There’s good reason why the Budget speech for 2022-23 left the stock markets in a buoyant mood while depressing Indian bond markets. With corporate taxes in India already trimmed to 22 per cent and the advent of GST reducing the room for sector-specific sops, expectations that the Union Budget will offer a leg-up to corporate earnings and thus to stock prices, have significantly diminished in recent years.

This perhaps explains why the Sensex, which was already up over 800 points when the Finance Minister began her speech, saw no reason to lose cheer, even after she concluded her speech without handing out material tax breaks to India Inc.

Equities: Capex spree cheers

The Budget announcements and numbers which reassured markets that the Centre was still in ‘stimulate-growth’ mode and hadn’t gone into ‘tighten-the-belt’ mode were fourfold.

One, contrary to some market expectations that the fiscal deficit for the current year would significantly undershoot the 6.8 per cent target, actual deficit numbers have come in slightly higher at 6.9 per cent. Nor has the Centre chosen to clamp down on the deficit too hard for FY23. While some commentators expected fiscal deficit numbers for FY23 to be slashed to 5.8-6 per cent, the Centre has gone with a more generous 6.4 per cent, allowing room for a continuing spending spree to stimulate growth.

Two, there’s little reason to complain that the Centre is using this additional leeway imprudently, as it continues to go whole hog on capital expenditure. Apart from enhancing outlays on capital expenditure by 35.4 per cent (from RE of Rs 5.5 lakh crore in FY22 to BE of Rs 7.50 lakh crore for FY23), the Budget has promised States significant financial assistance of over Rs 1 lakh crore to double down on capital projects. Effective capital outlays funded by the budget are therefore expected to jump from Rs 8.4 lakh crore in RE FY22 to Rs 10.68 lakh crore in BE FY23.

Three, though the Budget had every excuse to announce some populist handouts ahead of upcoming State elections, it seems to have refrained. That the Budget speech skipped the usual ode to farmers and the rural economy and dived straight into Gati Shakti, the Jal Jeevan Mission and other infrastructure building initiatives shows that growth has taken precedence over populism. Despite the bump-up in capital outlays, overall expenditure is expected to go up only by 4.6 per cent (to Rs 39.4 lakh crore) in BE FY23 against RE FY22.

Four, after tasting success with under-promising and over-delivering on numbers in its previous Budget, the Centre appears to have stuck to the same principles in framing its estimates for FY23. Given that the Economic Survey has just put out an 8-8.5 per cent real GDP growth estimate for FY23, the Budget’s assumption of a nominal GDP growth of 11.1 per cent in its numbers is conservative. Given this growth assumption, the Budget projections of tax revenues expanding 9.5 per cent and non-tax revenues falling by 15 per cent appear quite achievable. Even the disinvestment target, after two consecutive years of tall asks, has been set at just Rs 65000 crore for FY23 against the RE of Rs 78000 crore for FY22 (BE Rs 1.75 lakh crore). Bonus moves to impose a high rate of tax on ‘virtual digital assets’ may also have sparked hope that retail investors who’ve been punting on cryptos may seek their thrills with equities in the year ahead.

Bonds: Borrowings overshoot

 While the Centre’s decision to continue doubling down on capital spending to keep the revival going cheered equity markets, it predictably didn’t make the bond markets too happy. As bond prices fell, the yield on the 10-year government bond spiked 20 basis points to 6.89 per cent immediately after the Budget.

With the government sticking to a 6.4 per cent fiscal deficit target for FY23, it now expects to put through gross borrowings of Rs 14.95 lakh crore for FY23, noy only well above the Rs 10.46 lakh crore it actually expects to borrow in FY22 but also above market expectations of Rs 12-13 lakh crore. Net borrowings are seen to witness a big jump from Rs 7.75 lakh crore in RE FY22 to Rs 11.2 lakh crore in BE FY23. Such large government appetite for borrowings tends to soak up savings in the economy and push up interest rates for other private borrowers.

This apart, the lack of widely hoped-for capital gains tax breaks for Indian bonds traded overseas, have also dashed hopes for Indian bonds to be quickly included into global bond indices. The markets were hoping that such as inclusion, by opening up new buyers for Indian government bonds, could bring in foreign inflows of as much as $30-40 billion in the first year from global investors.

Published on February 1, 2022