Union Budget 2021 India: The variations across formal versus informal, rich versus poor, manufacturing versus services, fiscal profligacy versus rectitude, among others form the backdrop of the budget.
By Suvodeep Rakshit
Indian Union Budget 2021-22: The FY2022 Union Budget comes at an inflection point in the Covid-19 pandemic’s trajectory. Even as the scars remain, the vaccination rollouts have raised hopes of the end of the pandemic. The variations across formal versus informal, rich versus poor, manufacturing versus services, fiscal profligacy versus rectitude, among others form the backdrop of the budget. The broader aim of the government should be to focus on setting the stage for sustained income/consumption opportunities for the bulk of the population. The government would also need to provide a credible medium-term road map for debt and deficit to allay any concerns (which will come up once the fears of the pandemic recede).
This budget will see the trade-off become more acute between (1) stimulating growth, and (2) maintaining fiscal rectitude. We have long argued that the government needs to stimulate the economy through infrastructure spending in the recovery phase. The government needs to aim at increasing stable incomes for large parts of the population in the middle and bottom of the pyramid which have been the worst hit by the pandemic. To that end, infrastructure spending (a higher multiplier for the economy and employment generator for the bulk of the population), as well as a well-oiled financial system (providing growth capital for the long term), is essential to take the agenda forward.
We expect the government to focus on (1) health: expenditure on vaccination along with expansion of infrastructure in semi-urban/rural areas, (2) infrastructure: any additional fiscal room should get channelled into capital expenditure, specifically, roads, railways, housing, and rural/urban infrastructure, and (3) financial sector: government could explore setting up a ‘bad’ bank, creating a DFI for infrastructure financing, and penciling in proceeds from privatization of PSBs. However, both for privatization as well as DFIs, implementation and outcomes will be more important than the announcement. Rural India will continue to be in focus through NREGA and the agriculture sector spends.
We do not expect the government to announce any major changes in taxes though we do not rule out measures/incentives related to housing (mostly in affordable) and health. There have been reports about a Covid cess though it is unlikely to yield much unless rolled out to most of the taxpayers (high income individuals and large corporates). On the indirect tax front, we expect the government to revisit some of the custom duty rates on finished/semi-finished products in the PLI related sectors.
Keeping in view the need to maintain an easy fiscal, we pencil in GFD/GDP at 5.5% in FY2022 after 7.1% in FY2021. The FY2022 expectations assume nominal GDP growth of around 14%, gross tax revenues growth at 20%, a heavy reliance on non-tax revenue and divestments, and capital expenditure growth of 12%. Beyond the usual financing routes, we believe that if banking system liquidity stays comfortably in surplus, the government should explore issuing Covid bonds directly to retail/HNI investors (possibly with tax benefits) which would not complicate the liquidity management plans too much.
Finally, budgets are much less focused upon in most economies and usually viewed as a presentation of the accounts with allocations for the next year. As the government has demonstrated, pushing long term growth is a year round exercise and certainly not restricted to the budget. Keep watching more intently for what happens (and doesn’t happen) in the rest of the year.
(Suvodeep Rakshit is Senior Economist in Kotak Institutional Equities. Views expressed are the author’s own.)