action vis-à-vis India’s sovereign debt rating.
There are two aspects of the budget where the fine print will be very interesting to read. The government plans to launch a single Securities Market Code, encompassing the SEBI Act, 1992, Depositories Act, 1996, Securities Contracts (Regulation) Act, 1956, and The Government Securities Act, 2007. What sort of regulatory regime emerges from this, how much more customer friendly financial regulation will become remains to be seen.
Secondly, whilst announcing a relatively modest disinvestment target for FY22 (of Rs 1.75 trillion), the government said that intends to privatise two public sector banks (PSBs). Related to this, the government said that it would create an asset reconstruction company (ARC) to act as a ‘bad bank’. We await details of how the bad bank would be funded, which banks it will buy assets from the PSU banks and which sectors’ stressed assets will be prioritised. We cannot help but feel that if the government wants to successfully privatise PSU banks, it will have to get the bad bank ARC rolled out sooner rather than later.
The stock market is cheering this budget because it is relieved to see no incremental capital gains taxes or taxes on higher rate Income-Tax payers. Whilst the real economy will in the near-term benefit from the expansionary nature of the budget, for these gains to be long lasting, we need to see tangible progress in asset monetisation and privatisation by the government. If they can pull that off in the post-Covid-19 world, then the 2021 budget can go down in history as a turning point in the socialist orientation of the Indian state.
(Saurabh Mukherjea and Nandita Rajhansa are founder and analyst, respectively, at Marcellus Investment Managers. Views expressed are personal.)