If there is one word that describes the budget it is growth. The government’s focus on growth at the cost of fiscal deficit, sops and freebies with elections in important states around the corner, and maintaining its borrowing program is commendable. Growth at any cost seems to be the mantra and its impact will be dictated in the Indian markets.
Over the last two years, since the beginning of the pandemic, capital expenditure of the government has increased by an unprecedented 76 percent. From 4.26 trillion in FY21, the budgeted number is Rs 7.5 trillion in the present budget.
One reason for the sharp increase could be the reluctance of the private sector to share the burden. The government continues with its heavy lifting and spending on infrastructure and creating an environment in the hope of higher private sector capex.
With a robust tax to GDP ratio which keeps on increasing thanks to higher corporate tax and GST collection, the government is now facing a problem of plenty. It has provided most of the support that the economy needed during the pandemic years. They will not need these expenditures going forward, thus further improving the government’s finances.
A growth estimate of 9.2 percent, which may be on the conservative side, is still the highest among large economies.
With the kind of spending the government is talking of, and the earning trajectory of corporate India, the market has reason to be excited about. The improved market confidence stems from the fact that the government has not diverted from its stated goal of growth and did not bother about what rating agencies will think about its fiscal deficit that stands at 6.9 percent. However, the government has budgeted for a lower fiscal deficit target of 6.4 percent despite his capital expenditure.
While the budget has not given any relief to the salaried class, the need of the hour is employment generation and that has been taken care of by increased capital expenditure.
The government has also checked all the important boxes that were needed to improve market confidence. The budget did not increase any taxes on corporate India. It continued to support the MSME sector, which it acknowledges is not yet at the pre-pandemic level. Renewable energy continues to be the focus area that is required to help reduce the focus on fossil fuels.
The Gati Shakti Programme launched in October 2021 which includes expansion of roads, railways, ports, airports, mass transport, waterways, and logistics infrastructure has been given special focus. The multimodal logistics plan talks of synergy in logistic infrastructure and driving the country’s infrastructure growth for the next 25 years.
As part of the plan, the National Highways network will be expanded by 25,000 km involving a capital expenditure of Rs 20,000 crore. This target is twice the current run-rate of road construction in the country. Railways have got its share of mention in the budget with the announcement of 100 percent electrification of Broad Gauge Route, 100 cargo terminals, more metros, and semi-high speed rails. These announcements are music to the ears of market participants.
While there has been no increase in taxes on market transactions, the government has capped the LTCG tax on unlisted shares at 15 percent. As a result of this, the effective tax rate has come down to 23.9 percent from 28 percent earlier. This is a big relief for the start-up industry and private equity investors.
Another important announcement of this budget was the announcement of RBI’s launching its own digital currency. Simultaneously, though giving some legitimacy to cryptocurrencies by imposing a tax of 30 percent and a TDS of 1 percent on every transaction, the government has made the transaction in these currencies difficult. Though the tax rate on profits is the same as that of speculative income on markets or those on lottery tickets, the differentiator is the treatment of losses.
The budget does not allow for setting off losses against the gains. Further, the 1 percent TDS and 18 percent GST on brokerage is increasingly making this asset class prohibitive. Though the cost of trading may have increased in cryptocurrencies, it is unlikely that investors will sell these assets and flock to equity markets anytime soon.
As for the market, the budget document has not rocked the boat but has added more fuel to it by providing an environment for growth by increased spending. If the government is successful in doing so, increased tax collection will take care of the fiscal deficit.
Vikas Singhania is the CEO of TradeSmart
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