Unlike previous ones, this budget has a fiscal-expansionary approach
Aditya Narain, Head Of Research at Edelweiss Financial Services
This is a very good budget—it will likely be remembered for a while. Its strength lies, in many ways, in its brevity (under two-hour speech)—decisive in messaging, bold in policy turn—on a fiscal-expansionary approach. It is also efficient about its work on the plumbing of the ecosystems and is stark in what it does not do—burden the consumer, the business or the banker with taxes. It also a budget that takes more risks than the preceding ones; borrowing and debt will go up, inflation risks could derail the path, and the currency could be exposed to hiccups.
This budget, after many, does not take a middle path or seek to balance interests or interest groups; that is its biggest strength. The markets will cheer it—though, as with markets, the proof of the pudding lies in its economic and growth impact—and that will only be long-term coming. A strong capital market and a buoyant budget feed on each other: this mix should only better the chances of the budget having its desired impact on underlying economic growth.
The most compelling swing is the shift to an expansionary fiscal approach from a typically cautious, and often, contractionary approach. This is now in sync with most developed economies—better late than never, and the need of the hour. The fiscal path is spelt out for five years and is undemanding at every stage (50bps contraction every year). This makes it a policy switch, rather than a budget exercise for FY22. It is also in sync with RBI’s monetary approach, and this complementarity should bolster its effectiveness.
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The second shift lies in the relative simplicity of the exercise, often a reflection of clearheadedness and a sense of purpose. The budget speech, a break from the recent past, was low on rhetoric and high on economic objectives, and more centred on spend sizes than programmes. There is greater transparency in the accounting—off-balance sheet lending (FCI) and direct capex, rather than the PSU’s, asset offloading and monetisation. The more realistic approach to non-revenue receipts, albeit with a still high dependence on the LIC IPO, only lends greater credence to estimates, and the expectations built around it. The approach is also a shift from the past, and gains, direct and perceived, could well be more immediate and confidence-inspiring.
This budget also focuses on the ecosystem’s plumbing—a now sustained effort in ease of doing business, particularly with the tax authorities. This is complemented by a further effort at clearing up the asset challenges—bad bank, regulatory recovery law tightening, credit buying entity and the lending system—capitalisation, DFI creation and the ambitious attempt at divesting a few large banks. These are all in the right direction and complement each other. These call for institution creation and building, which takes time; suggesting the gains could be more structural, and cannot be achieved in the budget year.
On this day of accolades, the risk lies in the fact that the current government has been so far reluctant to take chances—even at the height of the Corona pandemic. These vest in the threat of inflation—already there, with a visible global commodity spike, decent demand and sloshing liquidity—while deficit funding is expected to rise substantially. They also lie in global policy and liquidity. India has been a second-order beneficiary of the global fiscal and monetary pump-priming, and reversals or breaks could well unwind the easy liquidity, comfortable currency and strong market (and the mood) cushion; a backdrop of the budgets growth turn, and its positive early reception. The budget, interestingly, hurts almost no constituency; this please all could well be a risk!
On their part, the equity markets have celebrated quite unambiguously, the interest rate and currency markets understandably less so. We do see the equity markets buoyant reaction as fair. It is a turn in the approach that they have been asking for, is likely appropriate, and could well herald a new growth paradigm, precipitated by the pandemic, policy and the government’s clearer sense of economic purpose. That said, in our view, it is going to be a year of reconciliation, of a market that is all charged up and well valued, and an economy that has got the policy push it needs but still needs to catch up. That might well make FY22 a better year for the economy, than the market.