By Deepak Jasani
The Union Budget for FY23 will be presented at a crucial time. Covid and its variants have still not disappeared and keep impacting the normalization of economic activities. Despite this, the revenue collections have been good this year helped by buoyant direct tax collections and higher imports/fuel taxes. The imminent withdrawal of liquidity and increase in global interest rates could impact FPI flows into India for some time.
While the divestment target for the year seems too difficult to achieve (Rs 9330 crore collected so far vs Rs 175000 crore target for the year), the Fiscal deficit for FY22 could exceed that budgeted solely due to this shortfall despite the cushion available by higher than expected nominal GDP growth. In such a circumstance, Budget provisions will need to give the right signals to the Indian people and investors from abroad.
As far as fiscal deficit is concerned, assuming that both BPCL and LIC divestment get postponed to FY23, we could end FY22 with a deficit of ~7% compared to the budgeted 6.8% despite gross tax receipts exceeding the target by 11% of the Budget. Adding the state Govt deficit of 3.2-3.3% of GDP, the combined fiscal deficit will be above 10%. This situation cannot continue for long. The global credit rating agencies have given the benefit of pandemic for India posting these wide deficits year after year.
Although the fiscal deficit for Apr-Nov 21 was just 46% of the full-year target, back-ended spending, especially on those items that were included in the Second Supplementary Demand for Grants, such as food and fertiliser subsidies, export incentives/remissions under various export promotion schemes (such as MEIS and RoSCTL), equity infusion into Air India Assets Holding Limited (totalling Rs 3 lak crore) could result in higher fiscal deficit.
In FY23 we could see the winding down of pandemic stimulus plus normalization of economy (fingers crossed) and divestment of BPCL and LIC. Hence a fiscal target of any thing around or just under 6% is doable. In case this comes in at close to 5.5%, then the street may get excited. However nominal GDP growth may come in slower at ~13% vs ~18% in FY22. Also if the Govt is required to do additional spending by the way of extension of free foodgrains scheme for a period of six months and higher spending on the MGNREGA, then the path to fiscal consolidation would be even tougher.
We need to remember that in case the interest rates continue to keep rising, the gross borrowing by Centre and states in FY23 of Rs.22-24 trillion could create an additional pressure on the rates. However focus on fiscal consolidation, continued RBI intervention in the bond market, possibility of inclusion in global bond index and some moderation in inflation in H2 FY23 is likely to provide support to yields. Budget is likely to propose to exempt Euroclear settlements from tax, possibly the final step for India’s sovereign bonds to be included in global indexes.
In Aug 2021, the GoI had unveiled the National Monetisation Pipeline of Central ministries and public-sector entities, with the aggregate potential of ~Rs 6 lakh crore through core assets of the central government, over a four-year period, from FY2022 to FY2025. This includes Rs 1.6 lakh crore to be raised in FY23 through direct contractual (such as PPP) and capital market (InvITs) instruments among others.
There is a strong demand from infrastructure companies to provide tax incentives for investment in Infrastructure Investment Trusts (InvITs). Changes in REITs and InvstITs taxation specifically with the objective of bringing long term capital gains treatment at par with other asset classes may also be considered in the Budget. Fiscal support is needed for the commercialization of new technologies for the transition to low carbon/ zero carbon pathways, and for demand creation of such technologies.
We think the Budget could focus on maximising growth-supportive expenditure (capex and Infra spend) and adequate allocations for the PLI schemes. On ground realities may nudge the government to roll out more supportive schemes for rural India and smaller businesses. Healthcare infra and spend could also see an uptick. A fresh move to tackle inverted duty structures while focusing on reducing evasion, as well as the compliance burden on businesses and individual taxpayers, could be another objective.
This apart we expect more clarity on impending privatisation of IDBI Bank and two PSBs, which the Government of India (GoI) had indicated could happen in FY2022. Clarity on operationalisation and scaling up of National Asset Reconstruction Company Limited (NARCL) and National Bank for Financing Infrastructure and Development (NABFID) is also expected as is enhanced budgetary allocations for housing schemes such as Pradhan Mantri Awas Yojana (PMAY). Trade, hotels, transport and communication, have been badly hit by the pandemic and continue to struggle. These may come under special treatment in the Budget.
All in all, in case the Govt positively surprises the street by a lower than expected fiscal deficit number for FY23 and/or brings out a practical plan for speeding up disinvestment and monetization of assets, then the stock markets may get excited. Or else post a couple of days of anticipation and reaction, the indices may go back to their existing trend.
(Deepak Jasani is the Head of Retail Research at HDFC Securities. Views expressed are the author’s own please consult your financial advisor before investing.)