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Budget 2021: When offense is the best form of defense

An office worker walks past a digital screen showing \Finance Minister Nirmala Sitharaman delivering the budget speech in parliament, at the Bombay Stock Exchange (BSE), in Mumbai on Monday (AFP)Premium
An office worker walks past a digital screen showing \Finance Minister Nirmala Sitharaman delivering the budget speech in parliament, at the Bombay Stock Exchange (BSE), in Mumbai on Monday (AFP)

The big positive from Budget 2021 is two-fold – a transparent increase in deficit and govt share of economy in these troubled times and secondly, no new taxes or cess, which can impinge on nascent economic recovery that we have been witnessing off late

Presenting the Budget as a series of mini-budgets presented through the course of the year, one can see the parallels. When most governments across the world expanded their balance sheets and spent significantly during the early part of the pandemic, we played it safe and saw through the period of uncertainty. However, as we normalize on the back of vaccination drive as well as economic activity unlocking, the budget has chosen to play offense! It was as if, the Finance Ministry morphed from a Pujara innings (seeing through the Covid-19 uncertainty) to a Pant innings (big boost on expenditure) over the last few months!

So, my big positive was two-fold – a transparent increase in deficit and government share of economy in these troubled times and secondly, no new taxes or cess which can impinge on nascent economic recovery that we have been witnessing off late.

The government has done some heavy lifting spending, almost 4 lakh crore more than what it budgeted for last year. To put this in context, it is likely that Central government share of expenditure to economy has risen from 13% pre-covid to almost 17-18% (depending on where nominal GDP comes in for the full year). While a significant increase was on account of food subsidies, for the coming year, big shift going forward is capital expenditure moving up by 24% in FY22, even as the food subsidies come off. This spending is welcome, as spending on healthcare, capex can have significant multiplier benefits on the overall economy.

The second big take was – almost no tinkering of taxes. Economic recovery is fragile, and so increase in taxes or cess may dampen this recovery. Expectation of tax collection are also below nominal GDP growth for FY22, under-scoring that lot of revenue collection is impinged on recycling of capital assets. Recycling of capital assets includes strategic divestment, Asset Reconstruction Company, setting up of Development Finance Institution, monetizing land banks and infrastructure assets through InViT and REIT etc. This sets the tone that focus of budget is to recycle capital from these assets, which in many ways have already run their course and capital locked in these assets can be better used if recycled and re-deployed into fresh infrastructure assets for the future.

Apart from these 2 big takeaways, there was refreshing focus on providing minimum government maximum governance. An Investor Protection Charter for all financial products, reduced time frame to re-open past filings, relief to senior citizens for filing tax returns, relief to file advance tax for dividends etc. are all welcome initiatives for genuine tax filers. There has also been a convergence of taxes between ULIPS and equity Mutual Funds for most investors, providing a level playing field for these investment vehicles. With global commodity prices going up and feeding through inflation, the government also tinkered with few custom duties of various commodities, even as it hiked some duties in electronics and consumer durables sector, so as to budge them into local manufacturing and benefit from Atmanirbharta initiatives.

While all of the above are seemingly positives, the increased spending over inflows means an increased fiscal deficit. While headline numbers do convey a material hike in fiscal deficit (3.5% projected in budgeted estimates for FY21 when FM presented last February, has moved up 9.5%), and then a fall to 6.8% for FY22. However, some nuances of government accounting suggest a transparent disclosure, which may actually get plaudits from rating agencies. Over the last few years, there was significant borrowings in government entities like NHAI, FCI etc. which were kept out of purview of government budgets. With food subsidies ballooning in FY21 due to Covid-19 (total subsidy for FY21 is 6.5 lakh crore of which food subsidy alone is 4.2 lakh crore), the government finally merged these borrowings and guarantees of these entities into its own books. In a year where all major economies will see a spike in deficits, one would believe that rating agencies will be more focused on the trajectory going forward. On a like-to-like basis, it does appear that deficit is higher than street estimates by about half a percent. Interest rates rose a bit, factoring in the increased market borrowing.

To sum up, a growth oriented budget which focuses on the revival of economy, no tinkering or introduction of new taxes – does provide a catalyst for the economic recovery to gather further momentum. As they say in sports – often offense is the best form of defense!

The author is Group President & MD, Kotak Mahindra Asset Management Company. Views are personal and do not reflect the views of Kotak Mahindra Asset Management Company Limited.

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