Quick Comment. Budget sheds fiscal rectitude for pushing recovery along

Union Budget speeches seldom spark a euphoric reaction from the cynical stock market without direct giveaways, either on corporate tax or personal income tax. But Finance Minister Nirmala Sitharaman’s Union Budget for FY22 seems to have achieved this unusual feat, with the bellwether BSE Sensex up nearly 1,200 points even as she concluded her speech.

While the euphoria may well temper down once the fine print is read and digested (in the past, googlies such as higher FPI taxation were hidden in the fine print), there appear to be four key facets to the proposals that hold promise for nudging the tentative economic recovery along.

Liberal with spending: In its six-year stint so far, the NDA government has acquired a reputation for not loosening its purse strings sufficiently even when the situation warrants it. In its pre-Covid February 2020 Budget, it projected its fiscal deficit target at 3.5 per cent and chose not to officially revise the number even after the onset of the pandemic. A key criticism of the three Atmanirbhar Bharat packages that entailed spends of over ₹26-lakh crore, was that a very low proportion of those spends came from the Central Budget, while RBI did much of the heavy lifting through its monetary and liquidity measures. The current Budget however, remedies this. After pegging the revised estimate for the FY21 deficit at 9.5 per cent, it expects to retain the deficit at 6.8 per cent for FY22, and hopes to return to the path of normalcy only by FY24. Projected total Budget expenditure for FY22 at ₹34.8-lakh crore has been pegged 16 per cent higher than the Budget estimate of ₹30.4-lakh crore in FY21 and revised estimate of ₹34.5-lakh crore. Plans for the Centre to borrow ₹12-lakh crore from the markets in FY22, the same as FY21, has unsettled the bond markets while positively surprising the stock markets.

Better quality of spending: In deciding to use fiscal spending as the primary catalyst for revival, the Centre seems to have chosen its mix of expenditure carefully. Therefore, capital expenditure is set to receive a 25 per cent higher allocation at ₹5.5-lakh crore, higher than revenue spending. With an eye on the sluggish urban economy, infrastructure creation in public health, roads and urban amenities appears to take precedence over the usual rural infrastructure and irrigation projects, in this Budget. This isn’t unreasonable given that the agricultural economy has proved far more resilient than manufacturing or services which bore the brunt of the pandemic this year.

New routes to revenue-raising: Taxpayers — both corporate and individual — can heave a sigh of relief that the Centre has unearthed new routes to try and raise non-tax revenues. The PSU disinvestment target of ₹1.75-lakh crore (lower than the ₹2.1-lakh crore last year) appears attainable given pending strategic sales of PSUs such as BPCL, Air India, BEML, Shipping Corporation as also LIC’s IPO, carried forward from last year. Monetisation of operating assets with PSUs by leveraging the InvIT route, if it works in the long run, can reduce the reliance of large PSUs such as NHAI, PowerGrid, Indian Oil and GAIL, apart from the Indian Railways, on the fisc for funding ambitious targets laid out in the National Infrastructure Pipeline. While direct taxes have been left largely untouched, significant tweaking on the customs duty front promises to chip in, with the tweaks designed to promote the Atmanirbhar Bharat mission. Monetisation of idle land with PSUs, while a good idea, has been on the drawing board for many years now and proceeds from this source can only be counted when there’s progress on the ground. The plan to set up a new development financial institution specialised in project lending with initial capital of ₹20,000 crore, would also augur well for the funding of long-gestation projects, but it needs to be seen if this experiment proves more successful than the ones in the previous era.

Credit push: Poor credit growth, at sub-7 per cent year on year on an aggregate basis and at less than 1 per cent for industry (end December 2020) has been a key constraint to the tentative economic recovery. RBI’s recent FSR report predicting that bank NPAs could surge to nearly 14 per cent by next fiscal, posed a further threat to banks shedding their risk aversion and expanding lending. The Budget promise of an asset reconstruction company (ARC) — which appears to meet bankers’ long-standing demands for a ‘bad bank’ to take over stressed assets — holds potential to relieve banks of their post-Covid burden of bad debts and free up capital. This would require ironing out contentious issues on adequate capitalisation of the ARC and haircuts at which it takes over the stressed assets. However, for credit flow to pick up and low borrowing costs for India Inc to remain reasonable, the continuation of RBI’s accommodation measures appear far more critical at this juncture than Budget proposals, which are more long-term in nature.

The move to provide depositors in ailing banks with temporary liquidity accommodation to the extent of their deposit insurance limit of ₹5 lakh, when banks are placed under ‘directions’ by the RBI, can shore up faith, both in the deposit insurance system and in banks.

Overall, the FM appears to have put fiscal rectitude on the back-burner in the interests of giving the fledgling recovery a fighting chance. How the bond markets and international rating agencies view this, will however, be the factors to be watched.

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