Opinion Budget 2023: A budget that ticks the right boxes on populism with pragmatism

Despite apprehensions about elections having an impact on the fiscal glide path, the budget offers tax relief to individuals while providing sufficient resources for government schemes

Among the populist moves and demand for lower tax rates for individuals, the budgetary announcements significantly improve the attractiveness of the “new tax regime”. (Express Photo by Tashi Tobgyal)

February 1, 2023 06:19 PM IST First published on: Feb 1, 2023 at 06:12 PM IST

Written by Karthik Srinivasan

In a pre-election year, there were wide expectations that the Union Budget would announce populist measures, which could impact the fiscal deficit glide path. However, the budgetary announcements ticked all the boxes by balancing the wider expectations of tax relief to individuals with sufficient resources for various government schemes. Adherence to the fiscal deficit glide path and market borrowing in line with expectations led to a rally in bond prices and a decline in the yield on government securities. This is expected to provide some relief to the debt markets and prevent any near-term crowding out of private borrowings from the debt capital market.

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From the financial sector’s point of view, the budget continued to focus on further enhancing the public market infrastructure. Various announcements such as the setting up of the National Financial Information Registry, a continuation of fiscal support for digital payments and digitalisation of documents for MSME lending or computerisation of agricultural cooperatives were some key positives. Further, in a bid to improve ease of doing business, the announcements to carry out a comprehensive review of existing regulations by various financial sector regulators will significantly ease the compliance burden on various participants. With a few recent failures of banks and governance issues around others, the budget also proposed amendments to the Banking Regulation Act to enhance investor protection and governance structure in the banks. We will also be watching out for the amendments related to the government’s shareholding in public banks as a precursor to the expected privatisation of these banks.

The above measures are expected to have a significant positive impact on the financial sector in the long term. However, certain measures such as the continuation of the credit guarantee scheme for MSME lending and continued thrust on affordable housing are likely to support credit off-take in the near term. Further, setting up a new subsidiary under EXIM Bank could provide competitive financing for export-oriented activities. The increased budgetary outlay on capital expenditure could also provide sufficient opportunities for credit demand and help the overall growth of the financial sector.

On the recapitalisation of various public sector institutions, the announcements were largely in line with our expectations and no capital infusion was announced for public banks as well as the All India Financial Institutions. However, given the weak solvency profile of PSU general insurance companies, we expected some announcements related to their recapitalisation. We will wait for subsequent announcements in the year as the capital infusion into these insurers was outside the budgetary announcements during FY2022 also.

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Among the populist moves and demand for lower tax rates for individuals, the budgetary announcements significantly improve the attractiveness of the “new tax regime”, which allows individuals to pay taxes at lower rates but with no deductions from taxable income. Increased adoption of this tax regime could potentially impact the demand for investment products such as insurance, which offer deductions. Moreover, the proposal to limit the tax exemption on receipts from insurance policies, which are below Rs 5 lakh premium could also adversely impact the demand for guaranteed income insurance products and hence, the premium growth for insurance companies. Among the other populist announcements, the government also announced the hike in investable limits across various small saving instruments for senior citizens. This could lead to a further increase in competition among banks for deposits at a time when credit growth has been running ahead of deposit growth and is likely to remain so for next year.

The market-linked debentures (MLDs) have gained prominence among high-networth individuals during the last few years with annual issuances estimated to be over Rs 250 billion. As the returns on these MLDs were market-linked, the taxation on the long-term capital gains was similar to equity instruments at lower rates. However, incrementally, many of the recent MLDs issuances had been structured to generate debt-like returns and hence became an attractive investment proposition on a post-tax basis. The budget has proposed to tax the income from these MLDs as short-term capital gains, which will attract taxes at applicable tax rates for the investors. As tax-efficiency was the biggest driver for the growth in issuances of these MLDs, the proposed amendments to taxation will adversely impact these issuances.

The writer is Senior Vice President & Group Head — Financial Sector Ratings — ICRA