Backdrop
So far, Finance Minister Nirmala Sitharaman has presented two of the three Union Budgets with a distinctive backdrop. The first occurred with a resounding electoral mandate that provided an opportunity for change, while the second occurred during a raging pandemic that limited the variety of possibilities. And this time it was Omicron. The COVID-19 waves are evocative of snakes and ladders. When a pandemic hits, the economy suffers a setback, then recovers just to be hit by another one.
While the quantum of decline is low as compared to the second wave, some sectors were facing structural changes which could lead to an uneven recovery. A dichotomy exists between the product economy and the contact-intensive services sector, with the former surviving the third wave relatively intact. The restrictions imposed due to the Omicron might stall the recovery in the service sector, which was already 12 percentage points behind pre-pandemic levels before the new Covid mutant struck. Most of the lagging sectors are the ones that employ a high proportion of unorganised sector workers. Because of their reduced savings buffer, individuals at the bottom of the income pyramid are in danger of long-term scarring. According to the RBI's December 2021 Financial Stability Report, retail stress is rising, as is consumer credit delinquency.
Even while the economy is expected to recover from the latest wave this quarter, the consumption outlook may deteriorate over time, putting the economy at risk of a non-durable recovery. After all, demand visibility is a necessary condition for the private sector to invest in, but supply-side reforms and corporate balance sheet deleveraging are only sufficient.
The pandemic is far from ending, and targeted assistance to hard-hit areas is still required such as the MSME sector’s support program, ECLGS, and the funding of the demand-driven scheme, MNREGA. This economic backdrop plays a significant role in contouring the Union budget 2022-23. The fourth Union Budget is a challenge to see how best the government could enable the next step on the path back to normalcy and if successful can serve as a ladder in the economic game.
Policy Changes
There have been numerous policy transitions, such as crypto being brought under the purview of taxation shaking its investors, which led to its price correction, and a variety of other indirect effects.
The deferment of filing of income tax returns (ITR) taking into consideration the 'ease of doing businesses' and assessment part is being welcomed by many but another implication might point resulting into probable losses due to deferment embedded with unprecedented high inflation deteriorating the value to be received in next 24 months which is the contemporary threshold for filing, relative to 12 months earlier.
Much of the emphasis is being laid over the Capex with spurge of 35.4% and almost doubling in relation to 2-3 years back. National highways and roads have been accentuated with the initiation of projects like PM Gati Shakti which has been in much of the limelight in the budget for the succeeding fiscals. Speaking in a superficial manner, the emphasis of FinMin has rather been on Capex from preceding budgets too.
As predicted, the budget has something for the EV sector too. A contemporary battery swap policy implies reduced upfront ownership cost of EVs and invigorates for Research & Development (R&D) to private contenders too.
This must be put in context, India, along with the world is moving towards climate action at breakneck speed, due credit for which must be given to the recent rise in cognizance amongst the masses about climate change’s ill effects, and how tragedy of the commons itself is at a tipping point. The resultant policy shifts mirror the same sentiment.
The sovereign green bonds are designed to be issued by the governments with the condition that its proceeds will only go towards financing green infrastructure, while not a novel idea, a great initiative. It shows a lot of things, firstly, that the energy sector is changing its rhythm, and establishes the perception that green energy is viable for the corporate elite. Moreover, it shows that the government is willing to make tangible efforts on its a long journey towards net zero, and this just marks the beginning. Most importantly perhaps, it provides nigh-superlative institutional credibility to the concept of ESG Investing, and may result in this method of investing being bolstered into the vogue for times to come.
Even if one were to be a glass half empty person, the move is wonderful. Assuming the worst case scenario, that the government were to pursue this as an appeasement measure, it still shows that those in power believe that the masses care about environmental sustainability, and given how this is an issue which doesn’t affect anybody directly, and still becoming a critical point in the appeasement of the masses, is incredible in itself.
Another spotlight was the grandeur of the Defence allocation which has been the sky-scraping all the budgets the nation has witnessed. Defence domain has recorded a 10% spurge with the allocation of Rs. 5.25 trillion. Talking on the health lines, no policy amendment has been there for private players but the government is there with its Ayushman Bharat Digital Mission.
