Vijay Kumar Gaba

 The finance minister seems to have reinvigorated the animal spirits of Indian entrepreneurs and financial market participants. The Union Budget for FY22, is perhaps the most celebrated budget after the “Dream Budget” presented by the then Finance Minister P. Chidambaram in 1996.

This is also perhaps the first time when markets have cheered higher fiscal deficit. This ought to be taken as a sign of rising assertive India, which is fully aware of its importance in global order and refuses to be bogged down by unreasoned views of global rating agencies.

The market also cheered the fact that after dithering for six years, this NDA finance minister has picked up the threads from Vajpayee led NDA.

The finance minister has spoken about “privatization” of a majority of CPSEs, instead of “disinvestment of minority stakes”, as was the case in NDA-1.

The massive thrust on infrastructure building to ward off the impact of economic sanctions imposed in the wake of 1998 nuclear tests and bursts of dotcom bubble etc. was the hallmark of Vajpayee government. His government gave up government monopolies on Coal, Ports, Airports, Mobile Telephony, Roads, Power, Oil & gas exploration etc.; and introduced schemes like SEZ to encourage domestic investments. The incumbent finance minister has also ignored the fiscal slippages due to pandemic induced lockdown and focused on investment in infrastructure building.

It is widely expected that this Budget could unleash third round of Economic Reforms (Reform 3.0), after 1991-1994 and 1999-2001. It is therefore pertinent to evaluate whether the incumbent government has learned lessons from the earlier rounds of reform and adequate precautions are being taken to ensure that collateral damage of reforms could be minimized. For example—

·         Opening of Indian economy to global competition in early 1990s, led to redundancy of numerous small and medium sized Indian producers. This led to a surge in bad loans in the financial system and eventually led to failure of gigantic institutions like UTI, ICICI, and IDBI etc. High interest rates, higher inflation and sharp depreciation in INR during 1991-1998 were also partly associated with the reforms.

·         Massive investment in infrastructure building during NDA-1 regime resulted in massive demand-supply match. The investment resulted in accelerated growth during 2003-2008 period, but led to bankruptcy of many infrastructure projects (power, roads, airports, telecom, Oil & Gas etc.) due to lack of demand and strained finances. Schemes like SEZ were implemented without adequate regulatory framework, and was eventually reduced to land grabbing exercise by unscrupulous entrepreneurs. A part of the present day stress in banking system could be attributed to the projects initiated in early 2000s.

·         Both rounds of reforms resulted in two very popular governments not getting re-elected.

We shall have to see that the government does not lose sight of the severe stress in unorganized sector and burgeoning household debt.

I also found the following points in budget that may need closer scrutiny of investors:

·         Most of the development programs announced and funds allocated are for a period of 5-6 years. This effectively means that the government is resorting to long term plans, as was the case in (now scrapped) Planning Commission era. The only difference is that NITI Aayog the body that replaced the Planning Commission, may not be holding wide and deep consultation with State Governments on various issues, even though the number of central schemes transferred to the States has increased materially.

·         It is now many years since FRBM targets have been violated. It may be time to scrap this law and work out a more practical legislative framework. It would be prudent to stringently control the Revenue Deficit rather than bother too much about fiscal deficit in this phase of growth. Borrowing for investment should not be considered a problem so long servicing is not an issue.

·         The government continues to place very high reliance on high rate Small Savings for financing the fiscal deficit; while the sourcing from very low cost external debt is minimal. The appropriateness of this strategy needs to be evaluated.

·         Allocation for Information Technology and Education in FY22BE is less than the FY21BE. Similarly, allocation for Health in FY22BE is less than FY21RE; and allocation for Scientific Departments in FY22BE is less than FY21BE.

This does not sound congruent with the core ideas of the budget.

·         Corporate Tax collection target for FY22BE is lower than the FY20 actual collections. This needs to be corroborated with projected 14.5% rise in nominal GDP.

·         It is proposed to pre fill IT returns with details of income from salary, interest, dividend and capital gains from listed securities.

The government must make sure that it remains a facility for the tax payers and does not become a source of harassment. For example consider this. IT department will take data of capital gain on listed stock from Stock Exchanges. This data will be based on gross trade prices. In case of frequent traders the charges (brokerage, STT, Stamp Duty etc.) may be more than the amount of gain itself. Obviously, tax payers will have to correct the pre filled amount in the returns. If department runs a variance check, a large number of returns may be pointed oout and this could potentially lead to harassment of tax payers.

