Budget 2021-22

The stock market had dropped from about the 50,000 levels to 46000, in the week leading to the Budget presentation, on 1^st Feb, in anticipation of a tweak in the Long term Capital Gains (LTCG) tax or the imposition of a COVID cess thereof; no such tax announcements prompted a relief rally. The high fiscal deficit of 9.5% for FY 21, 6.8% by FY22 & a glide path towards 4.5% by FY26, however, spooked the bond markets though leading to yields, on 10 year bonds, rising from around 5.9% to around 6.1%. Despite the RBI (Reserve Bank of India) dovish stance on interest rates, the reduction of liquidity, phased increase of CRR (cash reserve ratio) from 3% to 4% by May 27^th 2021 & the commodity price increases are likely to push interest rates upward in the days to come.

Modi called it a “reformist budget” while former Finance Minister P Chidambaram chastised it for not even mentioning the Military budget during the Finance Minister’s speech & doing nothing for the BPL (Below Poverty Line) & the MSME (Micro Small & Medium enterprises) sectors  effected substantially during the pandemic.

The Budget Positives

Transparency: The budget scores high on transparency.  Food Corporation of India has a debt of 3.3 lakh cr. end FY20 with an interest outgo of 0.19 Lakh cr. to the national Small savings scheme; by incorporating the otherwise “off balance sheet” items of food subsidy  the budget ends up showing a fiscal deficit of 9.5%. Hopefully, the states budgets, too, replicate the “transparency” principle. As per the FRBM ACT (Fiscal Responsibility & Budget Management) 2003, the fiscal deficit of the centre should have been 3% & revenue deficit zero I.e. the fiscal deficit should fund capital expenditure in its entirety. While the centre under successive governments faltered, States’, surprisingly have displayed more fiscal discipline.

Sajid Chinoy, of JP Morgan, has calculated the fiscal deficit of the centre, states & the off balance sheet items to be about 8.2% of GDP for 2017-18. With centre itself at 9.5% & states given an additional 2% leeway due to the pandemic, the total fiscal deficit of the Indian Union could be closer to 15%. While the economic survey accused the rating agencies for being biased in assigning India the last investment grade rating – only one rung above junk status, the high fiscal deficit & the high debt/GDP as compared to its peers were cited as reasons by the latter; Moody’s says that India’s Debt to GDP was 72 % against its peers at 50% even pre pandemic which has since ballooned to around 90% & 60% respectively.

Nomura warns that a fiscal deficit of 9.5% is akin to “kitchen sinking” - lumping of all bad news together – that could invite a downgrade from the Ratings agency Fitch which had incidentally downgraded India from “BBB- Stable to Negative” in June 2020.

The 15^th Finance Commission recommended that the debt/GDP be reduced to 85.7% of GDP by FY26 indicating that India matching its peers, on this metric, is a discomforting decade away.

Counter cyclical Fiscal Policy: The size of the central budget which was about 15% of GDP in 2012 has dropped progressively since to 13.44% by FY 20 leading to central spends being less than the combined states budgets. Budget FY 22 at 15.6% addresses the demands of a countercyclical fiscal policy to aid growth.

Rise in Capital Spending: 26% rise in capital expenditure from 4.39 lakh cr. to 5.54 Lakh cr. is welcome.

Capital Expenditure (Lakh Crores in Rs.)
Item	2019-20	2020-21 RE	2021-22 BE	Growth
Defence	1.11	1.35	1.40	4%
Roads & Highways	0.70	0.87	1.08	24%
Railways	0.68	0.29	1.07	-2%
Loans to Railways		0.80
Ministry of Finance	0.75	0.45	0.96	113%
Communications	0.05	0.04	0.26	550%
Others	0.07	0.59	0.77	31%
Total	3.36	4.39	5.54	26%
RE: Revised Estimate
BE: Budget estimate

 

In Dec 2019, Nirmala Sitharaman had announced the launch of a Rs 102 Lakh cr. (later revised to RS 111 Lakh cr.) National Infrastructural Pipeline project, with a contribution ratio of 39%: 39%: 22% from the Centre: State: Private sector which envisaged  infra spent, over the next 5 years, on Energy (~25 L Cr.), Railways (~14 L Cr. ), Roads (~ 20L Cr. ) urban development, irrigation, mobility, education & health. With a spend of about 20 L cr. this year, the central contribution should have been 7.4 L cr. not clear if the difference (7.4-5.5) shall be contributed by Central Public sector enterprises (CPSEs).

Former Finance secretary SC Garg contests the 4.39 L Cr. shown as capital expenditure for FY21 as ~0.80 Lakh cr. was a “special loan for Covid related resource gap” as liquidity support to railways to meet its losses in the current year” which along with Rs 0.12 Lakh cr. given under the Budget head “Transfer to States” that lands actuals at 3.47 Lakh cr. This incidentally, is only 3.3% higher than the 2019-20 fig. of 3.36 lakh cr. much lower than inflation.

FDI Increase & Privatization: Increasing FDI from 49% to 74% in the Insurance sector is welcome. The promise of privatizing IDBI, 2 PSU banks, 1 general insurance bank & LIC is welcome. Success of the same is critical to achieve the disinvestment target of 1.75 lakh cr. Sameer Arora of Helios capital says that as per the LIC statute 95% of LICs profits accrue to the policy holders & 5% (~2500 cr.) to the govt.; unless the same is tweaked, LIC might attract a valuation of $35-40 billion only.

While a booming market is the right time for securing better valuations, & hence divestments, investor interest may be weak unless the employee pension liability is taken over by the govt., bad debts transferred to a “Bad Bank” & the Bank Nationalization Act is tweaked to make sale possible.

