Letter # 27, 29 January 2021
Hey, been a while mate; catch up, Monday?
No, can’t do. Gotta listen to the budget speech, crunch the numbers and put the report out.
Blimey! You kidding me? What’s there to do? 28% of receipts is GST. Don’t you have a separate council there? And, another 28% is corporation tax, the glide path for which is already announced, no?
Yeah, but there’s more.
Really? Like the excise and custom duties at 16%, half of which is different types of tax on fuel. Those aren’t really tinkered with in the budget, right?
Right. So, you are really going to see what they do with income taxes then. The last standing bastion. Put in Covid cess if you like, ‘coz unlike the West, it’s not like you really need a second stimulus.
No mate, the rating agencies put India a notch above junk (with “negative” outlook by two of the three). We didn’t really stimulate the economy during the lockdown, but it doesn’t mean we didn’t spend (F21 likely scenario–tax revenue down 7-8% and non-tax down 25-27%, and expenditure up 6-7%). We could still manage with federal fiscal deficit at c7% (state + Center at 12-13% of GDP) and public debt of 85-90% of GDP. You know right, that those numbers for the US are 15% (FD) and 130% (debt to GDP), and they still got their AAA (or AA+ for S&P).
But, come to think of it, that’s not really riling me up a lot; most industrialists will still give a ‘ten on ten given the circumstances’ to the budget. And yes, we will plan to borrow almost INR11tn this year at the gross level (in F21, we did INR13tn), and despite that, we do not think the RBI will raise interest rates anytime during 2021.
Oh right, that reminds me, you’ve also got the monetary policy on 5th Feb–a policy packed week. Start Monday with the budget and end Friday with monetary policy. What do you expect there?
The RBI hasn’t really looked at the supply-side boost to inflation that had stayed above its 6% upper band and gone ahead and cut rates, almost 250bps (135bps before pandemic and 115bps after). Inflation appears to have peaked in October 2020 and should trend down below 5% for 2021 driven by lower food inflation primarily (down from 9% in 2020 to something like 5%). We have had bumper crops you see and wheat/rice stockpiles are like 3x normal.
No rate cut then, pretty much like the Fed then, huh?
Umm… not so fast. The rates at the shorter end of the curve have fallen much below 4% (the policy rate). The RBI will dry out current liquidity (INR7.5tn) to more a sustainable level (INR2-3tn) by end March 2021. First, it will allow the 1% cut in CRR announced in March 2020 for one year to lapse. Also, tax-related payments will come due too. You see, the RBI has tolerated supply-side inflation so far, it may not be as tolerant of the demand-side one once the economy expands again in 2021 and may want to target liquidity at more sustainable levels.
Oh, the recovery!! We got a K-shaped one, did you too?
Oh yeah. Companies with strong balance sheets have gotten stronger and people with excess liquidity have deployed in markets and gotten richer, while the unorganised sector has all but disappeared. And yeah, looks like real estate is turning around as well. But then, that’s the problem for the fiscal budget to sort out. Back to square one! See, that’s why I can’t see u Monday!
A’rite then! excited and looking forward to Monday?
Super excited, against the odds, can you imagine! The current dispensation has presented seven budgets so far and on six of them, markets have sold off post the budget speech.
Not that seven is a statistically significant sample size anyway, right! But then, all of us have the optimism bias; like whenever something good has to happen, it happens to me and when something bad happens, it happens to others, that sort of thing. SAP and Qualtrics did a global poll (1) and discovered that Indian respondents are exceptional when it comes to their optimism with regards to job prospects, use of technology, pay rise, ability to find the next job easily and everything in between that you could imagine. So, lets see how this one goes.
Alright then, sounds like you have a packed week. Catch up, Monday – umm, the next one?
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