 “Progress lies not in enhancing what is, but in advancing toward what will be.”

—Khalil Gibran (Lebanese Thinker Poet, 1883-1931)

Allaying all fears, the finance minister presented a brave budget. She took all Covid-19 blows on (fiscal) body and refused to yield to fiscal pressures. She prudently refused to indulge in allurements of raising resources through additional taxation. The Budget for FY22 is continuation of various measures announced during 2020 to support the economy. The recognition of the need of new economy (ecommerce workers, startups, e-learning, new education techniques etc.) and willingness to let go the control over even strategic CPSEs are signs of pragmatism. This is perhaps the only budget in independent India that does not propose to make any change in income tax rate structure.

It is now upon the administrative ministries, departments and state governments responsible for executing the proposals. Like Rishabh Pant, who went to Australia with a poor record of recent execution, the performance of these executing organs of the government in recent past has not been encouraging. It is to be hoped that the execution will improve materially in next 15 months and Indian economy shall emerge winner.

The stock market celebrated the budget ebulliently. This is despite the warnings by RBI Governor and CEA (Economic Survey) that stock market appear disconnected from the real economy.

Six core ideas of the budget

1.    Health and Wellbeing of citizens - Preventive healthcare, better sanitization and clean water

2.    Physical & Financial Capital, and Infrastructure – investment in building physical and financial infrastructure.

3.    Inclusive Development for Aspirational India – Recognition of the needs of new economy

4.    Reinvigorating Human Capital – Modern education policy

5.    Innovation and R&D – National Research Foundation to research ecosystem in country

6.    Minimum Government and Maximum Governance – Aggressive disinvestment; administrative reforms; easier and transparent tax administration

Key development proposals

·         Rs 64180cr to develop capacities of primary, secondary, and tertiary care Health Systems, strengthen existing national institutions, and create new institutions, to cater to detection and cure of new and emerging diseases.

·         Universal water supply in all Urban Local Bodies; and liquid waste management in 500 AMRUT cities. (Rs. 2,87,000cr in 5yrs)

·         The Urban Swachh Bharat Mission 2.0 (Rs. 1,41,678cr over 5years).

·         Voluntary vehicle scrapping policy Commercial vehicles 15yrs age and personal vehicles 20yrs age would need a fitness test.

·         Rs. 35000 allocated for Covid-19 vaccination. More to be allocated if needed.

·         Mega Investment Textiles Parks (MITRA) Scheme to be announced in addition to PLI.

·         A Development Financial Institution (DFI) with Rs20000cr initial capital to be set up. The institution to have Rs5trn loan book in 3yrs.

·         Proposal to set up National Monetization Pipeline. DFC to be monetized after commissioning in June 2022.

·         Award of 8500kms of road under Bharatmala project in FY22.

·         Private sector may be allowed to own and operate 20000 city busses under PPP mode.

·         Portability to be allowed between power distribution companies. Rs3.05trn for upgrade of power distribution infrastructure.

·         Proposal to launch a Hydrogen Energy Mission in 2021-22 for generating hydrogen from green power sources.

·         Private players to be allowed to manage and operate major Ports.

·         Proposal to consolidate the provisions of SEBI Act, 1992, Depositories Act, 1996, Securities Contracts (Regulation) Act, 1956 and Government Securities Act, 2007 into a rationalized single Securities Markets Code.

·         Proposal to introduce an investor charter as a right of all financial investors across all financial products.

·         FDI limit in insurance sector increased to 74% from present 49%.

·         Asset Reconstruction Company and Asset Management Company to be set up to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds and other potential investors for eventual value realization.

·         Rs. 20000 cr allocated for recapitalization of public sector banks.

·         The limit of Rs50lac outstanding for action under SARFASI Act reduced to Rs20lac for large NBFCs.

·         Proposal to launch data analytics, artificial intelligence, machine learning driven MCA21 Version 3.0 with modules for e-scrutiny, e-Adjudication, e-Consultation and Compliance Management.

