Did the Budget meet expectations? Oh sure yes says CARE Ratings II Details highlighted

CARE Ratings highlights that the Union Budget announced yesterday is indeed a landmark budget and probably took the nation by surprise. The FM has taken a bold step of not procrastinating crucial expenditure at a time when the fiscal deficit is already running very high and additional sources for revenues appeared to be very limited. Instead, the FM has rightly pushed the attainment of the fiscal consolidation objective by a few years to make room to continue to borrow more although it will be lower relative to last year.

Targeting a fiscal deficit of 6.8% and keeping an extended timeline before we move below the 4.5% mark makes a lot of sense as the first priority for the government unequivocally had to be “Growth” in order to get the economy back on its rails post-pandemic. The Budget has been quite focused on sectors that matter the most, which are capital expenditure and health. Using these two props the Budget has built constructively on its expenditure plans which would have strong backward linkages with the rest of the economy and hopefully create more jobs.

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While this will be supplemented with the efforts of the states which are allowed to run deficits of 4% (with an additional conditional 0.5%) of GDP, CARE Ratings believe that the private sector has to be the main driver which will finally determine the pace of growth.

All of this expenditure increase needed innovative ways of financing. The FM has announced so many potential sources of disinvestment & privatization including the proposed public issue of the gigantic state-owned Insurer amongst a slew of measures that are innovative, thoughtful and underscore the new thinking of raising resources from monetization of government owned assets. The FM spared the individual and corporate taxpayer by not increasing direct taxation rates for them, thereby supporting consumption and investment.

However, there have been some targeted changes in customs duty rates which should help the concerned sectors. Hence this one is an intensely growth-oriented budget, focused on investing in capital expenditure, so critically needed for this economy at this juncture. Here too there were not too many surprises as the ARC for bad assets of PSBs and the new DFI to be set up were already in the grapevine.

CARE Ratings are keen to know how the thrust proposed for the corporate bond market would work out as this has been a challenge to boost liquidity. Maybe an institutional market maker is on the anvil which will help to provide a boost to investment grade paper. My research and ratings teams have put together this rather comprehensive analysis of the Budget in this report and I do hope you find it useful; and as usual, any comments or suggestions from you would be welcome.