Union Budget 2022-23: In FY22, tax collections have been buoyant and ahead of budgeted estimates
Indian Union Budget 2022: Union finance minister Nirmala Sitharaman. Image courtesy CNBC-TV18
The Union Budget is scheduled to be presented on 1 February 2022, and all eyes would likely be on the quantum of fiscal deficit for FY23 and its implications on both debt and equity markets. The finance minister would have to walk the tightrope in terms of balancing the need for fiscal consolidation and facilitating expenditure growth to nurture economic recovery as the country emerges from the challenges faced during the COVID period.
Tax collections up in FY22
In FY22, tax collections have been buoyant and ahead of budgeted estimates. This has been on the back of better tax compliance and relatively faster growth of the formal sector. This higher than budgeted tax collections would likely offset other revenue shortfalls, and hence the expectation is that the Budget would likely see the FY22 fiscal deficit remaining at the level of 6.8 percent of GDP (in line with the budget estimates).
On the expenditure side, while the Budget could keep a tight lid on total expenditure in FY23E, the quality of expenditure could shift to be more growth supportive. COVID risks are likely to be more subdued in FY23 and hence some of the social safety net expenditure might not have to be repeated. This will likely help reduce subsidy spending, which rose in FY22 from the pre-COVID levels.
We believe that the Budget will likely require policymakers to ensure that the fiscal impulse is maximized to improve potential GDP growth all the while signalling adherence to medium-term fiscal prudence. The other key factor to watch out for would be the steps taken to boost capital expenditure to further the improvement of the investment to GDP ratio in the country.
In this context we expect Budget 2022 to focus on the following:
? Infrastructure growth and push on capital spending
? Job creation and improvement of the rural growth impulse
? Healthcare spending and strengthening the health infrastructure
In the past few years, the government has indicated that its long-term policy focus is to ensure that GDP growth is not just led by consumption but also by investment activity and manufacturing. Various policy initiatives to further the same have been taken in the past few years including the Production Linked Incentive (PLI) scheme.
Infra push to remain key
In keeping with that, we expect infrastructure push to remain the key macro theme of the FY23 Union Budget. Visible implementation of the asset monetisation pipeline and the national infrastructure pipeline could likely be high on the government agenda.
The Budget would also likely signal a continuation of the reforms policy of the government. This entails continued financial sector reforms, better resource allocation, funding infrastructure growth by asset monetisation, and outlining the further plans for disinvestment of PSU undertakings.
Job creation could be focus area
Job creation and boosting income in the rural and lower-income segments could be the other key focus area for the budget. Recent data seems to suggest a wide divergence on the impact of the pandemic between higher and lower-income segments which means that the stress is likely to be significantly more in the lower tier and rural households as compared to higher-income urban households.
Unemployment levels remain high as well. This could mean that the Budget would likely announce steps to alleviate the stress at the bottom of the pyramid and continue to support areas such as MNREGA, irrigation, and agriculture.
Creating ecosystem to strengthen healthcare
Finally, with India having endured significant challenges posed by the COVID-19 pandemic, we expect the Budget would focus on strengthening the health infrastructure and catering to the healthcare sector. Investment into healthcare could likely have a multiplier effect on the economy. This would however require creating an ecosystem to accelerate innovation, address the long and short-term structural gaps in the healthcare infrastructure, and fast-track the recovery of the overall healthcare sector.
The writer is Senior EVP and Head- Equity Research, Kotak Mahindra Asset Management Company.
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