Taxation Changes
In terms of tax-related policy shifts, as a quick overview, it would perhaps be fair to say that the impact was negligible, or at least minuscule as compared to other policies. Despite the large That is to say, there seems no motivation from the government to ramp up its collections, which seems fair, considering what the FM revealed in the budget speed itself, January 2022 had the highest ever tax collections amongst all months post the inception of GST. This, of course, stands in stark contrast with what one might interpret the recent digital asset gains tax move to mean, yet this needs to be put in the context of the litany of other initiatives to discourage investors from entering the crypto space and other associated verticals. Moreover a quick glance at the Laffer Curve would reveal the same, that the tax rate is too high to generate sizable tax collections, and far above the optimal tax slab to maximise said collections. At the same time, these record-breaking collections don’t translate into institutional magnanimity or tax breaks either. This is also, a justifiable move, the covid crisis, exacerbated of course in India by the already dismal and crumbling medical infrastructure, and finally stretched to perhaps more than it could handle with its prolonged nature, persisting wave after wave.
That doesn’t, of course, negate the shifts that have been made. The shifts can largely be divided into two aspects, the ones provided for individuals, and those provided for business entities.
For individuals, the shifts have been straight from the ethos of India, a blend of welfare policy and compassion towards citizens. An extension in the Income Tax return filing period, exemption on Covid related medical expenditure, employer or acquaintance generosity, the cap on Long Term Capital Gains, to ensure citizens keep their money in a financial investment vehicle for longer, withdrawal of concessional tax regime for foreign-sourced dividends, are all characteristic of the same.
On the business entity front, the Government sentiment also seems to slide more towards the development of a domestic capital goods sector, as evidenced by the announcement of phasing out of concessional custom duties on capital goods and project imports. There is also a clear push towards larger-to-India capital flows, with SEZ act replacement in toe in order to increase its efficiency, and extended tax holidays for both startups and for new manufacturing companies.
What we see in this case, is that the government is utilising its most powerful tool, taxes, to promote both the welfare of its citizens in these trying times, and ramp up domestic production value and scope, in line with their objectives of Atmanirbhar Bharat.
Expected Affect
In many ways, the budget was more about what wasn’t covered, than what was. Yet, first things first. Starting with perhaps the most conspicuous part, the Government is interfering in the digital space, and they come with guns blazing. From (yet another) change on the crypto stance with setting up of a litany of nearly punitive measures with regards to loss offset, gains tax, and transfer, it may not be a reach to say that these measures are less about further tax collection, but understandably, discouraging the Indian small and vulnerable investors from playing with fire. From a regulatory standpoint, this is very much in line with how India treats risky investments, and in the author’s opinion, a sufficiently fair stance, Should one compare India’s demographics and financial literacy rates with its peers around the world. Yet, it is not immaterial that this represents a rather softening stance on crypto by those in power, and a far cry from the initial push to simply de-platform the currency (or maybe not a currency?) and claim it to be akin to a Ponzi scheme.
Apart from protection, vast efforts are being made to bridge the digital divide, the Central Bank Digital Currency (CBDC), a new digital university, setting up of numerous Digital Banking Units, and connecting the Post offices to the core banking system are examples of the same. All in all, the Government has gained cognizance of how digitization can be a powerful tool in accessing conventionally marginalised sections of society, credit for which can perhaps be given to the covid crisis and is all set to lay the groundwork to build models which are more expansive in nature than brick-and-mortar models can ever be. This move is consistent across all major fields which are perhaps the government’s primary responsibility to its citizens, Education, Health, and Financial Well Being.
Furthermore, hidden in the fine print is another push of the government which isn’t really being talked about a lot. The government set its eyes on replacing the Special Economic Zones policy with one which allows States to become partners in “Development of Enterprise and Service Hubs”, EODB 2.0 (Ease of Doing Business 2.0) is another mammoth in itself, which promises reduced compliance overlap, state-centre system integration via IT bridges and much more, the effort to scale up investments from PE VC. What we see, as a common link among all these pushes, is a nudge towards free flow of capital, and efficiency of decisions as well as bureaucratic mechanisms. The government is wishing to streamline its structure, fight the good war against red-tapism, and allow for further capital investment from sophisticated sources.
All in all, it was an eventful budget. What comes out of it, will only be known as time progresses, yet what is known, are where the government's sentiments lie, from drones to e-commerce, from funds to education, from healthcare to insolvency. That, in itself, is monumental information.
Co-authors: Aagya Mehta, Naman Gambhir, Ketav Rastogi, Vardan Gupta
Cover Illustration by: Harsh Agarwal
The complete in-depth analysis of the Budget featuring exclusive commentary from Subhash Garg (Former Finance and Economic Affairs Secretary of India) will be published on February 10 as part of the January edition of our monthly newsletter: The Hansraj Finance Gazette. To subscribe to our newsletter, click here.
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