1.Short, sharp & smart: FM’s big bet on growth is what India needed

Brevity and bravery defined FM Nirmala Sitharaman’s fourth Budget. In a short speech, she articulated three excellent strategies. First, GoI is taking a big bet on growth by massively pushing capital expenditure, and is ready to risk high inflation. Growth is the priority now, and most inflation will be via higher energy and commodity prices, over which GoI has little control. Will RBI scupper the growth party? Remember, it has frequently called for fiscal heavy lifting. As inflation rises – retail fuel prices will start rising again after the election hiatus – RBI’s MPC may want to increase rates. But that should be done gently. Sharp rate hikes will affect growth without bringing down cost-push inflation. Second, FM was also clear that public capex is needed to spur private investment, which is still low. To further encourage private investment, the Budget offers stability in the direct tax regime. No bad taxes are actually an incentive. Third, she acknowledged that economic recovery is uneven by extending credit guarantee for MSMEs and focussing, within that, on the badly hurt contact-intensive services.

Commendably, the Budget math is realistic. Nominal GDP is expected to grow 11.1% in 2022-23 to Rs 258 lakh crore. Consequently, gross tax revenue is expected to increase 9.6% over the ongoing year’s revised estimate to Rs 27.5 lakh crore. Total expenditure is budgeted to increase by a modest 4.6% to Rs 39.4 lakh crore. The interesting question is how FM has found the money for the huge hike in capex. First, via increase in tax revenue. Second, there’s a big switch from welfare spending to investment. Allocation towards food subsidy and MGNREGA together have been lowered by about Rs 1.05 lakh crore. In addition, spending on vaccines and Air India will fall in 2022-23, thereby freeing up resources that will be spent on roads and railways. There are two assumptions here. First, there will be no more shocks. Second, growth will reduce the need for high-level targeted support. Those critiquing cuts in welfare spend should remember that GoI can always spend out-of-Budget if the need arises.

What to make of the 30% tax on gains from crypto assets? Post-budget, FM said taxing gains on digital assets doesn’t mean legalising them. That’s correct in the sense that any gain in income can be taxed. But it is reasonable to think that having brought crypto assets under the taxation regime, GoI will subsequently declare the underlying asset to be legal. Therefore, unless there’s a nasty surprise, the Budget has made the first move towards accepting the reality of crypto assets. That’s a smart call, as is making the new tax applicable from March 2023. This will give time to crypto asset holders to adjust their portfolios. The crypto move aside, if RBI launches its digital currency in the next financial year, India will have moved up the blockchain technology ladder.

Disappointments? GoI seems to have lost enthusiasm for privatisation, perhaps fearing it can become an electoral liability. But then again, with markets choppy, it’s not the best time to sell assets anyway. There’s plenty that’s good in this Budget – if GoI can spend all the capex it has budgeted for.

2.Golden middle path: Budget’s pronouncements on cryptos a step in the right direction 

One of the big takeaways in Budget 2022-23 is the provision related to cryptocurrencies or virtual digital assets. Profits from all virtual digital assets will be taxed at 30% while every crypto transaction will also attract 1% TDS. Finance minister Nirmala Sitharaman simultaneously announced the issuance of the RBI digital currency sometime this year, which is not to be confused with private cryptocurrencies. In fact, in the post-Budget press conference, Sitharaman made this distinction very clear, emphasising that the only digital currency is the one that RBI will be issuing. 

 This is certainly a welcome move. For, there was considerable lack of clarity around cryptocurrencies given the absence of a regulatory framework. Plus, there were previous indications from the government that it wanted to ban all private cryptocurrencies. However, cryptos are a reality and crores of Indians have already invested in the virtual digital assets. Thus, banning them completely would have been counterproductive. 

