FM delivers what we craved for

‘In preparing for battle, I have always found that plans are useless, but planning is indispensable’.

This quote, widely attributed to US President Gen. Dwight D Eisenhower, is an apt way to think about dealing with uncertainty. The finance minister today disclosed that the revised estimate of 9.5% for the fiscal deficit for FY21, more than twice the original estimate courtesy the disruption to economic activity and life caused by the Covid-19 pandemic. Therefore one might argue that any plan or target for the current year is meaningless, though there are incipient signs of an economic recovery. Increased health and humanitarian costs, worries about a second wave and optimism about a vaccine make for a difficult environment for policy making and target setting.

Faced with such an uncertain environment, this budget delivers what we craved for - stability and fiscal support. There were some tax tweaks, but by not tinkering with taxes the budget provides certainty to the markets and citizens of India. It is good to see the budget follow through on the tone and tenor of the Economic Survey. India cannot overcome its macro-economic challenges by way of austerity. Growth is the only way to achieve macro-economic stability and deliver higher incomes and a better quality of living to our citizens. The budget does not hesitate and provides a fiscal impulse to the economy.

The economic data points to an incipient recovery but there is uncertainty as the recovery is unequal. Profits of the corporate sector surprised positively in the quarter ended September 2020 and early data suggests that the surprise is likely to continue. But given the unequal recovery there was a clear need to demonstrate a pro-growth fiscal stance and not do anything to dampen sentiments. By largely staying on-hold on taxes and pushing a fiscal impulse via significantly higher capital expenditure the budget does exactly that. A targeted attempt to put money into the hands of those still in pain was called for but perhaps the targeting mechanism is absent. Make no mistake - the signalling impact of a 6.8% fiscal deficit for FY22 is that the government is not going to choose fiscal prudence over economic growth at this point. These actions provide confidence to the economy.

Stress in the financial sector has been a pain point for several years. There is an attempt to hasten the clean-up by creating an asset reconstruction company. Further, the government has indicated its intention to privatize two PSU banks and an insurance company. The willingness to reduce the size of the state-owned banking sector reduces the government’s potential future recapitalization liabilities. Just like the privatization of Air India, the privatization of banks may not convert into a significant consideration for the government but it prevents further accrual of losses to the exchequer. The creation of a new Development Financial Institution (DFI) is a return to an old policy tool; there is little reason to believe that it will work. Lenders to infrastructure projects suffered losses due to a wide range of reasons and these do not change.

There are genuine concerns about the fiscal deficit given that it is much higher than market expectations. In analyzing the size of our budget deficit, we must keep in mind the comparable data for economies across the world in the current year rather than our history. These are not normal times. The higher fiscal deficit is driven by capex which has a positive multiplier impact in the current environment, provides visibility to businesses and potentially creates new jobs. The budgetary plans provide the baseline of the government’s intent. If the current trajectory of economic recovery persists then the government may eventually find itself pleasantly surprised on the revenue front. That would be the time to revisit the elements of revenue and spending plans of this budget and make changes as appropriate.

A miss in this budget would be that it does not reverse the tax hikes on fuel that were implemented during FY21 when crude oil prices were significantly lower. This will protect government revenues but has an inflationary impact on the economy. Perhaps this reflects a choice made in favour of higher capex over a consumption boost. The absence of a ‘soak the rich’ tax, even if one time, does wonders for sentiment, given the concerns on this front. The procedural changes across tax laws and compliance rules across several laws would improve the ease of doing business.

The true impact of many of the things said in the budget would lie in its execution. Now, that the speech is done and dusted the focus must change to execution like ‘never before’. The words and intent that went into planning this budget provide succour to the economy.

Vetri Subramaniam, Head-Equity, UTI AMC