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Budget should focus on bridging widened inequality in economy, creating jobs: D Subbarao

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Subbarao also opined that experience shows export promotion behind protectionist walls is seldom competitive, so there is a case for reducing the tariffs.

The upcoming Budget should focus on creating jobs and bridging the widened inequality in the economy besides accelerating growth, former RBI Governor D Subbarao said on Thursday while observing that given the continuing need to raise spending on education, health and infrastructure, there is not much leeway for tax cuts.

Subbarao also opined that experience shows export promotion behind protectionist walls is seldom competitive, so there is a case for reducing the tariffs.

"Accelerating growth is the objective of every Budget as it should be of this one. But this Budget should pay special attention to bridging the widened inequality in the economy," he told PTI in an interview.

While noting that the COVID-19 pandemic has caused enormous distress to the low-income segments who operate in the informal economy, Subbarao said the upper income segments have not only been able to protect their incomes but have in fact been able to grow their savings and wealth.

Citing the latest World Inequality Report which had said that India is among the most unequal countries in the world, he said,” Such wide inequality is not only morally wrong and politically corrosive, but it will also dent our long-term growth prospects.”

Finance Minister Nirmala Sitharaman is scheduled to present the Union Budget 2022-23 in Parliament on February 1.

“We need job intensive growth. If there is a theme for this Budget, it should be jobs,” he said.

The former RBI Governor pointed out that jobs have been lost because of the growth slowdown and also because of the shift in activity from the labour-intensive informal sector to the capital-intensive formal sector.

“Growth is necessary to generate jobs, but not sufficient,” he said, adding that there is a need for stronger emphasis on improving the ease of doing business through governance reforms so that investment becomes a promising option for both domestic and foreign investors.

Subbarao pointed out that raising the level of exports is good not just for balance of payments reasons but also from a jobs perspective because export production is labour intensive.

“Experience shows that export production behind protectionist walls is seldom competitive. There is a case therefore for rolling down the tariffs,” he said.

Asked if there is any scope for reduction in taxes in the upcoming Budget as that will provide some relief to the poor, Subbarao said as per media reports, this year’s tax collections will be better than the budgeted target which, he said, will be largely offset by lower privatization proceeds and higher expenditure on food and fertilizer subsidies.

“So, the net positive impact on the fiscal deficit is likely to be marginal,” he said. Also, Subbarao noted that the tax buoyancy the country saw this year will dissipate next year as the informal sector revives.

“Besides, given the continuing need to raise spending on education, health and infrastructure, I don’t believe there is much leeway for tax cuts,” he argued.

Asked whether the government should continue with stimulus measures in order to stimulate growth, Subbarao said in the last Budget, the finance minister committed to a fiscal consolidation path of reducing the fiscal deficit to 4.5 per cent of GDP by 2025/26.

“I believe it’s important to operate within that space. Any deviation from the fiscal consolidation path will impair credibility, dent investor sentiment and hurt our growth prospects.” he said.

Asked how big a concern is inflation, Subbarao said inflation has remained in the upper reaches of the RBI’s target band for much of the last two years.

Going forward, he said there will be pressure on inflation because of an unfavourable base effect, rising commodity prices and output price hikes by firms.

“Controlling inflation can go a long way to redress the distress of the poor,” Subbarao observed.

On the risk of stagflation, he  said he thinks that’s being too alarmist.

“Yes, inflation has been persistent over the last two years but note that it is still within the RBI’s target band.  RBI should be able to bring it down to the mid-point of the target band by normalizing the policy,” Subbarao said.

Stagflation is defined as a situation with persistent high inflation combined with low growth.

Retail inflation in India rose to 5.59 per cent in December 2021, while the wholesale price-based inflation eased to 13.56 per cent last month.On economic growth, he said if Omicron remains mild, mobility restrictions are likely to be targeted and decentralized.

“In the base case scenario therefore, we should achieve 9.2 per cent growth for the full year. If in fact these assumptions about Omicron do not hold, there will be a downside risk to the 9.2 per cent growth estimate,” Subbarao said.

Crash in new-age tech IPO stocks sours sentiment in unlisted market

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The meltdown seen in stocks of some of the biggest initial public offerings of last year seems to be driving investors away from the unlisted space as well. Dealers pointed to a sharp decline in trade volumes and investor interest in companies close to going publiclisting gains: Strong listing gains driving retail investors by hordes to  IPOs - The Economic Times.

“As the broader market is giving up the gains before the Union Budget, the unlisted markets too have failed to recover from the recent lows. One rarely sees a rapid fall in unlisted markets as most participants are long-term investors. Hence, if the broader market extends the losses, we may see a rub-off effect in unlisted space but at a slower pace,” said Manan Doshi, Co-Founder of unlistedarena.com.

The sentiment in the unlisted space turned after the disastrous debut of One97 Communications, parent of Paytm, on the bourses in November that saw the stock plunge 27 percent from the issue price. Paytm has lost nearly 51 percent since listing, eroding over Rs 70,000 crore of its market value.

In recent sessions, dealers warned of volumes drying up scorched by a simmering sell-off in both global and domestic markets amid fears of interest rate hike in the US and geopolitical tensions in Eastern Europe.

The fears around higher interest rates have hit the shares of new-age technology stocks like Paytm, Zomato, PB Fintech, Nykaa and CarTrade Tech hardest as the net present value of their future earnings sees a sharp downgrade when interest rates rise.

“It was a known fact that there was a good amount of froth in the unlisted markets and as the NASDAQ and the Indian new listings (especially new-age ones) corrected heavily, the unlisted markets also got spooked,” said Aditya Kondawar, COO of JST Investments.

In addition to the broader market sell-off, the disappointment around issue price of recent public offerings like PB Fintech and AGS Transact Tech has also mellowed risk appetite of investors in the unlisted space.

Both PB Fintech and AGS Transact were traded at Rs 1200 and Rs 220 a share in the unlisted market before their IPO. Their IPO price band came in much lower at Rs 980 and Rs 175 a share, respectively.

The pressure on unlisted stocks has not been as much as that in the officially listed space. Shares of API Holdings traded at Rs 107 in unlisted market at the end of December and quoted Rs 98 apiece on January 27. Ixigo-owner Le Travenues Technologies also traded unchanged at Rs 104 during this period.

Shares of Sterlite Power Transmission are down to Rs 1,260 from Rs 1,390 apiece, while those of Mobikwik Systems fell to Rs 860 from Rs 900. HDB Financial, an HDFC Bank arm, has risen to Rs 900 from Rs 895 but Tamilnad Mercantile bank declined to Rs 625 from Rs 640.Kondawar expects the unlisted market to find its mojo back once the listed space reflects some signs of risk appetite among investors. “They will return to vibrancy once the listed markets return to euphoria because while unlisted markets see a lot of interest from long-term investors, in the past few years, investors have been also getting to unlisted markets to make a quick buck,” he said.

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