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Interim Budget Leans On Political Capital, Sticks To Infra Push

The Government is sticking to its original budget strategy which included investments in infrastructure like roads and railways, affordable housing, tight rein on fiscal deficit and new initiatives across renewables

By Govindraj Ethiraj
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Interim Budget
On today’s episode, financial journalist Govindraj Ethiraj talks to Ashok K Bhattacharya, Editorial Director with Business Standard as well as Mukesh Butani, Managing Partner of BMR Legal, a leading legal and tax consulting firm.

Our Top Reports For Today

  • (00:00) Stories Of The Day
  • (00:50) Interim budget leans on political capital, sticks to original strategy on infrastructure push.
  • Government sets aggressive fiscal deficit target of 5.1%, tightens spending.
  • (22:04) Oil stays below $82 a barrel despite Biden threat to respond to Iran.
  • (23:46) More large organisations are calling people back to work or asking them to leave.


NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.

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Budget/Markets

The interim budget on February 1 leaned heavily on the political capital the Government is enjoying by sticking to its original strategy which included investments in infrastructure like roads and railways, affordable housing, tight rein on fiscal deficit and new initiatives across renewables.

There were no major spending or tax measures at least aimed at voters.

Elsewhere, on the taxation front, it took a philosophical and practical call not to go after tax payers who have sums apparently due from 1962 and thereabouts, including below Rs 25,000.

The reason suggested was that all the centralisation and digitisation happened in 2010-11 and getting hold of records scattered across the country only to find that taxpayers would say they had already paid up was too cumbersome and not worth the effort.

The thinking is welcome even if the step may seem relatively small and should and would hopefully lead to easing up in other actions of the tax department as well, for instance high pitched assessments which usually have no hope of seeing light of day and only serve to lock companies in long litigation cases.

The government says it will cut its budget deficit sharply in the coming fiscal year that begins in April, reducing it to 5.1% of gross domestic product — lower than the 5.3% predicted by economists in a Bloomberg survey. The deficit for the current year was revised down slightly to 5.8%. To put things in context, it hit 9.2% in the pandemic year and the target is 4.5% in 2025-26.

The smaller-than-expected deficit and the cut in borrowing for next year prompted a rally in bonds. The yield on the benchmark 10-year bond fell 11 basis points to 7.04% on Thursday. 

Gurpreet Chatwal, MD of Crisil Ratings said, “The corporate bond market is expected to benefit from increased availability following lower than expected government bond sales by ~Rs. 1 lakh crore next fiscal, as the government seeks to rein in the fiscal deficit to 5.1% of GDP. This also augurs well for the anticipated revival in private sector capex across sectors in fiscal 2025.”

In the markets, the BSE Sensex ended the day with a loss of 107 points at 71,645 without much action through the day, possibly looking for direction from the Budget which did not come, expectedly. The NSE Nifty 50 finished 28 points lower at 21,697.

Elsewhere, Reuters reported that India's manufacturing industry improved substantially at the start of 2024 with factory activity expanding at its fastest pace in four months in January on robust demand and an upbeat year-ahead outlook, a private survey showed on Thursday. The HSBC final India Manufacturing Purchasing Managers' Index compiled by S&P Global, rose to 56.5 in January from December's 18-month low of 54.9.

Back to yesterday’s budget it allocated about 11,00,000 crore rupees  ($134 billion) for capital spending, an increase of 11.1% from the previous year. 

The government has ramped up capital expenditure by almost a third annually in the past three years as we have been discussing here.

There were no tax changes for individuals or businesses nor were there expected to be.

There were some extensions of tax holidays and we will come to that shortly and elsewhere there were not, like for new manufacturing investments. 

Overall, India will spend 455,000 crore rupees on subsidies for food, fertilisers and rural employment schemes in the fiscal year starting April 1, down 7% from the current financial year, an official budget document showed on Thursday.

Fertiliser subsidies will be cut to Rs 164,000 crore next year, while the allocation for food subsidies was reduced to Rs 205,000 crore.

The Government says it will raise around Rs 50,000 crore from the sale of state assets in the next fiscal year, after missing this year’s target. 

In general, the Government has gone slow on asset sales and seems quite content with the status quo.

The usual argument for the Government dragging its feet on asset sales is lack of political consensus which is obviously not an issue here. 

