Union Budget 2022: Credible, Trustworthy & Consistent
There is always a risk in providing instant analysis of complex budget documents without the benefit of studying the fine print. But the larger picture post the FM’s budget speech should be apparent.
The headline says it all.
As I had written in these columns last week ( Lage Roho, Nirmal Behn ), she has delivered on almost all the expectations I had listed out. The budget is unequivocally growth oriented, is capex driven, has not raised taxes, and has remained on the fiscal glide path whilst signalling a non adversorial tax regime going forward. Most hearteningly, it has remained consistent to the framework enunciated post the major shift in the economic trajectory she had chalked out last year. This underlines the importance of economic consistency which is crucial to creating confidence in a nation’s tryst with its wide array of stakeholders.
Keynesian economics predicates the necessity of government’s interventional policies as the cornerstone in influencing aggregate demand during an economic slump. The optimal effects on output, employment and inflation are driven by substantial government expenditure coupled with lower taxes. This is precisely what the FM has opted for as the policy option.
One of the most intransigent economic problems we have been grappling with has been on the demand side for which the supply side measures taken since 2020 would obviously not work. The extremely wide ranging measures taken today affect mostly all sectors of the economy – infrastructure, roads, logistics, rail, green energy, cargo terminals, water, canal linking, rural, manufacturing, MSME, etc – and will thus stimulate demand throughout the economy and create an inter generational productive national asset base. Whilst this will spur consumption which has been stressed post COVID, its multiplier effect will be seen over time through a shrinking of the capacity under utilization in the corporate sector, and thus lead to a virtuous private capex cycle. With corporates today having operating cash flows in excess of twice the capital formation for the half year, the massive demand push could not have come at a more opportune time.
The headline numbers are big : capex at INR 7.5 L crores and borrowing at INR 14.95 L cr. Along with State Govts’ investments, India will potentially see a INR 12 L Crores of public sector capital formation – an all time high and deemed incomprehensible since the 2009 Global financial crisis. This will create an additional capital thrust of another at least INR 10 L crores ( PSUs : INR 2L crores, domestic/overseas capex : INR 3L crores, Overseas INR 2L Cr, NBFID : INR 3L Cr ). Hence, India is well placed to reach the National investment plan ( NIP ) targets of INR 20 L crores pa to 25 L crores pa for the next 5 years.
The borrowing program of INR 14.95 L cr has quite obviously sent the bond markets in a tizzy with the 10 year G Sec yields touching 6.8% today post the budget announcement. This has been accentuated because there was no mention of inclusion of Indian sovereign bonds in global bond indices which, depending on the weights assigned to India, could have potentially seen inflows of about INR 1L Cr to INR 2L Cr. This would, of course, have had the countervailing impact of a much stronger currency and is a complicated equation when seen in conjunction with the lower yields and cost of capital in domestic markets. However, given the very conservative tax revenue figures of INR 17 L cr ( as against INR 14 L cr already collected in FY 22 till Dec 2021) most likely the bond markets will retract over the next few weeks as it scales down its expectations on the fiscal deficit and market borrowings.
Given the headwinds globally of higher commodity prices including oil, the withdrawal of liquidity by the Fed and lingering COVID, the FM has done well to under promise on the revenue side both on divestments of INR 65 k cr and tax revenues of INR 17 L cr. This is sensible as the various imponderables due to these headwinds including potentially reducing excise on oil imports if oil crosses $ 100 per barrel ( as against at budget assumption of $ 75 per barrel) or another disruptive COVID wave. This is a far cry from the usual stance of previous budgets from across dispensations of making overtly optimistic projections only to disappoint at the end of the year. The departure she made last year on the road to building credibility of financial statements is more than welcome. So in all likelihood we should end with a far better fiscal deficit than the 6.4% as budgeted.
Understanding Government balance sheets are key to interpreting its policy actions : the balance sheet’s structure , and changes thereof, provides significant insights into its goals, their efficacy, and policy consistency, over time.
Hence, above all, the very fact that the FM has managed to stay the course - in the chosen framework of the economic architecture unveiled in 2021 - despite the inevitable pressures of populism inherent in an election year is the biggest comforting aspect from a directional perspective of where the Indian economy is headed. As I have said over the years, economic consistency is crucial in building credibility and trust in a nation’s ability to navigate its most existential crises, and indeed the credibility of its leadership whilst rebuilding the nation by fundamentally restructuring the economy.
Well done, Nirmala Ji.
The author is a Sloan Fellow of the London Business School, non executive director, and an advisor to chairmen, of corporate boards.
