Budget 2022: Ridham Desai Is Disappointed Over One Thing

Lack of clarification on the tax issue around Fully Accessible Route bonds in Budget 2022, disappointed Ridham Desai.

Ridham Desai, managing director and head of equity research at Morgan Stanley India. (Photo: BloombergQuint)
Ridham Desai, managing director and head of equity research at Morgan Stanley India. (Photo: BloombergQuint)

Morgan Stanley India's Managing Director Ridham Desai was disappointed by the lack of clarification on the tax issue around fully accessible route bonds in Budget 2022.

"A couple of things need to be fixed over there. Withholding tax as well as income tax return filing for global bond investors who are in no position to do that," Desai told BloombergQuint's Niraj Shah in an interview.

If India wants to be included in the MSCI Bond Index, then these things need to be addressed, he said. "I was actually quite confident that it will be done in this budget because all the signals were there. From the government to the RBI, everybody wants this to happen."

"Now it has not happened and I don't know why. Maybe it will happen in the next six weeks or in the next three months," he added.

Investment banks expect the index inclusion to prompt one-off flows of $30 billion to $40 billion into Indian bonds.

According to Desai, when it happens, it's going to take a lot of pressure from the bond market and the banking system. "Today banks are the primary funders of the deficit. And it will therefore fulfill the government's strategy of crowding in private investments because it will release domestic capital for credit because foreign investors will do some of the heavy lifting on funding the deficit of the government."

Watch the full conversation below:

Here are the edited excerpts of the interview:

What do you make of the budget?