Quite likely, the Government is happy with the fact that several PSUs are actually doing well, including their stock prices and thus sidestepping the more conceptual question of why it should be owning and running businesses in the first place. 

As they say, the more things change, the more they remain the same. Surely in the case of disinvestment and privatisation, except of course for Air India which was a hot potato in the most literal sense and had to be dumped.

A few specific announcements, which were welcomed include an increase in food storage and warehousing fund which would address perishable and post harvest loss which in turn has a direct impact on all the spiking prices you have seen in the last year in fruits and vegetables.

Crisil says quoting government estimates that 6% of crops in India suffer post-harvest loss, which translates to a whopping Rs 1.2 lakh crore loss. 

Of this, highly perishable fruits and vegetables comprise a significant ~48% share. Hence, the increase in allocation under Food Storage and Warehousing Fund by ~17% over fiscal 2024.

The renewables space saw several announcements including financial assistance for biomass procurement, which will provide impetus to the growth of the biofuels sector. 

Phased mandatory blending of compressed biogas (CBG) in compressed natural gas (CNG) for transport and piped natural gas (PNG) for domestic purposes has been mandated, which will further boost the growth of CBG plants in the country. This should enhance production of CBG thereby saving on imported gas.” 

I reached out to two experts, in tax and overall economy. Budgets are political projects as well and this perhaps more so since it comes two months ahead of a general election.

So I spoke with Ashok K Bhattacharya, Editorial Director with Business Standard to get a political-economic temperature check and I began by asking him how we was seeing the path as defined in the budget statements of Finance Minister Nirmala Sitharaman and how he was seeing that being carried through to next financial year.

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I also spoke with Mukesh Bhutani, Managing Partner of BMR Legal, a leading legal and tax consulting firm and I began by asking him what he was seeing in a directional sense.

Among other economic news, India’s leading carmakers reported their best-ever monthly sales with volumes growing 13% to 394,571 units, the Economic Times reported.

A senior Maruti Suzuki official told ET that  “Industry stocks were low at the start of the month which prompted dealers to restock. While demand parameters are stable, February onwards we will see the direction the market is moving”

Oil Holds On

The tensions in the middle east have not ceased.

But Brent crude prices are still holding below $82 a barrel at around $81 a barrel and 35 cents.

Prices stayed down after data showed increasing US crude stockpiles and rising oil output.

President Joe Biden said earlier this week that he had made a decision on how to respond to the attack over the weekend that killed American troops, without providing details. 

He said Iran was responsible for providing the weapons used in the strike, but Tehran has denied involvement and vowed to hit back against any strike on its soil or assets abroad.

Bloomberg said that US oil output rose to 13.3 million barrels a day in November, surpassing a previous record in September, according to the Energy Information Administration. Data also showed weekly production back at 13 million barrels a day, while crude inventories gained for the first time in three weeks.

This was part of our energy segment supported by IEW to be held from February 6 in Goa. For more details log onto www.indiaenergyweek.com

Interest Rate Cuts Seem Some Time Away

The dollar index is hovering near a one and half month high as Fed chair Jerome Powell said it’s unlikely that the central bank will start cutting interest rates in March. 

Investors are now expecting only 34% odds for a March rate cut. The inflation rate in the Euro Area went down to 2.8% year-on-year in January 2024 from 2.9% in the previous month, in line with market expectations, a preliminary estimate showed.

Gold prices are also trading lower.

More Companies Are Calling Employees Back

UPS on Tuesday joined a small group of large companies pushing for a return to what has become an anomaly in American worklife: five days in the office, the WSJ reported.

The delivery giant followed JPMorgan Chase, and Boeing  among employers requiring full-time attendance for at least some segment of their workforces.

An aside, I am not sure I want to fly in an aircraft produced by people sitting at home. Just saying and please don’t jump on me.

In the UK, Ernst and Young is  monitoring staff attendance in the office as workers break its hybrid-working rule policies.

The Big Four accountancy firm has begun using anonymised turnstile data to assess compliance with its hybrid-working policy, the Financial Times reported.

IBM has asked all its US managers to return to the office or leave the job, according to a Bloomberg report.

In a memo dated January 16, a senior IBM official said all managers based in the US must now report to an office or client location for a minimum of three days each week, irrespective of their current work arrangement.

And guess which organisation has a zero work from home policy, flexibility and folks working there can’t even dream about it.

It’s the Government of India and that’s been the situation even during some of the worst days of the pandemic.

Think about it.