·         Clear roadmap for privatization of CPSE. Proposal to take up the privatization of two Public Sector Banks and one General Insurance company and IPO of LIC in FY22. Rs1.75trn to be raised from disinvestment in FY22.

·         Social security benefits will extend to gig and platform workers. Minimum wages will apply to all categories of workers, and they will all be covered by the ESIC.

·         15,000 schools to be qualitatively strengthened to include all components of the National Education Policy.

·         Higher Education Commission to be set up for standard-setting, accreditation, regulation, and funding of higher education institution.

·         National Research Foundation to be set up to develop research ecosystem in the country. (Rs50000 over 5years)

Direct proposals

Personal taxation

·         No change in tax rates and slabs.

·         Assesses above 75yr of age having only pension and interest income need not file return, if TDS covers their full tax liability.

·         Dividend income to be considered for advance tax only when announced. For FPI, TDS on dividend to be at lower treaty rate.

·         ULIPs Premium over Rs2.5lac in a year to be treated at par with Mutual Fund Investment.

·         Interest on contribution to Provident Funds on contribution exceeding Rs2.5/year to be taxable. (Wef 1-04-2021)

·         The additional deduction of `1.5 lakh shall therefore be available for loans taken up till 31st March 2022, for the purchase of an affordable house.

·         IT Returns to come pre filled with salary, interest, dividend and capital gain of listed securities.

·         Person in whose case TDS/TCS of Rs50,000 or more has been made for the past two years and who has not filed return of income, the rate of TDS/TCS shall be at the double of the specified rate or 5%, whichever is higher.

·         Proposal to increase safe harbor limit from 10% to 20% for the specified primary sale of residential units.

Business taxation

·         Further affordable housing projects can avail a tax holiday for one more year – till 31st March, 2022. Tax exemption to be notified for Affordable Rental Housing Projects.

·         For assesses carrying 95% or more transactions digitally, Tax Audit would be needed only if turnover exceeds, Rs10cr.

·         Eligibility for claiming tax holiday for start-ups extended by one more year - till 31st March, 2022.

·         TDS of 0.1% required on purchase transaction exceeding ` 50 lakh in a year, provided the supplier’s turnover exceeds rs10cr.

·         TDS requirement on dividend paid to Trusts (REITs/InVits) in whose hand dividend is not taxable.

·         Provisions for Equalization Levy on ecommerce players rationalized.

Assessment Procedures

·         Time limit for reopening of assessment reduced to 3yrs from present 6yrs. Re-opening for serious tax evasion to be made more objective and system driven.

·         Dispute Resolution Committee to be set up for small assesses and Settlement Commission to be wound up. ITAT to also go faceless.

·         Time limit for completing assessment reduced to 9months from the end of relevant assessment year.

Budget at a glance

Besides other things one thing that the year 2020 has established is the need for global manufacturing to rebalance its over reliance on China. This need was being felt for past many years, but the following factored appeared to have reinforced this need in 2020:

(a)   Major global economies like US, Japan and India took some aggressive tariffs and non-tariff measures to correct the imbalances in their trade with China.

(b)   Pandemic induced mobility restrictions exposed the vulnerabilities in the global supply chain and prompted businesses to diversify their manufacturing more widely.

(c)    Geopolitical aggression shown by Chinese establishment is now increasingly perceived as potent risk for global supply chain. Political unrest in Hong Kong has may have also embellished this perception.

A recent survey conducted by UBS highlighted that “70% in the China CFO survey and 86% in the US CFO survey said they had moved or plan to move a part of their production out.”

Amongst Asian countries, besides Vietnam, Taiwan, Japan, Korea and Thailand, India is seen one of the preferred country for relocation of manufacturing facilities. India is seen o have lowest manufacturing costs amongst peer, but some skepticism remains about the ecosystem and administrative hurdles. Despite a strong commitment of the top leadership to encourage manufacturing base in India, the progress on the administrative level is perceived rather slow. It is important to note that low labor cost does not necessarily lad to overall lower cost structure, if the overall ecosystem (regulation, taxes, logistics, infrastructure etc.) is not favorable for manufacturing.

