ETMarkets Smart Talk | Why the Budget’s 4.3% fiscal deficit target is a positive for markets: Sunil Sanghai

Sunil Sanghai, Founder and CEO of NovaaOne Capital Pvt. Ltd, believes the target strikes the right balance between growth support and macro stability, especially in a year marked by tax cuts and constrained revenues.

In this ETMarkets Smart Talk, Sanghai explains why the deficit number is a positive for markets, highlights the importance of capex exceeding borrowing, 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 feel about the Budget?

Sunil Sanghai: As you rightly mentioned, it was a Sunday, but I would say the Sunday was well spent. A number of things have happened in the Budget, particularly for practitioners like us who are connected with the capital market. I would split this into three parts.

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First, look at the fiscal aspect. The fiscal deficit is bang on target at 4.4%. Last year, we did better than our target. Going forward, the expectation is 4.3%, and the market was expecting somewhere around 4.3% or 4.2%. So, we are well within the range. There is a bit of confusion around the gross borrowing number, which I believe will get reconciled as we go along. We really have a weekend to assess this.
As far as certain aspects impacting the market are concerned, particularly STT, if you look at it in totality, the buyback option, which was taken out earlier, is now back, and the market was requiring it. However, I would put a rider on buybacks and request SEBI to review its regulations. SEBI had earlier cut down the available methods to just one. There were two methods, open market and tender route. The open market route was effectively removed, leaving only the tender route, which was not taken up because, from a taxation perspective, it did not make sense. So, we would request SEBI to step in now and bring the open market buyback back again, as that would act as a counterbalancing factor.
Third, as far as corporates are concerned, there are a number of initiatives. One example is data centres. If anybody sets up a data centre in India, there is a tax holiday up to 2047, which could be very attractive for global players and will have a big impact on FDI.
In totality, we need to put this in perspective. The Budget has now become a much more routine exercise compared to what it was 30 years ago. I have been watching Budgets since 1983. At that time, everything used to be announced in the Budget. Now, direct taxes are taken care of outside the Budget. Direct tax reforms were addressed last year, and indirect taxes have been addressed now. A lot of policy announcements also happen outside the Budget. As a result, it has become a much more limited exercise now.

Kshitij Anand: Let me get your perspective on the macro front. Does the 4.3% fiscal deficit target strike the right balance between growth support and macro stability?

Sunil Sanghai: Very good question. Again, let me put this in perspective. The 4.3% target, as I mentioned earlier, is in line with what the market was expecting. We need to read this along with the capex numbers. Capex has gone up by 8 to 9%. Yes, the expectation in some commentary was for more than 20%, but of course there are constraints on the revenue side.

We are in a year where there has been a double tax cut, direct tax last year and GST this year. Revenue growth is expected to be subdued, with a revenue growth target of around 10.4% for next year. Lower inflation also plays a role, as it impacts nominal GDP and, in turn, revenue growth. Given all these constraints, a 4.3% fiscal deficit is, in my view, remarkable and clearly a positive.

If I may take another minute to add a few specific reforms, some of these are somewhat hidden and need to be brought out. One very interesting mention was banking sector reform, with a comprehensive review being set up for the sector. Going back to banking sector reforms, long ago we took a call that corporates would not be allowed into banking, and foreign banks would not be allowed to acquire Indian banks. That stance has already started to change. I hope this comprehensive review includes all of that, because we need capital in the banking system. For the growth of the economy, we need larger banks, and the government and capital markets alone cannot keep supporting them. We need large pools 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 around RBI’s FEMA guidelines for non-debt instruments, essentially equity, which directly impacts FDI. There are several valuation-related aspects involved here. These guidelines were originally set up in 2014 to 2015 and have not been comprehensively reviewed since. They have been irritants for both inflows and outflows of foreign direct investment. Addressing these issues, as mentioned in the Budget, is a very positive development.

Kshitij Anand: On a scale of one to five, how would you rate this Budget, with five being the best and one the lowest?

Sunil Sanghai: Instead of rating it, I would rather point out areas I would have liked to see addressed. Gold is one such area that we should, at some point, start looking at. This can also be done outside the Budget, but it has implications for foreign exchange, savings, and several other factors.

As far as the fiscal side is concerned, this government has been very focused on fiscal discipline and has done quite well despite increases in capital and defence expenditure. This time, capex is actually higher than borrowing, which is a positive sign. Typically, capex is lower than borrowing. We are also moving in the right direction on the debt-to-GDP ratio. There are still areas we need to work on, and this is an ongoing process. The Budget is just one exercise; it is 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 have been doing. Expectations are always very high, but we need to appreciate that the scope of the Budget is now quite limited. It is not what it used to be 10 years ago.

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