Measures carried a near as well as medium-term focus, without any quick fix fiscal stimulus. Personal income tax rates have been cut, accompanied by rationalisation in exemptions to contain revenue slippage. These can provide short-term fillip to discretionary consumption, hinging on the take-up rate of the new tax regime.
By Radhika Rao
Set against a backdrop of slowing economic growth and weak revenue collections, the government prudently deferred consolidation plans. Tapping the 'escape clause' in the FRBM Act, the fiscal headroom was raised by lifting the FY20 and FY21 deficit targets.
The medium-term consolidation path was maintained, but with a more gradual slope to - 3.3 percent for FY22 and -3.1 percent in FY23, deferring the medium-term -3 percent goal.
Measures carried a near as well as medium-term focus, without any quick fix fiscal stimulus. Personal income tax rates have been cut, accompanied by rationalisation in exemptions to contain revenue slippage (cost estimated at 0.2% of GDP). These can provide short-term fillip to discretionary consumption, hinging on the take-up rate of the new tax regime.
A medium-term focus continues, targeting better social construct (health, education, women upliftment etc.), improve farm productivity, attract more manufacturing investments and embracing the new digital economy. Budgetary support for capex is up 18% yoy in FY21 while revenue spend is to rise at a more moderate pace.
These spending plans rest on an aggressive divestment target, high telecom receipts, an optimistic tax buoyancy assumption, along with scaling back expenditure.
Financial sector reforms are likely at the regulators’ behest. With the sector being a key lubricant for the economy, conditions need to be conducive to support recovery. Encouragingly, public sector banks have received around INR3trn worth capital support in the past four years, with onus now on markets- based funding (domestically and offshore) along with long-standing reforms i.e. mergers and consolidation. A major overhaul of the regulatory environment and health checks of non-banks can be expected, particularly for entities exposed to real estate and smaller enterprises.
With the authorities steering clear of outright stimulus, rather taking a measured path to boost demand, we reckon that the potential lift to growth will hinge on households’ sentiments and demand appetite. The Budget adds to our conviction that incoming growth indicators are beginning to stabilise even if at moderate levels, but a sharp lift purely due to fiscal stimulus from the Budget is unlikely.
For the financial markets, announcements turned out to be a mixed bag. Equities were left uninspired, due to an absence of sector-specific measures e.g. auto/ banks and lack of tweaks to the long-term capital gains tax. Policy prerogative will also be to stabilise sentiments as conducive market conditions are necessary, along with attractive valuations, to achieve the aggressive divestment targets.
The Budget is perceived as a positive for the domestic debt markets. The FY20 gross borrowing schedule remained anchored at INR7.1trn and along expectations at INR7.8trn in FY21. There are plans to further open up the local bond market to foreign participation - foreign portfolio ceiling into corporate bonds was raised from 9% of outstanding to 15%, certain specified categories of government securities would be opened fully to non-resident investors, along with domestic investors, and wider tax relief for sovereign funds. Expectations are that these incremental steps, and more in the course of the year, are designed to facilitate inclusion of India’s securities in key global benchmark bond indices.
The environment is also bullish for bonds, as global central banks maintain loose monetary policies and outbreak of the coronavirus adds to the downdrift in global yields. With fiscal policy taking a growth-supportive role, on the back of monetary policy being ahead of the curve last year, the calibrated policy mix should bode well for growth.
We look for the central bank to remain on an extended pause on rates (even as supply-induced shocks dissipate) but maintain an accommodative bias to ensure cost of capital remain stable and favourable.
Swap markets have priced out rate cuts, but the language of the monetary policy committee will be under scrutiny for any potential shift in policy leaning.
A premature change in stance to neutral (low odds, few quarters see the risk) will trigger unintended consequences. This might be misinterpreted as a precursor to a tighter rate environment, lifting money market rates up for a start. Not only would this be a wash-out for the policy transmission agenda, it can nullify the impact of the RBI’s Op-twist moves, which was intended to lower belly-to- longer tenor rates. Higher borrowing costs spells trouble for firms and companies which are still in midst of deleveraging, adding to the pipeline risk to banks and non-banks’ balance sheets. Lastly, these could negatively impact the interest of foreign investors, just as doors are being opened to encourage their higher participation.(The author is Economist, DBS Bank)
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