In this ETMarkets Smart Talk, Sanghai explains why the deficit figure is positive for markets, emphasizes the importance of capital investments that exceed loans, and points to hidden structural reforms, from banking to FEMA guidelines, that could support long-term capital formation. Edited excerpts:
Kshitij Anand: What exactly do you think about the budget?
Sunil Sanghai: As you rightly said, it was a Sunday, but I would say it was a Sunday well spent. A number of things have happened in the budget, especially for practitioners like us, who are connected to the capital market. I would split this into three parts.
First look at the tax aspect. The budget deficit is right on target at 4.4%. Last year we did better than our target. Going forward, the expectation is 4.3%, and the market expected somewhere around 4.3% or 4.2%. So we are well within the margin. There is some confusion around the gross amount of the loans, which I believe will be reconciled over time. We really have a weekend to review this.
Regarding certain aspects affecting the market, especially STT, if you look at it as a whole, the buyback option, which was previously disabled, is now back, and the market needed that. However, I would put a rider on buybacks and request SEBI to review its regulations. SEBI had earlier reduced the number of methods available to just one. There were two methods: the open market and the tender route. The open market route was effectively abolished, leaving only the tender route, which was not pursued as it made no sense from a tax perspective. So, we would request SEBI to intervene now and bring back open market buybacks as that would act as a compensating factor.
Thirdly, on the business side, there are a number of initiatives. An example is data centers. If someone sets up a data center in India, there is a tax exemption till 2047, which could be very attractive to global players and will have a major impact on foreign direct investment.
Overall, we need to put this into perspective. Budgeting has now become much more routine than it was thirty years ago. I have been watching Budgets since 1983. Back then everything was announced in the Budget. Now direct taxes are arranged outside the budget. Direct tax reforms were addressed last year, and indirect taxes have now been addressed. Many policy announcements also happen outside the budget. As a result, it has now become a much more limited exercise.
Kshitij Anand: Let me get your perspective on the macro front. Does the 4.3% budget deficit target strike the right balance between growth support and macro stability?
Sunil Sanghai: Very good question. Again, let me put this into perspective. The 4.3% target is, as I said before, in line with what the market expected. We need to read this together with the capex figures. Capital investments have increased by 8 to 9%. Yes, the expectation in some comments was over 20%, but there are obviously limitations on the revenue side.We are in a year of double tax cuts: last year a direct tax and this year a VAT cut. Sales growth is expected to be moderate, with a sales growth target of approximately 10.4% for next year. Lower inflation also plays a role, because it affects nominal GDP and therefore sales growth. Given all these constraints, a budget deficit of 4.3% is, in my view, remarkable and clearly positive.
If I can take another minute to add a few specific reforms: Some of these are somewhat hidden and need to be brought out into the open. A very interesting mention was the banking sector reform, which is setting up a comprehensive assessment for the sector. Coming back to the banking sector reforms, long ago we were calling for companies not to be allowed into banking and foreign banks not to be allowed to take over Indian banks. That position is already changing. I hope that this comprehensive review will include all of this, because we need capital in the banking system. We need bigger banks to grow the economy, and the government and capital markets alone cannot continue to support these. We need large amounts of capital flowing into the banking sector. Therefore, a review of ownership, voting rights, promoters and related aspects is a very positive step.
The second point was on RBI’s FEMA guidelines for non-debt instruments, mainly equity, which have a direct impact on FDI. A number of valuation-related aspects play a role in this. These guidelines were originally drafted from 2014 to 2015 and have not been extensively revised since then. They have been irritating to both inflows and outflows of foreign direct investment. Addressing these issues, as stated in the budget, is a very positive development.
Kshitij Anand: How would you rate this budget on a scale of one to five, with five being the best and one being the lowest?
Sunil Sanghai: Rather than review it, I would rather point out areas that I would have liked to see covered. Gold is one of those areas that we need to start looking at at some point. This can also be done outside the budget, but will affect exchange rates, savings and several other factors.
On the fiscal side, this government has been very focused on fiscal discipline and has done quite well, despite increases in capital and defense spending. This time, capital investments are actually higher than loans, which is a positive sign. Capital investments are generally lower than loans. We are also moving in the right direction with regard to the debt ratio. There are still areas we need to work on, and this is an ongoing process. The budget is just one exercise; it’s not everything.
Kshitij Anand: So, from your side, would that be three out of five, or four out of five?
Sunil Sanghai: I would say it is a balanced budget and a continuation of what we are already doing. Expectations are always very high, but we must realize that the scope of the budget is now quite limited. It’s not what it was 10 years ago.
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