Budget 2022: FM may focus on roadmap to recovery for economy through job creation, demand generation

The Union Budget for 2022 comes at a time when the Indian economy has been hit hard by the continuing pandemic. This year’s Budget will likely focus on a roadmap to recovery for the economy through job creation, demand generation, and driving the economic growth of over 8 percent. A pre-budget survey by Deloitte revealed that a vast majority of industry leaders are optimistic regarding India’s growth in 2022, with the BFSI industry being one of the most positive.

This positivity could come from the fact that despite the ongoing pandemic, revenue collections have been better than expected, driven by the increase in fuel and import taxes, as well as direct taxes.

Here’s a look at the key factors that will drive budget decisions this year.

Fiscal deficit

The divestment goal might be difficult to achieve, with only Rs 9,330 crores of the Rs 1,75,000 crore target having been collected thus far. The fiscal deficit for FY22 is likely to exceed the target due to this shortfall, despite the higher-than-anticipated nominal GDP growth providing a cushion. The potential withdrawal of liquidity by global central banks, along with an increase in interest rates worldwide, could hit foreign investments into India in the near future. Against this backdrop, this year’s budget provisions will have to give out the right signals to both foreign investors and the Indian citizen.

Regarding the fiscal deficit, we believe that the deficit for FY22 could stand at about 7 percent, versus the target of 6.8 percent, if the divestments of LIC and BPCL are postponed to the next fiscal year. This would be despite gross tax receipts having exceeded the budget target by a whopping 11 percent. Now, if we add the state government deficit of 3.2 percent-3.3 percent of the GDP, the total fiscal deficit could exceed 10 percent. This is an unsustainable situation. For now, the global credit rating agencies have been giving some leeway to India due to the pandemic, but this is unlikely to continue in the long term.

While the fiscal deficit stood at a mere 46 percent of the full-year target for the April-November 2021 period, back-ended spending could lead to a higher deficit. Such spending includes the Second Supplementary Demand for Grants, such as fertiliser and food subsidies, as well as export incentives and remissions provided under the government’s export promotion initiatives, such as the RoSCTL and MEIS. In addition, there is the equity infusion worth Rs 3 lakh crores into Air India Assets Holding Limited.

Withdrawal of stimulus

We are likely to see the pandemic-related stimulus winding down in FY’23, as the economy normalises and LIC and BPCL are divested. Due to this, a fiscal target of around 6 percent could be achievable. If the target is closer to 5.5 percent, the financial market sentiment could be positively impacted.

On the other hand, nominal GDP growth is likely to be lower in FY23, at about 13 percent, versus 18 percent+ expected for FY22. Furthermore, if the government needs to take on additional spending, such as extending its free food grains initiative for another 6 months or raising spending on MGNREGA, achieving fiscal consolidation could become difficult.

Fiscal and Monetary Policy

One decision that the RBI’s Monetary Policy Committee will need to take is when to start to raise interest rates and to what extent. If the MPC does continue raising interest rates, gross borrowing by the states and the centre this fiscal year, worth Rs 22-24 trillion, could put additional pressure. At the same time, the RBI’s continued intervention in the bond market, its focus on fiscal consolidation and potential inclusion in the global bond indices, along with a moderation in inflation in the second half of the year, could stabilise bond yields.

The Union Budget might propose a tax exemption for Euroclear settlements, a likely final step before India’s sovereign bonds can be included in the global indices.

In August 2021, the Government of India had unveiled the National Monetisation Pipeline of the public sector entities and central ministries, with an aggregate potential of about Rs 6 lakh crores via the central government’s core assets. This will occur over a 4-year period, from FY 2022 to FY 2025. It includes Rs 1.6 lakh crores to be raised in FY’23 via various means, including contractual (such as PPP) and capital market (such as Infrastructure Investment Trusts) instruments.

Currently, there is strong demand for tax incentives from infrastructure companies, associated with investments in Infrastructure Investment Trusts (InvITs). So, changes in the taxation regime for InvITS and REITS, with the aim of bringing the treatment of long-term capital gains at par with other asset classes, could also be part of the Union Budget 2022. Fiscal support will also be required to drive new technologies and for their commercialisation so that India can transition to low/zero-carbon alternatives.

Driving growth

We believe that a key focus of the Budget could be on increasing growth-focused expenditure and allocation of funds for production-linked incentive schemes. Ground realities could also motivate the government to roll out additional supportive initiatives and schemes for small businesses and rural India. We also believe that there could be an increase in healthcare infrastructure spend.

In addition, the Budget could seek to deal with the problem of inverted duty structures. Working to reduce tax evasion and the compliance burden on individual and corporate taxpayers could be another focus area.

We also expect greater clarity on the imminent privatisation of IDBI Bank and two other public sector banks, which the government had hinted could occur in FY2022. Greater clarity is also needed on the operationalisation and scaling of National Asset Reconstruction Company Limited and the National Bank for Financing Infrastructure and Development. There could also be higher budgetary allocations for the government’s housing schemes, such as the PM Awas Yojana, along with enhanced allocations for sectors hit by the pandemic, such as hospitality, transport, trade and communication. These could see special treatment in this year’s Budget.

Conclusion

If the government brings a positive surprise to the table in terms of a lower-than-anticipated fiscal deficit for FY’23 and/or a pragmatic plan to speed up asset disinvestment and monetisation, the stock markets could be positively impacted.

All in all, we believe that this will be an important budget that could help India emerge from the pandemic-led crisis and provide reassurance for sustainable growth.

The author is Head of Retail Research, HDFC Securities.

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