Union Budget FY22 not as fiscally expansionary as believed initially: Financial Express 8th Feb 2021

 Indian Union Budget 2021-22: Budget speeches are all about presentation, and hence the market movement following Budget FY22 unveiling on February 1 was a vindication of the positive vibes that were sent by the government. Words uttered are often taken at face value, and the market has cheered Budget FY22 all the way, as have all CXOs who have concluded that this is a Budget that shows the way with an aggressive stimulus through expenditure. Forty-eight hours after the announcement of the Budget, the Sensex had gained over 3,000 points. Hopefully, this fraternity should not have any complaints for the next 365 days on policy.

The characteristic of all Budget speeches is that they convey what has to be said in the best possible manner. Therefore, there are references made to the policies under Atmanirbhar series announced last year, a new set of reforms, outlays which will happen anywhere between two and six years; at times, FY22 (BE) figures are compared with FY21 (BE) numbers, and, on other occasions, it is compared with FY21 (RE). Sometimes, it is FY21 (RE) over FY21 (BE). Budget speeches also drift into poetry to, probably to lighten the environment or underscore the gravitas of a point. There is a clubbing of allocations, under modified new headings which add to the ‘wow’ factor. Hence, it is this author’s belief that, to really understand the Budget, one must take the time to digest the numbers by going through the Budget documents (downloadable from the Budget website) to get a more thorough understanding. This can take some time, but is more useful for making sense of a Budget’s import.

Has the Budget provided a stimulus? In terms of fiscal deficit—it is 6.8% of GDP—it sounds big, seems to involve lots of borrowing and, thereby, connotes a lot of spending. The fact that the timeline for reaching 4.5% fiscal deficit has been extended to FY26 means that we can expect significant deficit figures for the next few years, which clearly signals continued fiscal expansion. However, if we look at the size of the Budget FY22 and compare it with FY21(RE), the numbers appear to be broadly similar. In fact, if interest payments, which are now Rs 8 lakh crore are excluded, the expenditure for FY22, at Rs 26.71 lakh crore, will be lower than that for FY21 (RE), which stood at Rs 27.57 lakh crore. In a way, this does not really seem like expansion of spending.

Now, GDP growth has been taken to be lower than what the Economic Survey had presented, which means a conservative approach has been taken, pegging it at 14.4% rather than 15.4%. Therefore, real growth could be lower than 11%. Does this matter? It does for the Budget because the GDP in nominal terms was to be Rs 225 lakh crore in FY21 (BE) while, for FY22, it would be Rs 223 lakh crore. However, the tax to GDP ratio would be coming down from 10.8% to 9.8%. While tax collections from corporate, income and GST would be higher than that in FY21(RE) they would be lower than the budgeted numbers for last year. The same also holds for non-tax revenue, which is normally heavily dependent on RBI-surplus transfers and spectrum income. Income from ‘communications’ is estimated lower, at Rs 63,000 crore vs Rs 1.33 lakh crore targeted last year.

Either the Budget has been very conservative or has assumed that growth in FY22 will not really be buoyant. One conclusion is that the fiscal deficit number is more likely driven by revenue not growing at the desired rate and expenditure being at same level as FY21 (RE). Hence, a high fiscal deficit number may not necessarily mean more spending as revenue could be the contributing factor.

One major reason for euphoria was health spending. While the Rs 2.23 lakh crore number is higher than Rs 94,000 crore, the heading is ‘health and well-being’; the second part thereof relates largely to water & sanitation. The health ministry actually sees a dip in spending from Rs 78,806 crore in FY21 (RE) to Rs 71,269 crore in FY22 (BE). Around Rs 98,000 crore of the Rs 2.23 lakh crore headline number in the Budget speech is in the water & sanitation bucket, spread over multiple years, while there is an allocation of Rs 35,000 crore for Covid-19 vaccination.

Further, there has been some other economising in the Budget, which does not stand out and requires a close look to become apparent. The PM-Kisan scheme had lower outflows, of Rs 65,000 crore, last year as against a budgeted number of Rs 75,000 crore, which is being retained in FY22. This means that fewer people will have access to this scheme—108 million instead of 125 million. NREGA spending was up by around Rs 50,000 crore last year over the budgeted number, but has been reduced to Rs 73,000 crore. Hence, in a way, there has been some rollback of relief to the targeted sections, ostensibly because it is believed that this hand-holding may not be required as the economy chugs along.

There are some bits that will only become clear when the ministry officials give clarifications—the creation of a new DFI, for instance. This, in a way, could moderate expectations. The DFI announcement was a big one, but, it now appears that the new institution will either take over or be merged with an existing one (likely IIFCL). Therefore, it would be capitalising an existing structure and not necessarily creating a new one. The same holds for the bad bank, which, the financial services secretary has clarified that it will not be owned or funded by the government and will have to be created by the banks. This takes the fizz out because ARCs in the past have not quite worked out, because of the mismatch in expectations between buyers and sellers. Buyers want the lowest price and the sellers (the banks) the highest. There weren’t too many deals struck and the realisation rate was low, at around 20-25%, as against IBC’s 43-45%. The basic fear of PSBs was to sell at a low price and later get questioned. If the ARC were a government body, the willingness to sell at a lower price would be higher. Therefore, we may be getting back to the original state of slow decision-making.

The other big proposals relate to asset monetisation and disinvestment, which is now being called privatisation to signal a change in ideology. The first part will have more to do with the PSUs which sell assets through the InVits or Reits routes. That is outside the budget. If NHAI monetises a road, the money will go the entity. Disinvestment would be in the Budget, and it can be merry times provided the market has the appetite . Will there be fatigue at some stage, given all PSUs don’t fare well in the market? To begin with, there will be a burst of money, but towards the end of the year it will be interesting to see how things work out. More important, to get the right valuation, the market has to continue with enthusiasm and the Sensex has to move towards the next level—even 50,000 may not be enough!

Some tax benefits have been given to InvITs and REITs. But, will investors be assured that this will hold in future? This is the problem with continuously changing tax structures. Let us look at the taxation of interest on EPF savings of above Rs 2.5 lakh a year. The amount that is put in EPF is mandatory as dictated by the government. What was tax-free is now being taxed on grounds that it is the rich who benefit from this remaining tax-free. It is true for irrational sums being put in the EPF, but typically a person who reaches the Rs 2.5 lakh threshold is on the road to retirement and hence sees all future plans going awry. This has been a major problem with the tax rules over the last six year. One can never plan for retirement. Debt funds suddenly had the carpet pulled under their feet with respect to LTCG taxation as the tenure got extended to three years.

Then, it was time for equity gains being taxed. Those who sought dividend for future planning (which is actually inefficient when investing in mutual funds compared with growth schemes) suddenly find this component being taxed. The uncertainty in tax structures can be very unsettling and hence any tax benefit can be assumed to hold just for a year. This approach should be reconsidered.

While there have been no overt tax changes, the ideology of tinkering with rates every year and justifying that such tinkering affects the rich is something that needs a relook as it is this class which pays the highest taxes!