In that sense, the Budget announcement strikes a good balance by treating cryptos as an asset class alone and taxing them at the highest bracket. This clears the air around the legality of cryptos, but at the same time creates substantial disincentives for investors looking to make a quick buck. Add to this the launch of the RBI digital currency and the message is clear: The government continues to see private digital assets as risky but will reluctantly live with them. Given that cryptos aren’t backed by central banks and can be extremely volatile assets, this is a sensible approach. Allowing investors with appetite for risk to continue to dabble in cryptos while clarifying the red lines is the best that the government could have done. This will also enable innovations in the underlying technology. A proper regulatory framework for virtual digital assets flowing from the Budget guidelines is now eagerly awaited.   

3.Big on hopes, short on ideas: On Union Budget 2022-23

The Budget aims to focus on infrastructure and connectivity, but lacks growth-invigorating proposals

Finance Minister Nirmala Sitharaman’s fourth successive budget, while commonsensical in its approach, is not exactly bubbling with new ideas. With the economy still in search of durable momentum that could help entrench the recovery from the last fiscal year’s record contraction, Ms. Sitharaman has missed an opportunity to address the flagging consumer spending in the wake of erosion in real incomes and savings through a combination of tax breaks for the middle class and cash handouts for the poor. And even as the Minister acknowledges the role public capital expenditure could play in crowding-in private investment at a time when “private investments seem to require that support” and help to ‘pump-prime’ demand in the economy, the Budget outlay of ₹7.50 lakh-crore for the capital account marks just a 24.4% increase from the revised estimate of ₹6.03 lakh-crore for the current fiscal. To be sure, Ms. Sitharaman’s speech highlights the PM GatiShakti, a “transformative approach for economic growth and sustainable development” that is to be powered by the ‘seven engines’ of roads, railways, airports, ports, mass transport, waterways, and logistics infrastructure. While the broad sweep of the public infrastructure envisioned by the programme could potentially be truly transformative if it were to be executed as imagined, the Budget is largely short on details where it concerns the specifics and pencils in some figures only for the roads and railways components. The Budget lists a ‘Master Plan for Expressways’ that will be formulated in 2022-23 under the scheme and projects the addition of 25,000 kilometres of roads to the National Highways network. The talk of enabling seamless multimodal movement of goods and people and providing multimodal connectivity between mass urban transit systems and railway stations, however, all sound a familiar refrain from past speeches.

Spending outlays on several other key sectors including health care, rural development and the vital jobs and income providing national rural employment guarantee scheme have all shrunk as a percentage of overall expenditure in the Budget estimates for fiscal 2023 from the revised estimates for the current year, even if in some cases only marginally. That these sectors have been forced to bear the impact of the Government’s keenness to broadly stick to a fiscal consolidation road map — with the Budget projecting a narrowing of the fiscal deficit to 6.4% of GDP in 2022-23, from a revised estimate for 6.9% — reflects on its priorities. Government spending on health care ought to have instead been significantly increased, with the lessons from the ongoing pandemic’s first two waves serving to illuminate the need for a sizeable enlargement of the public health infrastructure. A source of some solace, though, is the announcement of a ‘National Tele Mental Health Programme’ to address mental health problems that have been exacerbated by the claustrophobic lockdowns and plethora of anxieties triggered by the pandemic.