Ridham Desai: I'm going to give you a slightly lengthy answer. So just be patient and I'll request your listeners also to be patient. So, you know, we have to step back a bit. There have been three refrains that people have had for both the market, as well as you know, macro-observers in India about the budget. One is that the government spreads are not productive, the second is that the fiscal deficit targets lack credibility and transparency and the third is that budgets in the past have lacked any strategy. So, you know, they just address the problem of the moment rather than having a long-term vision or some strategy. I think I'm going to step back a bit because it's not about this one budget. I think you should look at how things have evolved in India over the past few years, particularly since this government assumed office in 2014. So, in 2014, and I'm addressing the first part of it, which is productive spending, the total cash dole outs that the government was making was about 3% of GDP. So, this was being done through subsidies through, you know, through Rural Employment Guarantee Schemes and various other things that the government did, which is doling out cash to poor people. There was another aspect of these dole outs and in fact, you know, if you add up these dole outs going back 30 years, they add up to half a trillion dollars, so we really gave a lot of money away, doesn't seem to have made much impact, because India still has a lot of poor people and the reason historically was that these schemes were ridden with leakages, middlemen, and therefore money never reached the intended beneficiary. Now two things have changed. One is that this government has started compressing these cash dole outs and in fact, just pre-pandemic, we had reached a number of one and a half percent of GDP, which is a multi-year low. It had halved in the preceding four years and the other thing was that the cash rollouts were linked to Aadhar, so I would say the efficacy and the reach of this cash was far more efficient than it had been in the past and, in fact, I think the leakages are now probably dropped to a negligible amount. So, the cash was reaching the right people, which meant that the government would actually reduce the headline cash that was being given out because then it is, you know, probably 50% earlier and now, even though the headline numbers suggest that leakages are down 50%, they weren't really down in the hands of the beneficiary. So, a lot of money is saved for the country and for taxpayers. This number, of course, shot up in the pandemic and went all the way back to fold up naturally, because the pandemic caused a lot of pain for poor people, and the government needed to respond. Now, starting with last year's budget, and with this year's budget, this number is now sub two%, and I think, it'll probably go back to one and a half percent and even lower in the years ahead. This is a major shift. What has the government done with this money? It has basically transferred this to building productive assets. So, everything that the government builds in infrastructure is running at record highs, and the spending cumulatively has increased quite a lot over the past few years, including this budget. Now, I know there is a bit of debate whether there was actually a 25% increase in capital spending because the budgetary allocation for capital spending went up 25%. But then there were extra budgetary resources that could be reduced and maybe the total Capex did not go up as much as the headline numbers suggest. But I think that is not really of concern to me, what I am focused on is this transfer of non-productive spending to productive spend as a trend, which has continued this budget has reemphasised that and has restated the Government's intention to go back on, to be on this path of productive strength. So, first point addressed, second one is with respect to transparency and credibility. Now, obviously, you know, the governments in the past have, have kind of, massaged numbers in the budget to achieve a certain fiscal target. There has been this unmentioned pressure on India, that credit rating agencies will take higher fiscal deficit negatively and therefore you need to pursue lower deficits, year after year and of course, the government itself wanted to be on the path and it's a good path to be on, but it is clearly the path that India needs to be. But it did take the flexibility of previous governments to expand the deficit in years where it was required, for example, pandemic was one such occasion, but the more structural reason for the government to use the deficit as a tool when private investments are down, and the government needs to respond to low private sentiment to bolster the economy and this government has not been hesitant to do that and that is I think a welcome change. Hopefully, the fiscal deficit will not be persistent, and the Finance Minister keeps reminding us that she is on the glide path down and if that is done, then I think this ability to use the fiscal deficit as a tool to revive the economy, I think, is a welcome shift in government thinking. Along with it, we've seen that the government has taken a lot of off-balance sheet items back on the budget. So, one of the reasons why this year's deficit did not fall as much, is because this trend has again continued. Last year it was Food Corporation of India this year, it was a lot of PSUs that spend on capital which the government is not doing on its behalf. So, there's a kind of cleanup of the balance sheet. So that takes care of the aspect of transparency and credibility and again on the point of credibility, my observation as well, as a lot of people think that the revenue may be easily achieved. You know, you go back in the past and we have really struggled to justify revenue estimates of previous governments. That's not the case anymore and the good thing is that the divestment revenue also has crashed, in the sense that it responds to the fact that you never achieve your stated targets or why run such high targets and create a problem and credibility of the fiscal, in the third point is strategy. So, I have mentioned this in our Diwali conversation, and I think in the previous budget, I see the strategy very clear. The strategy is and I'm borrowing from the Finance Minister's speech is that private investments need to be crowded in and the government will support that until we get private investments going. So, there's one more year that the government is going to support and hopefully in the next 12 months, we did a private investment cycle. Now the context here is we circled back to 2003, Corporate private investments were at about 4% of GDP, in the peak in 2010 they were at 17% and they went all the way back down over the previous decade to 5%. So, we're sitting at pretty low levels of private investments to GDP. The government cannot do the heavy lifting of investing on behalf of the economic it can only do it when there is a cycle which is depressed and that is where we are right now. So, the government is stepping in and trying to crowd in private investment and has done various things to do that. We will not go into those details; it will consume too much time. But that's the strategy, now where does this thing take us? So hopefully in the next 12 to 18 months, we can get a pretty reasonable visible Capex cycle in the private sector. The government can then cut back on its capital spends. What that does is, it allows the fiscal deficit to fall. In fact, I think because the growth cycle improves, as a consequence of higher private investments, tax revenues go up and come in next budget and for sure, I think the budget after that, which is February just ahead of the election year, the elections there's going to be scope in that one year between 2023 and 2024 and this may not necessarily be a budget event because GST rates are no longer in the budget. They're outside the budget. There may be a recalibration of GST rates. Now what that will do is basically give a fillip to consumption because it puts money back into the hands of households and households will be able to consume few more, which is the virtuous cycle to start by crowding in private investments, then results in higher consumption and back into more investments and I dare say, the growth cycle gets extended from a normal say to a three-year period to five or six years. So, I see that strategy at place. What could you know upset this? Well, I think the most important thing is what happens globally, if Fed falls behind the curve, then I think we may have a little bit of a problem. If there's a geopolitical event which causes oil to keep surging then we have a problem, but otherwise, domestically, I think we are pretty much on this path of a new growth cycle where India's growth could go back about trend, I think it's almost a given in the next couple of years. A trend I reckon is between six and a half- seven% yield growth and we could go about trade, which we have not seen since the middle of the first decade of this meeting. So, I may have answered a few other questions that you were going to ask but I took this opportunity to put the whole thing down. We have got productive spending, we have got a credible fiscal deficit and we have got a strategy in place, and I think that's why the stock market is so happy with it, off course, the stock market is happy anyway, because earnings are coming back. The budget has not done much to upset it. Just one last point before I hand it back to you, is that one nice thing about this budget is the continuing recognition of the importance of risk capital. So that was made last year and again, it was made this year. It was not just a statement that, you know, we love risk capital. The government is backing it up with, you know, subtle changes, like what it did for long term capital gains and the equalising of surcharges that whether the risk capital comes from the secondary market nor the primary market, there is no point in differentiating the two, risk capital is risk capital private, and I think that's a very strong signal and that's what the finance minister has said in various interviews over the last 12 or 18 months. It's a very strong signal to households who are currently upping their equity exposure and my view is that this this domestic bid on stocks is not going to go away in a hurry because the environment is very conducive for domestic investors to continue buying equities. So, we'll see this bid I think, persist for a fairly long time. We've been seeing this now for three or four years, the seeds were sown, when NPS and Provident Fund were allowed to invest in equities, those like the 1980 401k moveme