Consolidation of centrally sponsored schemes: Reduction of 131 centrally sponsored schemes by about 1/3^rd as per the expenditure Secy. TV Somanathan is welcome as it helps focus spends on specific schemes for impact rather than spraying small amounts  across multiple schemes. Former CEA Arvind Subramanyan has alluded to this kitty being about 5% of GDP.

Extension of incentives for Affordable Housing:  Extension of the 1.5 lakh deduction on buying affordable housing, till 31^st Mar 2022, is welcome. If states replicate the Maharashtra govt. lead in reducing registration & premium charges the revitalization of the real estate sector – with the consequent upside in derived demand of steel, cement, sanitary, paints, tiles industries etc. apart from the enhancing jobs market -can be aided.

The Budget Negatives

Military Budget: The Military budget at 4.78 lakh cr. is only about 1% higher than last year, insufficient when we have a belligerent enemy at the Northern gates.

Figs in Lakh Crores	2019-20	2020-21 RE	2021-22 BE	FY22 Vs FY20	FY22 Vs FY21
Revenue Expenditure	2.150	2.195	2.206	2.6%	0.5%
Army	1.468	1.496	1.529	4.2%	2.2%
Navy	0.230	0.249	0.240	4.3%	-3.6%
Air Force	0.315	0.334	0.319	1.3%	-4.5%
Ordnance factories	0.047	0.028	0.024	-48.9%	-14.3%
R&D	0.090	0.088	0.094	4.4%	6.8%
Capital Expenditure	1.110	1.345	1.350	21.6%	0.4%

The Pension bill of 1.15 Lakh cr. & MOD (civil) expenditure completes the total budget

Intriguingly, when there is a drop in revenue expenditure for all arms – hopefully due to manpower rationalisation vide increase in short service commission intake or cost reductions due to outsourcing of  services like transportation, the Army shows a rise – which could invite accusation that the Chief of Defence Staff is displaying favouritism since he is Ex. Army. The R&D spends appear meagre especially when it is universally acknowledged that wars are evolving into the cyber, space & electromagnetic domains

For details please read  

https://meetrk.blogspot.com/2018/04/war-machines-indias-options.html

Launch of a New Cess: The increasing propensity of the centre to launch new cesses – agriculture Infrastructure & development cess of 2.5% imposed in the current budget - is regressive since surcharges & cesses accrue, in entirely, to the central revenue pool with no legal obligation to share with the states -  that goes against the principles of “co-operative Federalism”  

Taxation on Provident Fund (PF) : From 1^st April 2022 employee contributions towards PF beyond 2.5 lakhs per annum shall attract tax. At 12% PF this shall effect employees drawing more than Rs. 1.73 Lakhs per month of basic salary which critics argue could effect only the creamy layer; however there are 2 caveats

(a)Many of the employees contributing above the mandatory PF, vide the voluntary PF, are being disincentivised from contributing & earning tax free interest. However a contribution to Public PF is outside the 2.5L remit & provides an escape hatch.

(b)The New wage code, which comes into effect from 1/4/21, has mandated that the basic salary has to be 50% of the total salary of the employee thereby automatically increasing the PF contribution of the individual & pushing many into the creamy layer.

The 2016 budget proposal of taxing interest accrued on 60% of EPF through rolled back then due to a massive outcry gives a peep into the govt. thought process. Budget 2020-21, incidentally, had already capped the employer’s contribution to PF, NPS & superannuation fund to 7.5 Lakhs. Personal Income tax which was 14% lower than corporate tax collection, in FY 20, is budgeted at a similar fig. of 5.5 Lakh cr. for FY 22.

	2019-20	2020-21 RE	2021-22 BE	FY22 Vs FY20	FY22 Vs FY21
Direct Taxes	10.37	8.93	10.95	6%	23%
Corporate tax	5.56	4.46	5.47	-2%	23%
Income Tax	4.80	4.47	5.48	14%	23%

 

Other  Omissions: Rs 35000 allocation for covid vaccination is welcome. But the cost of procurement of Serum Institute’ “Covishield” is Rs 200 per dose & Rs 280 for Bharat Biotech’s “Covaxin”, India has a population of 138 cr & with 2 doses costing an average of Rs 500 (say) needs Rs. 70,000 cr budget; that only 50% has been allocated indicates that the govt. assumes that either 50% of the population with pay privately or the vaccination shall last over a 2 year period.

There are 1.5 lakh health & wellness centres across the country which the centre had promised to upgrade a few years back.  It would have been prudent had the centre taken the initiative to front load the investment & used those centres as vaccination points in the immediate term & to provide better healthcare outcomes in the long term. Instead, the govt. has increased the insurance budget form Rs 3200 cr. to Rs 6400 cr. indicating its preference for the private model of healthcare.

Conclusion

The budget has kept the stock market happy which could help in govt. securing higher valuations, for PSU privatization, if they hurry the process before another “taper tantrum” – a 2013 redux of the US Fed suggesting a rate rise that triggered outflows form Emerging markets including India leading to a stock market crash & currency depreciation thereof.

The 1992 budget of Manmohan Singh was a “historic budget” that heralded liberalization of the economy & the abolition of the licence quota raj while the 1997 budget of P Chidambaram was a “dream budget” that reduced incomes tax rates to 10, 20, and 30% & reduced custom duties to East Asian levels to spur trade; the current budget is in comparison “workmanlike”. Unlike the governments of the past that balked at using the word “privatization”- using “divestment” instead to temper opposition – the current govt. has displayed courage using the aforementioned word surprisingly, though, only over last 6 months, pregnant with the promise of replicating UK’s Prime Minister Margret Thatcher ‘s moves during the 1980’s. Privatization, though, is no manna from heaven & conflating it with governance is erroneous.