Expectations are huge with hope & optimism – need nothing less than “extraordinary” and “out of the box” to push sentiment euphoric with “wow” feel… Will FM deliver?
India needs top-line GDP output to sustain above INR 200 lac Crores in its aspiration & pursuit towards $5 Trillion (INR 350-400 lac Crores) economy, double from current level. Unfortunately FY21 output will be down below ₹200 Trillion from pandemic/lockdown impact on economic activities and loss of livelihood, with estimated output contraction of 8-10% or so, which is not insignificant – equivalent to combined fiscal deficit of the Centre & State Governments! Economy in suboptimal capacity usage/operations is the worst position to be in, while dreaming big! So, Budget2021 need to focus on being catalyst to economic activities to set up base for significant expansion in the years ahead. It’s not rocket science to conclude that the exchequer needs to focus on combination of (a) capital expenditure for investments in economic & social infrastructure (b) revenue expenditure putting more monies with have-not’s for consumption (c) invest in banking & financial intermediation sector, strengthening their capabilities to provide leverage on equity. Impact from this combination will lead to generation of more jobs and higher consumption & wealth creation, thus breaking out from current vicious cycle to building virtuous cycle of accruing benefits to all stakeholders of the economy.
It’s easier said than done when receipts (inclusive of disinvestment) are not enough to meet expenditure, to be in borrow for consumption mode. Capital expenditure continue to be dependent on market borrowing with low or negative returns from past investments. Worst is that such high dependence on market borrowing has steadily moved up into ₹15-20 lac Crores (inclusive of Centre, State and off-balance sheet) around 10% of GDP. It’s also belief that this number would have been worse if taking into account deferred payments & refunds. This kind of financial (trap) set up is not enviable when the expectation is for dream-come-true kind of Budget!
Good to put money where the impact is the most on employment & diversified consumption
In the Covid-pandemic phase, sectors that are badly hit by lockdown look for sustainability & continuity support from the Government, which has been directing monies towards lower end of the pyramid, to the have-not’s for sustenance and the MSME sector that generates employment in the unorganised sector. The budgetary focus needs to be on wholesale – funding infrastructure, manufacturing, real estate and the banking sector. All combined would be beneficial to the unorganised sector and the have-not’s
Government can’t do it alone when the need is huge! It would need beyond pushing the Centre’s fiscal deficit from FRBM’s tolerance zone of 2-3.5% to 5-6%, and all-combined number at alarming 12-15% of GDP. It’s fine if leads to higher revenue receipts and beneficial in the long term. Government need to work on support from offshore investors – direct FDI investments in systemic important sectors/businesses and participation from others in debt & equity capital market financial structures that would emerge from the GOI as sponsor. It’s also possible to tap into RBI FC reserves which is now over $500 Billion, perceived to be idle & negative yield asset. So, combination of foreign capital and use of FC reserves is the way to go to meet the huge demand for investments for output expansion and employment generation.
Game Changer is the revival of Banking and financial intermediation sector
Banking sector participation for providing debt leverage to capital is at its low, when demand for credit is high. There are hardly few banks that have appetite for high value & high risk sectors that are systemic important to achieve what is said above. Worse, participation from private & foreign banks is very limited, and those that were active are into backstage, nursing the wounds of aggressive play during 2013-2019. Given that bank credit as percentage of GDP is well below par standards, there’s huge upside that could be emerge as spark/trigger to push India GDP output from ₹200 Trillion to over ₹350 Trillion to make the ambitious $5 Trillion economy to reality by 2024.
Resolution on strengthening the financial intermediation sector is not straight forward – need combination of Bad Bank to relieve the banking system from NPA burden on their balance sheet by taking away zero-yield credit risk linked asset book, recapitalisation of PSU banks providing desired growth capital, opening up the private sector category to cash-rich NBFCs with proven track record and finally reinstate of sector specific DFIs to fund infrastructure, real estate, manufacturing, asset reconstruction etc building co-lending or risk-participation with commercial banks. To do all these together and at the same time will need strong belief on the existing untapped potential, and obviously with Public-Private-Foreign participation – it’s tough but not difficult! It would need combination of TARP kind of approach to deal with non-performing assets and helicopter-drop kind of debt delivery to create higher level of performing assets to achieve win-all proposition to all participating stakeholders.
What to look for from Budget2021 to feel good? Do remain in hope that post-budget sentiment will not be disappointing or unpleasant…
GDP growth BE for FY22 could be anywhere at 12-15% compared to RE of FY21 contraction at 8-10%. This is good feel to take GDP top-line/output beyond that of pre-Covid March 2020, end of FY20. While attention will be on fiscal deficit estimate (expectations around 6% of GDP on revised tolerance zone of 3-6%) and extent of gross market borrowing to be pegged at ₹15-18 lakh crores (against previous ₹12 lakh crores), which is high at 7-9% of GDP. It’s good that global rating agencies and foreign investors will see elevated fiscal deficit & higher market borrowing as one-off event and essential for infusing life & strength into the real economy. The comfort is derived from expectation of surplus system liquidity and low interest rate regime through FY22.
What’s expectation on post-budget impact on financial markets?
Given that corporate tax rate cut to 25% didn’t yield desired results when system went into suboptimal capacity mode, there would be expectation of personal tax rate cut below the super-rich category, those in sub 30% tax category. It would be out of the box to keep it revenue neutral by balance of impact between corporate tax payers (with marginal hike) and relief for those personal tax payers in below 30% category.
It’s price stability in FX and Money Market, taking comfort from RBI two-way administration to prevent excessive movements both on interest and exchange rate markets. USD/INR would get the benefit of higher FDI & steady FPI flows and higher premium to keep forward market in $ supply mode – lead & lag play of exporters & importers. There will be pressure on short term money market rates cutting down flows into R/R counter, but RBI would standby to ensure order, when GOI borrowing is high and the need to manage without disruption.
It’s wait & watch in the India equity market which has outperformed beyond expectations despite warnings from powers that be of disconnect with the real economy. While liquidity impact of FY21 will get diluted, it would need strong recovery on the real economy to keep undertone positive through 2021. So, it is tough call on directional bias of equity market, but comfort exists that bias would not be into extremes – euphoria or despair!
Good luck and take care…..
Moses Harding
