Announcement on personal income taxes will be taken very positively: Neelkanth Mishra

“The biggest variable to track right now is the cash balance that governments have with RBI which is actually more than 2% of GDP right now and this is coming primarily as the government functioning was very badly impaired by the lockdowns and activity restrictions,” says Neelkanth Mishra, Co-Head of Equity Strategy, Asia Pacific and India Equity Strategist, Credit Suisse.

Last time, the market rallied post Budget and on the Budget day itself, the Nifty showed a pop of nearly 5%. Can that magic be replicated?
What is happening right now is that the market is primed for higher deficits and so it is expecting that the Centre and the states will have high deficits and tax collections are going up, but the governments are unable to spend. The biggest variable to track right now is the cash balance that governments have with RBI which is actually more than 2% of GDP right now and this is coming primarily as the government functioning was very badly impaired by the lockdowns and activity restrictions.

So as we get into the Budget and not just the central budget but the states budgets, that will also get presented over February and March. The key variable to look out for would be what they are deciding to spend on, how much they can scale up spending because the tax revenues are good. The temptation would be to consolidate aggressively but at the same time, the best way to get debt to GDP down is to basically grow nominal GDP faster.

When the market is primed for higher deficits, it makes sense to spend a lot more and so that would be the first focus area. At the same time, one of the key takeaways from the last year’s Budget was that it was very progressive. It showed clean accounts. It showed parts where the government was very focussed on growth, very reform focussed, privatisation of PSU banks and several other such steps.

Even if there are no concrete steps that affect the fiscal numbers, if the Budget speech comes up with some such announcements on personal income taxes or some removal of exemptions, that will also be taken very positively. I do not know if that will be enough to offset some of the global market turbulence that we are seeing. But yes, it will help India hold up better.

In terms of the fiscal deficit consolidation path, this time around there is going to be no oil tailwind that they had earlier with the excise duty. At this point in time, with how should one be looking at the divestment programme and the oil revenues that would not be there?
The total cuts the Centre and state put together on an annualised level. This happened in November and so four months have already been seen in FY22. We will see eight months of reduction. The total was like one-and-a-half trillion rupees which is large but in the context of government taxation, I do not think that is a very large number.

This is coming at a time when because of formalisation and better compliance, the tax to GDP, even excluding the oil revenues, is actually not doing that badly. Corporate profits are doing well. So corporate tax growth will be strong and therefore the process of consolidation in theory can continue though as I said earlier, the objective should shift from just managing the year to year fiscal deficit to looking at debt to GDP and seeing how fast it can be brought down because at 90%, we are in a very tricky position. If the cost of borrowing goes up like it has, then very quickly one can fall into a trap where interest costs are climbing and then deficits start climbing. That will force reduction in the GDP and bring down ratings and a lot of other risks can emerge.

One needs to get that 90% down to 70% over the next decade and the best way to do that in my view is to grow the denominator and that must happen with the Centre and the states coordinating on how to spend productively in a way that once the economy really takes off, it can be withdrawn.

The simplest way to spend and some states may be tempted to do that is to give salary hikes to state employees. I am not saying that it should be done or that it will be done but that is one way of increasing expenditure which will have some growth impact but will then create a permanent liability which one cannot pull away from which is what happened 10 years back and these are the most important issues as we go into the Budget.