The events of Winstron, Narsupura (Bengaluru, December 2020) and Delhi (Violent protests by farmers, January 2021) are not good omen for this though. Rejecting these events as mere local politically motivated events might be mistake best avoided; because we are already in the midst of transition. The decisions are being already taken in board meetings. No one can deny that sometimes a newspaper headlines on decision day might impact a 30-40yr plan.

Global economy

The year 2020 witnessed the global economy contracting by 3.5%, the worst peacetime performance after the great depression. IMF has recently forecasted a “strong” (5.5%) revival in 2021 and “normalization” (4.2%) in 2022. Which essentially means the global economy would be growing at less than 1% CAGR over two years (2020-2021). This rather long pause in global growth means serious setback to the development goals of poverty elimination, climate change and inclusion. The fact that this “pause” in growth could only be achieved with trillions of dollars in fiscal and monetary stimulus, highlights that the legacy of global financial crisis (GFC) and subsequent quantitative easing might have materially weakened the growth drivers of the global economy in past few decades, e.g., development of human capital, globalization of trade and commerce, poverty alleviation, productivity growth, etc.

The new global survey of 295 economists from 79 countries, commissioned by Oxfam, reveals that 87 per cent of respondents, including Jeffrey Sachs, Jayati Ghosh and Gabriel Zucman, expect an "increase" or a "major increase" in income inequality in their country as a result of the pandemic. (see here)

In Indian context, IMF is now forecasting a contraction of 8.5% for FY21 and a growth of 11.5% for FY22. This implies, like global economy, Indian economy would also be growing at less than 1% CAGR over two years (2020-2021). This “pause” in growth over two years comes at the expense significant fiscal leverage (rs30trn stimulus), and massive liquidity infusion.

The latest Oxfam report highlights that the pandemic induced lockdown may resulted in massive rise in socio-economic inequality. While the formal sector workers mostly escaped unscathed or with small salary cuts; the job losses in informal sector were massive. “Out of a total 122million people who lost their jobs, 75%, which accounts for 92million jobs, were lost in the informal sector. The disruption in school schedules may result in massive rise in school dropout young population, further widening the socio-economic abyss.

As per Oxfam, "Only 4% of rural households had a computer and less than 15% rural households had an internet connection. Only 6% of the poorest 20% has access to non-shared sources of improved sanitation, compared to 93.4% of the top 20%.

Global Trade

IMF sees global trade rising by 8.1% in 2021, after an estimated 9.6% decline in 2020. The rebound is much weaker, as compared to post global financial crisis (GFC) rebound in 2010-2011. The recovery would look even insipid if we factor in poor trade growth during 8yrs preceding the pandemic (2012-2019).

In a recent update, ING Bank highlighted—

“With freight rates signaling capacity constraints in world trade, it’s likely that trade volumes won’t be able to rise much further – even to serve catch-up demand – when countries emerge from the second wave of lockdowns. Capacity may only come back on stream slowly as shipping liners wait until the global recovery is more firmly underway before bringing back inactive ships. Even then, containers being unavailable where they are needed will drag on volumes for some time. Capacity constraints mean that trade volumes won’t be able to rise much further even when countries come out of lockdowns

In the near term, limits to global trade growth are likely to be a modest headwind for GDP compared to the far more disruptive domestic lockdowns. More important will be higher freight rates and import prices building inflationary pressures over the course of the year.”

The present state of global economy and trade is therefore far from Blue Sky; even though the dark clouds may have dispersed for now. A bullish bet on sustainable global recovery to beyond “Pre Covid sub optimal levels” might be premature as of this morning, in my view.

A sharp rise in inflation, as presently anticipated by a section of global economists and investors, forcing monetary tightening; could however lead even the recovery to Pre Covid level, halting in its strides.

 Over the last weekend, I attended a lecture on the doctrine of Karma, read couple of books on philosophy of investment, and observed zillion of nuggets of investment advice, apparently written by highly successful investors and/or advisors, on my social media timelines. Admittedly, all this was quite befuddling for me. Everything, I read or heard caused an overflow of conflicting thoughts and emotions. I spent the entire Republic Day holiday in extricating the entangled thoughts. I am not sure, if I attained any degree of success in my endeavour. Nonetheless, I understood the following very clearly–

(i)    Like any other Karma, the process of investing in financial products is personal to every individual. No two individuals will have exactly same investment plan – strategy, goals, process and outcome. The similarities between religion (morality, ethics etc.) and investment end here.

