This Union Budget would be announced in the backdrop of the unprecedented pandemic, which has completely changed the economic landscape. This is the first instance when India has seen a decline in GDP numbers since the country began publishing numbers in 1996. The world has already accepted the fact of declining economic performance in every region, and the markets have already factored in the impact of such decline on the fiscal deficit of respective countries. So, a high fiscal deficit would not surprise the Indian Investors. Despite the higher expenditure and lower revenue this year, the government of India is expected to limit the fiscal deficit to 7%. The optimism on tax collection and the government’s aggressive estimates of disinvestments and non-tax collections are the key reasons highlighting that government will try to limit the fiscal deficit. The economic recovery has also surprised pleasantly, and GDP is expected to turn positive in Q3 of 2021, after the massive decline of 23.8% in Q1 of 2021.
As nominal GDP is expected to grow at around 15%, the government is likely to expect a surge in tax collections. However, expenditure will continue to remain high. The government will try to support the economic recovery by increasing public expenditure, boosting demand, and supporting industries that generate high employment. There is a very high cost that the government will incur to support nationwide COVID-19 vaccine programme and build supporting healthcare infrastructure.
At the same time, the government will try to control the fiscal deficit as much as possible, as increased government borrowing will have a crowding-out effect on the private sector due to high real interest rates. So, the government might project an improvement in of 150-200 bps in fiscal deficit for FY2022 as compared to FY2021. So, the fiscal management of the government can high rely on privatization and off-balance-sheet borrowings.
The Covid-19 pandemic has caused significant disruptions to the business and livelihood of common man, so the focus of Union Budget would be to soothe and support the economy with a special focus on the common man. Government via budget would try to focus on investments that directly help in job creation and therefore infrastructure, construction and significant incentives for high employment generating sectors (like textile, affordable housing, MSME, etc.) are key areas, which may get priority focus. The current account is also expected to be back in deficit in FY22 as growth returns and imports pick up and global trade normalizes.
Key Sectors to look out for
The government will focus on developing infrastructure (Roads, Water and Affordable housing). Such infrastructure would give economy earning/employment stimulus. The government can also extend PLI schemes to spur manufacturing. Some initiatives can be taken to support the urban poor especially from the disruptions in the MSME sector. So all in all, Real Estate, Construction, Infrastructure, and Railways are some key sectors which may become the focal point of the upcoming budget.
FY21 was very disappointing in terms of disinvestment as the government only collected INR161 bn through disinvestment as against an ambitious target of INR2.1 trn set by the government. Some of the high profile disinvestment which was supposed to happen this year did not happen. So disinvestment in Life Corporation of India, Air India, BPCL will be pushed for FY22 as these could not happen this year. This implies that the disinvestment target in the upcoming budget could revolve around INR1.6 trn.
This budget would be really important from the perspective of our country’s sovereign ratings. Most of the rating agencies are expected to revisit their assessment of India in Q1. Most of the rating agencies rate India a notch above junk, Fitch and Moody’s have both assigned a “negative” outlook for India. The next key step which will determine whether rating agencies will upgrade or downgrade the outlook will be fiscal dynamics as presented in the upcoming Union Budget.
The broad themes to watch for are as follows:
Overall government is expected to have a greater reliance on assets sale to keep spending at elevated levels while still managing to consolidate in FY22. The proper trade-off between ambition and credibility, as it related to long term fiscal consolidation path, will be an important macro determinant for rating agencies. The nominal GDP is expected to achieve significant acceleration, and to support it the further government will improve its outlays in different sectors.