Indian rupee may retest 75.20-75.50 levels on higher borrowing and fiscal targets.
By Amit Pabari
Prime Minister Narendra Modi’s government laid out India’s budget for the financial year 2023, presented by our finance minister- Nirmala Sitharaman with the help of a paperless tab. This was her fourth budget in a row. It really needs to look at the Budget from different angles and perspectives. Whether given allocation of funds, a transition towards tech-based process, or a launch of a new government scheme enough to boost growth across sectors? Whether the given budget was a relief for the common middle-class man? Let’s analyze on those fronts.
Fiscal and growth targets
From economic figure wise, India has set a Fiscal Deficit target of 6.4% for FY 2023, higher than the market expectation of 6%. They have also revised up their fiscal deficit target of 6.8% to 6.9% of GDP for FY 2022. The recently released 9-month figure for FY 2022 (April to December 2021) suggests a deficit of 50.4% of the estimates compared to 145.5% in the previous fiscal. This clearly shows that the final quarter will be more addressed towards spendings and hence, the government could easily achieve the stated target. On the borrowing front, the government has set a gross market borrowing target of approximately Rs 14.95 lakh crore for FY23. The borrowing has been doubled in just 3 financial years with no source of demand added. Capital expenditure to be stepped up by 35.4% to Rs 7.5 lakh crore. The state borrowing will also add to that.
On the growth front, India’s GDP is projected at 9.2% for the financial year 2022, which is the highest amongst all large economies. While delivering a speech, she said that the budget will lay the foundation for economic growth over the next 25 years. To add fuel to the growth, they are promoting fintech and technology-based development. Surely, higher growth could be achieved if there are higher credit off-takes, stronger support for the startups and existing small businesses. This all can be achieved if there is higher support for financial and infrastructure development. By rolling out Gati Shakti Master Plan- driven by 7 engines: roads, railways, airports, ports, mass transport, waterways, and logistics infra, this will not just help people to have easy access, but also help business to grow faster. To support Micro, Small, and Medium Enterprises (MSMEs) amid the COVID-19 pandemic, FM also announced that The Emergency Credit Line Guarantee Scheme (ECLGS) to be extended till March 2023.
Roaring revenue could help to mitigate fiscal target
On the revenue generation side, there was no new announcement of privatization or divestment. They have lowered the divestment target for FY21-22 to ₹78,000 crores from ₹1.75 lakh crore, indicating that major divestment proceeds are expected from Life Insurance Corporation of India’s IPO and strategic divestments of BPCL and others may not come through by March 2022. On the tax collection front, a record GST collection of 1.4 trillion in January 2022 will certainly help to improve tax buoyancy and reduce the fiscal deficit. But these figures seem very much conservative as businesses have been reviving on steady growth and overall tax revenue in the current fiscal could be 3-4 lac crore higher than the budget estimate.
No changes in LTCG on equity investment and no announcement on bond inclusion
What the market had expected and reacted to over the last 10-15 days on hiking the LTCG tax on equity investment settled off after the government didn’t announce any revision on those taxes or tenure. Although, there was a proposal to cap surcharge on the LTCG arising on transfer of any type of asset at 15%, helped the market to calm down on that rumor. Further, the market was expecting any announcement on India’s bond inclusion in the global indices, which the government seems yet to finalize the tax treaty with other clearing and settlement countries and their counterparties.
No upward revision in personal tax is also the good news
On the personal tax front, middle-class people were expecting a cut in the tax rate or revision of the slab rate, but the government didn’t touch those rates. One needs to understand that the government has not passed on a higher fiscal deficit burden on the common people by raising the rates, so not lowering the tax rate is also good news.
Analysis on the Budget
So, after looking at the expenditure versus receipts one can clearly make a conclusion that the government can easily hover near their yearly budget target. But this also carries a small condition, that how the government in coordination with RBI is able to borrow from the market. How RBI plans and what it cost to the government.
The Budget was more centric towards Spending Boost, Mega Infrastructure Plan, Digital Rupee, Crypto Tax. There was no relief to the individual on the tax front. Hence, one can say that this was a Reformist budget and not a Populist one. It was more growth-oriented and a move towards promoting Fintech and the digital economy. Obviously, this will create more jobs and help the economy.
Impact of the Budget on market and outlook
With no surprise, but as per expectation, it is surely going to be a tough year for the rates market and tougher for the RBI to support these borrowings. In an environment where major central bankers are trying to calm down inflationary pressure by raising the rates, how tough it would be for RBI to borrow and turn hawkish. Surely, it will add pressure on the local currency-Rupee.
As it was a reformist budget, the equity market turned red in a volatile session before ending higher by more than 1.37% on relief that the given budget could help to achieve higher growth along with a higher fiscal deficit. The Indian Rupee failed to hold its early gains and depreciated up to 74.86 levels. On the outlook front, the USDINR pair is likely to hold 74.20-40 zone in the near term and one can expect a retest of 75.20-75.50 levels on higher borrowing and fiscal targets.
(Amit Pabari is the Managing Director of CR Forex Advisors. Views expressed are the author’s own.)
TheSpuzz .. Click here to join our channel and stay updated with the latest Biz news and updates.