(ii)   Investment advisory issued (free) to common public is mostly a redundant function, inasmuch as it does not take into consideration the individual circumstances of an investor.

(iii)  Financial investment is a tiny subset of the one’s overall life. The life path one sets for himself does impact the investment plan. But vice versa may not be true. If investment plan (strategy, goals, process and likely outcome) begins to drive the life (cart before the horse), it is a huge problem.

Doctrine of Karma

Karma is perhaps the most popular word of Indian origin that has been incorporated in global lexicon. This is despite the fact that the doctrine of Karma is intrinsic to Indian belief system of rebirth and salvation and does not fit the practice of Abrahamic religions (Islam, Christianity and Judaism) and most other traditional religious belief system across Africa and Latin America.

By most simplistic definition, Karma means Acts performed by a living being. The doctrine of Karma says, insofar a living being is engaged in the eternal cycle of rebirth, the condition of present and future lives is determined by his/her Karma of past and present life.

While performance (or otherwise) of Karma is completely individual, the common goal of all Karma, performed by all living beings is to obtain release (salvation or Moksha) from this eternal cycle of rebirth. Each one has to accumulate enough good Karma that will be sufficient to secure a release from this cycle of rebirth.

The doctrine of Karma is thus motivation to live a moral & ethical life. This also explains the pain, suffering and existence of evil.

Investment advisory

Investment advisory is function of formulating a financial plan for a person or group of persons. This involves, evaluating the financial conditions of a person, setting investment gaols, making an investment strategy to achieve these goals, and assisting the person(s) in executing the plan.

Investment advice thus is very personal service. It is less likely that an investment advice shall be equally relevant for two persons or group of persons. It is therefore very important that while accepting a “common” investment advice, one needs to be extremely careful. Let me explain this by way of an example:

A “common” investment advice is that by investing in an Index Fund (passive investment), one can earn a steady return over a much longer period of time. Nifty has given CAGR of ~9% over past 30years. These 30yrs have seen extreme volatility, many wars, multiple scams, global crisis, pandemic, many droughts, extreme political instability (and stability), etc. Even in USD terms, CAGR of Nifty over past 30yrs is close to 5%. This sounds very good.

Now consider the following:

(a)   Nifty witnessed 18 corrections of over 10% in these 30years. These corrections ranged 10 to 60% from the peak level before correction. (See the chart from latest CLSA report below)

If a person had the investment plan period of less than 30yrs, there was a decent chance that he would have made much lower returns. For example, If someone invested in Index ETF in April 1992 (Nifty 1281) and redeemed his investment in September 2001 (Nifty 854), he would have lost over 30% on an nine year investment. Similarly, investment made in Nifty ETF in January 2008 (Nifty 6279) would have yielded just 1.5% CAGR if redeemed in March 2020, a good 12years later.

I appreciate that taking peak and bottom level of indices to state my point may not be appropriate. But it does not change the point. Investment in financial products is not like Karma. One wants to see the outcome of investments over a finite period, usually not as long as 30years.

We do not invest in stocks, with the idea that the profits will come, if not in this birth, may be in next birth; May be I would die before enjoying the fruits of my investment, but my grandchildren will certainly enjoy it. This may be an eventuality. But this is usually not the plan.

Therefore, while investing in an index fund, I must be mindful that only that part of my investment should go in Nifty ETF which I would not be forced to redeem in case of an emergency or contingency, especially if this emergency happens to be a macroeconomic event that might cause a sharp temporary fall in equity prices.

(b)   One must realize that protecting the savings from inflation is one of the primary goals of financial investments. In past 30years (and even in past 10years), India’s average consumer price inflation rate has been above 7%. Adjusted for this Nifty 30yrs CAGR may be under 2%. Does not look glamorous by any imagination!

The short point is that “common” (free) investment advice might be applying the doctrine of Karma to financial investment also. It may be assuming equity investment to be a perpetual endeavour, lasting for generations. Unfortunately, it is not the situation in most cases. People usually invest in stocks for generating some additional income (dividend plus capital gains) in foreseeable future. Their investment plan needs to be prepared accordingly.

