Wednesday, 2nd February 2022

Union Budget 2022 pegged the GDP growth for FY22 at 9.2% and the fiscal deficit slightly higher at than the budget estimates at 6.9%. However, the budget estimate for the fiscal deficit for FY23 has been scaled down to 6.4%, which is a good signal. While the government is confident on tax revenues in FY22, it is not too sure about the disinvestment plans to go through. The revenue deficit target has also been scaled down by 90 bps on a yoy basis. FM affirmed that the economy was on target to go below 4.5% by FY26. 

Government introduced tax on virtual digital products, which will include cryptocurrencies. Now any income on sale of such virtual digital products will be taxed at 30% plus any applicable surcharge. There will not be any sub-classification of short term and long term gains. Also, no expense will be allowable to be offset against these gains. Losses on virtual digital assets cannot be adjusted against any other head of income, except itself. There will also be 1% TDS of sale consideration above a threshold for an audit trail.

Budget 2022 as given a big boost to cutting edge sectors. For instance, the domestic allocation of defence capex has been enhanced from 58% to 68%. The budget has also spoken about a comprehensive Battery swapping policy to help create the ecosystem for electrical vehicles. In addition, the government has also offered special benefit of infrastructure status to data centres set up by telecom and technology units for storage of high end data. Above all, a big thrust is being planned for multi-modal transport for key cities.

Capital markets were disappointed as there was no mention about the scrapping of long term capital gains tax or reduction of STT or dividend tax. Also, there was no disposable income thrust in the form of higher income tax slabs or higher standard deduction exemptions. However, the government has provided a very structural ecosystem for economic growth. Also, the long term capital gains tax impact on equities will now be capped at 11.5% overall including surcharge. FPIs are likely to be impressed by lower fiscal deficit.

Budget 2022 has sharply enhanced the capital expenditure by 35% to Rs.7.50 trillion. However, this is not being funded by revenue resources but by reduction in revenue spending like food subsidies, fertilizer subsidies where such sops were not required in the aftermath of the pandemic. Of course, one can argue that the cut in health and education allocations were uncalled for. Markets were happy about the right direction of the economy on fiscal deficit, new age sectors, infrastructure and exported oriented units.

Bond yields in the Indian bond markets shot up from 6.66% to 6.89% in a short span of time after the budget announcement. The reason lay in a sharp spike in government borrowings for FY23. The FY22 target of Rs.12 trillion borrowing program is likely to be maintained but the borrowing target for FY23 has been raised to Rs.14.9 trillion. That is a very sharp surge and put pressure on the yields. However, a lot of fiscal deficit creation will be passed to states. Rising yields and bond devolvement are a bad combination.

Paint company Kansai Nerolac reported 14.95% rise in sales revenues at Rs.1,694 crore. However, like in the case of most of the FMCG players, the pressure was visible in the bottom line numbers. Net profits fell by -34.4% at Rs.133 crore in the Dec-21 quarter due to higher crude prices and other input costs. Even the EBITDA was down 27.8% at Rs.304 crore. Like most of the other paint companies, Kansai Nerolac has also been successful in passing on some of the input cost hikes as higher prices, but that only covers part.

Preliminary estimates put out by the Ministry of Commerce indicate that exports for the month of January 2022 grew at a much slower pace on a yoy basis. Despite the rise in Omicron cases, merchandise exports were up 23.7% yoy at $34.06 billion. However, on a sequential basis, compared to December 2021, the merchandise exports were lower by 8.6%. Merchandise imports were up 23.7% at $52.01 billion resulting in an overall trade deficit of $17.94 billion. India looks on target to scale $400 billion of exports in FY22.

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