In a nod to the ruling party’s nationalist moorings and in line with the Government’s push to increase self reliance or AtmaNirbharta, the Finance Minister has proposed a series of tariff and policy steps that could help bolster domestic manufacturing in the long run. A key policy element is a commitment to reduce import dependence in procurement for the country’s defence forces. To that end the Minister has proposed earmarking 68% of the armed forces’ capital procurement budget to domestic industry in 2022-23, a not insignificant increase from the current fiscal’s 58% target. The tariff rationalisations, which cover a broad swathe of items ranging from electronics, gems and jewellery, chemicals, inputs used by MSME units and project and capital goods, could, however, have varying short-term impacts. Specifically, the move to phase out the concessional rates in capital goods and project imports gradually and apply a moderate tariff of 7.5% could in the short term hurt infrastructure projects and the setting up of new manufacturing capacity, some proposed exemptions for advanced machinery notwithstanding. The Minister has tried to address the raging debate over how to deal with virtual currencies by adopting a twin-track approach. On the one hand Ms. Sitharaman proposes to introduce in the coming fiscal year a Central Bank Digital Currency that she posits will impart a big boost to the digital economy and “lead to a more efficient and cheaper currency management system”. The RBI-issued Digital Rupee would leverage blockchain and other related technologies. In parallel, she intends to tax income from the transfer of any virtual digital asset at the rate of 30%, with deduction allowed only for the cost of acquisition. It remains to be seen if the Government’s efforts at bringing the mushrooming trade and investment in a multiplicity of virtual digital assets including cryptocurrencies under the tax net would have a salutary impact besides adding a revenue stream to the exchequer. The Minister’s latest budget also skirts mention of the asset monetisation plan mentioned in the last Budget and shows a sharp decline in capital receipts from disinvestment. With just ₹65,000 crore budgeted from asset sale for fiscal 2023, as opposed to ₹78,000 crore as per the revised estimates for the current fiscal, the Minister has had to increase gross borrowings to ₹14.95 lakh-crore, a 24% increase from the current fiscal’s budget estimate but a far sharper 43% jump from the revised estimate of ₹10.46 lakh-crore. The resource crunch manifest in the proposed higher debt issuance is ultimately bound to get more acute in the days ahead, given the Budget’s lack of growth-invigorating proposals.

4.Turbulence ahead: On Tata Group acquisition of Air India

Air India will need all the managerial expertise it can get to turn into a successful buy

The Tata Group’s consummation of its acquisition of Air India last week marks both the culmination of the airline’s return to its original founders after an almost seven-decade hiatus, as well as the start of an arduous long-haul flight for the loss-making, formerly state-owned flag carrier. The Tatas’ enthusiasm for winning back what was once the country’s iconic airline brand notwithstanding, the skies in which the industry operates have changed considerably. A look at the market share data from the domestic air passenger segment clearly shows that budget or low-cost flights now hold a dominant position, commanding about four-fifths of the market. The Tata group’s full-service venture, Vistara, with no less a partner than Singapore Airlines on board, has struggled to establish a foothold and with Air India’s addition, the Tatas find themselves saddled with a bulk of their combined domestic market share of 23% (as of November) being in the less-in-demand full-service segment. Nor is the group’s newly combined share from the low-cost segment, comprising Air Asia India’s 5.9% and the fractional share that Air India’s Air India Express has, significant enough at the moment to give it scale in the high-volume business. That the group is said to be considering consolidating Air India’s domestic low-cost services along with Air Asia India’s operations is a clear indication that the Tata bosses realise the need to optimise the varied aviation resources that are now in the group’s fold so as to enhance viability.

On the international front too, Air India faces multiple challenges, not the least of which is the Government’s current pandemic-related curbs on commercial international flights. With foreign carriers restricted to limited capacity under the ‘Air Transport Bubbles’ arrangement, Air India too has found itself constrained in the number of overseas flights it can operate under the bilateral arrangements with counterpart countries. The Tatas, though, could use the current curtailment of overseas services as an opportunity to undertake a long overdue overhaul of Air India’s inflight experience. Also, with Vistara now operating to a few select overseas destinations, the Tatas will need to decide if they would want a younger in-house competitor to Air India once COVID-19 restrictions are lifted and normalcy restored as regards international flights. For the Tata group, the choices going forward will need to be strategic. With the domestic market set to see more churn with at least one new budget airline set to enter and other rivals struggling for capital, the group needs to decide whether it wants to add capacity to budget offerings or stay a predominantly full-service carrier at a time when the more lucrative business class travel has been hit. And with aviation fuel costs set to soar further, Air India will need to tap into all of the Tata group’s vaunted managerial expertise if it is to turn into a successful buy.