I received lots of comments on the yesterday’s post (Investing lessons from down under). Most commentators agreed with my view that a good portfolio must be a balance of consistent compounders and emerging businesses; whereas few expressed strong disagreement. Unsurprisingly, amongst those disagreeing were both types of investors – those who prefer to stick with consistent performers; and those who prefer emerging businesses with a potential of abnormal returns in short to mid-term.

I find myself totally disinclined to argue with any of the commentators, since I strongly believe that investment is essentially a personal endeavour. Each investor will have a different strategy based on his/her personal circumstances, requirements, and aptitude. The widely followed investment strategies are basically templates. Individual investors customize these templates to make an investment strategy most suitable for them.

I however would like to discuss one thing that stuck me hard while reading these comments. I found that most commentators (I believe they all are investors) are not sure about the primary goal of financial investments. Upon enquiry, I received the following answers:

·         Wealth creation (40%)

·         Become rich (25%)

·         Higher profit (25%)

·         Others (10%)

I wonder if these are correct definitions. What I have read in management books is that “goal” of a financial plan must be quantifiable and definite to the extent possible.

·         “Wealth” itself is a vague term. Various people define it in different ways. There are many who even refuse to consider “wealth” as a pure financial term. “Wealth Creation” is even more vague.

·         “Become rich” is even more vague. “Richness” in financial terms, is purely a relative term. It may have entirely different connotation for persons living in Mumbai and Madhubani. This goal is certainly not quantifiable.

·         “Higher Profit” is also a relative term and could be infinite. It could mean higher than alternative avenues of deploying savings. It could also mean higher rate of return than a targeted person or institution.

In my view, the core of investment strategy is to define a definite quantitative goal. Some examples of these goals are as follows:

(i)         Preservation of capital in real terms (inflation adjusted)

(ii)        Return on investment of 10% more than the nominal GDP growth

(iii)       Return of 5% in USD term, since I am saving for my child’s US education

 The recently concluded tour of Indian cricket team to Australia has been remarkable in many ways. I am sure, the cricket administrators, analysts, strategists and guides in the country would analyse the outcome of tour from the viewpoints of future playing strategies and improvement in fitness regime, and career path for the young promising players who may not get adequate opportunities due to limit of 11 playing members in the national team.

On my part, besides thoroughly enjoying two months of engrossing game of cricket, I have drawn some key inputs for investment strategy purpose from this tour.

Pujara vs Pant debate is meaningless

One of the prominent topics of discussions, before final day of the Brisbane test, was the “slow” batting of Cheteshawar Pujara; though the victory at Gabba ended this debate with tins of praise being heaped on Pujara for his grit and resilience. A loss or draw at Gabba might have seen strong criticism of Pujara.

On the other hand, Rishabh Pant, who has been consistently the target of critics for his irresponsible batting, was praised as true successor of Dhoni - A great finisher and match winner.

I find nothing new in this discussion and criticism. Players like K. Srikkanth, Virendra Sehwag, Yuvraj Singh, Kaluwitharana, Shahid Afridi, etc. have always faced this kind of criticism. The fact is that competitive cricket needs to strike a balance between entertainment and classical game. For every Gavaskar a Srikkanth; for every Tendulkar & Dravid, Sehwag & Yuvraj; and for every Jayasuriya a Kaluwitharana is needed. The balance between classical techniques and aggressive innovation is consistently leading to evolution of the game and keeping the interest of spectator alive.

Applying this analogy to investment strategy, we must understand that constructing an investment portfolio is like making a cricket team. The portfolio must strike a balance between safety, liquidity and returns. While anchoring the portfolio with consistent compounders, investors must keep trying the new businesses which could be potential winners due to their innovative methods and technology. Of course the failure rate in this endeavour will be high, but one winner will more than compensate for these failures and enhance overall portfolio return.

Just to illustrate, HUL played a Pujara for 10yr (2001-2010); ITC is playing the same game for past seven years; and RIL played it for six years (2011-2016). For these, the balance was provided by the likes of Bajaj Finance, Page Industries, Divis Lab, Eicher Motors, Havells, HCL Tech, PI Industries etc. Many rising stars though failed to live upto the expectations, e.g., IDFC First Bank, DHFL, Yes Bank, JP Associates, Suzlon, etc.

One pertinent question here would be what should be the proportion of Pujara’s and Pant’s in a balanced investment portfolio!

Well, for that one would need to sit with her/his investment adviser and work this out.

36 all out and 325/7 on fifth day Gabba pitch (January 2021) are both exceptions

On 19^th December 2020, the fabled Indian batting line up wilted under pressure and was all out for a mere 36 runs in Adelaide. One month later on 19^th January 2021, a much depleted team scored 325 on the fifth day Gabba pitch facing infamous hostile Australian bowling. The both performances are true but not normal. These kinds of performances do occur once in a while, but cannot be key parameters for evaluating the standard of Indian team.

The benchmark indices fell by 40% from peak in two months (February-march 2020) and have risen over 90% in past 10 months. The sharp fall and fast recovery, both are not normal conditions. These deep oscillations do occur almost every 10year, but cannot be a key parameter for investment strategy. Only a trading strategy can factor in these kinds of oscillations. As such these are more relevant from risk management viewpoint of brokers and lenders, rather than investors.

 The recent macroeconomic data indicates that Indian economic activity may soon reach to its pre Covid level. The latest reading on Nomura India Business resumption Index is 93.4, just 6.6% below pre Covid induced lockdown level. The media headlines and official commentary claims it to be a “V” shaped recovery, implying that one year may have been lost, but Indian economy is nearly back to “normal”. There is section of experts which is terming it to be a “K” shaped recovery rather than a “V” shaped one; implying that one part of the economy has raced much ahead while the other continues to slide.

Some noteworthy data includes:

IIP growth is now back to February 2020 level. In December, e-way bill collections rose by 15.9% to 6.42 crore in December 2020, the highest since April 2018. The mobility to work places ticked up in past 8 weeks, as shown by Google mobility index.

Elsewhere, China has reported positive growth of 2.3% (yoy) for 2020 as a whole. UK, USA and many other European countries have seen fresh surge in cases of infection and have re-imposed some mobility restrictions, hampering the process of economic recovery. In past couple of weeks the US job data has been disappointing.

These data certainly a matter of relief. However, in no way it makes me comfortable. I know from my travels and interaction with people that for a significantly large section of population, the normalization will take years, if not decades, of “high” economic growth. Besides, the amount of stimulus that has taken to bring the economy back to “pre Covid” level may not be available to take it back to pre global financial crisis (GFC) level; exatly we want to be.

For now, Indian economy is like a middle aged person suffering from chronic asthma and diabetes, who has just returned home after a successful open heart surgery.

One of the distinct childhood memories is about the Uncle, who used to visit foreign countries for work almost every year. After every foreign visit, he would host a family dinner. At the gathering he would explain the difference between heaven (Europe and USA) and hell (India). He would make every adult regret for taking birth in India and make every child aspire to settle abroad.

We (me and my brother) were usually not interested in what Uncle is saying. Our interest was limited to the last act – opening of goodies bag post dinner. He would very generously distribute the “gifts” he had brought from “foreign”. These gifts would invariably include – bathroom sleepers, shaving and dental kits, cosmetics and writing instruments picked from the hotel room he had stayed and flight he had travelled; bottles of perfume; some clothes; small toys; and souvenirs, mostly bought from dollar stores (this I know in hindsight after travelling myself). Three essential things were bottles of liquor bought from duty free shop, a wrist watch and some electronic gadget (camera, oven, juicer, VCR etc.). These items he would offer to sell. (In hindsight I know that he would recover the cost of his entire trip and gifts by selling these items.)

Presentation of Union budget, every year by the finance minister, always reminds me of the generous uncle. A great build up before the budget presentation; a long speech; a strong feeling of regret for being Indian middle class; distribution of some goodies for the poor; and higher taxes to meet the higher expenditure. Since the dream budgets of 1996; the same story has been repeated for past 25years. Almost every time, people end up disappointed and disillusioned after the fine print of the budget are explained to them the next morning.

Notwithstanding the outcome, the charade of pre-budget shows, writings, representations, expectations and analysis is repeated enthusiastically. Hopes are rekindled only to be shattered. This year is no different.

The grim reality of Union Budget 2021 is that the government is terribly short of resources and extraordinarily high on promise. To meet the promise, additional resources would need to be raised. The government knows it well. The businesses know it even better. Rest all (consultation with stakeholders etc.) is the Uncle’s dinner to sell the duty free liquor and gadgets.

For those who are expecting the finance minister to take out some bazooka from her tablet (this year budget is digital, hence no briefcase), I have stated this earlier also and would like to repeat:

The scope and importance of Union Budget has diminished materially over the past two decades.

·         Initially the changes in tax rates were made only through the Finance Bill which is part of the budget exercise. However, many springs ago the government assumed the power to change the rates of excise etc through notification outside the budget. Subsequently, the GST subsumed most of the indirect taxes and the power to alter GST rates has been exclusively vested in the GST Council. The Union Budget has no role to play in GST rates now.

·         The boundaries for rates of customs duty are now mostly set in accordance with the WTO agreements. The union government can change these rates to safeguard domestic industry from unfair pricing by overseas suppliers or to stabilize the domestic prices in times of abnormal supply shocks. These changes could be done whenever a need arises. The union budget has little role to play in this.

·         Post implementation of the 14th Finance Commission recommendations, the onus to implement a large number of welfare schemes has been transferred to the respective state government.

·         The petroleum products' pricing has been mostly deregulated and the budget provides no subsidies for the transportation fuel now.

·         Most of the public sector enterprises, like NHAI, Railway Subsidiaries, Oil & Marketing companies now raise resources directly rather than through the budgetary support.

·         The corporate tax rates were restructured materially in August 2019. It would not be reasonable to anticipate any further concessions in corporate tax.

·         Higher energy and food inflation may warrant some concessions in the personal taxation, especially for the smaller tax payers. Inflation scaled increase in basic exemption limit and standard deduction may be considered. But this will be subject to resource constraints.

·         The government has announced a National Infrastructure Pipeline (NIP) of Rs1.02trn in December 2019. This proposal was strengthened through various stimulus packages announced during the course of 2020. This obviously takes out almost all major projects from the union budget.

·         Disinvestment of public sector undertakings a continuous process. Though a provision for receipts from this head is made in the budget, there is no evidence of any correlation with the actual disinvestment proceeds and budget provisions, in past 30yeras of disinvestment process.

·         Telecom spectrum auction and bank recapitalization allocation are other two key items watched closely. Again, in past 20yrs, there is no evidence of any correlation between the actual allocation and budget provisions.

Analysis of various reports indicates that market participants may be expecting the following from Union Budget 2021:

(a)   Significantly higher government expenditure, especially on infrastructure building. Setting up of a specialized development finance institution (DFI) is also one of the key expectations.

(b)   Additional tax concessions to middle classes especially salaried people.

(c)    Concessions for housing sector, especially higher interest rate subvention; higher cut off limit for definition of affordable housing; additional concessions for developers of affordable housing projects including extension of tax holiday beyond March 2021.

(d)   Review of taxes on investment (STT, LTCG, Dividend Tax)

(e)    Continued suspension of FRBM till FY24.

(d)   Fresh (higher) allocation for bank recapitalization.

(e)    Cut in excise duty on automobile fuel.

(f)    Some progress on Bad Bank formation.

The fears of market include the usual wealth tax, estate duty, additional tax on tobacco products.

Clearly, the expectations this time are running quite low. Just for the sake of a good omen, I would also expect the following from the finance minister:

(1)   Make capital gains (Long term and Short Term) tax rate uniform across all asset classes. This will allow rationalization of asset allocation process by removing tax arbitrage between asset classes.

(2)   Formula to link the basic exemption with some objective criteria (e.g., inflation, per capita GDP, house price index, education and healthcare expense per household as per latest NSSO survey, etc.) This will make the taxation structure more equitable and end the need to speculate over exemption limit before every budget.

(3)   Refrain from imposing additional taxes and cess to cover the cost of Covid vaccination and stimulus.

I would however be not disappointed if FM refuses to oblige me by meeting any of my expectations. I know this is an exceptional year and she has many strings to balance.

Also read

What Finance Minister Needs To Do To Make History: The 10 Big ‘Asks’ From Budget 2021-22

You should be happy if there are no increases in income taxes: Kotak MF

Travel, Tourism sector expects pathbreaking Union Budget for post-Covid recovery

More income tax incentives for housing purchase necessary to revive realty sector