Hon’ble Finance Minister Smt. Nirmala Sitharaman is all set to introduce the Union Budget 2022 amidst the looming third wave of Covid-19. After a temporary breather, this new wave has adversely affected the investor confidence and market investments, and has resulted in falling share market and uncertain future of businesses. In this light, we present the expectations from the Union Budget 2022.
India has been slowly recovering from the pandemic, the pace of which has been largely defined by the government policies. Growth is expected to be strong in the next few quarters owing to the pent-up demand. An effective implementation of already announced fiscal, financial and manufacturing reforms could help in growth once the pent-up demand subsides. A total expenditure growth of 11% YoY in FY23 is estimated for sustaining the growth recovery. Fiscal deficit is likely to be targeted at 6.5% of GDP in FY23.
The tax collections this year have so far exceeded expectations. Tax collection targets will likely be higher next year if the government expects the economic activity to sustain. This could be done in two ways – reduction in tax rate or increase in spending. During the last year, although people have been forced to reduce expenditure in travel and commute, the cost of living has gone up owing to COVID related expenses such as medicines and hospitalization. By reducing taxes, the government will be able to ensure that common people have higher disposable income, which in turn increase consumption and output, and eventually prevent slowdown of economy. One way to put money in the pockets of taxpayers is by increasing the deductions. The government could increase the standard deduction limit of salaried individuals which was last hiked in the Union Budget 2019, from Rs. 40,000 to Rs. 50,000. It could also allow deduction of COVID-related expenses, over and above what is covered in Section 80D for insurance.
The government is expected to continue the spending in both public and private capital expenditure. It would be beneficial to infrastructure and allied sectors. 20-25% rise in budget spending could be seen, particularly in the rail and road infrastructure. Further monetization of power assets and railways could be on the books as well. It is also likely to raise additional resources through strategic disinvestment and privatization of PSU entities such as Bharat Petroleum Corporation and Shipping Corporation of India among others.
The financial services sector plays a pivotal role in stability of an economy. The Budget could introduce additional regulatory and tax reductions to boost innovation expenditure and further strengthen the financial service systems. A regulatory framework and taxation regime for cryptocurrencies and Central Bank Digital Currency is also expected. A method to determine the fair market value, costs, taxable income, reporting requirements etc need to be defined.
Education sector has taken a big hit due to the lockdown measures taken to contain the effects of Coronavirus. Online education, once a forced alternative, has now become the preferred mode of knowledge transfer for many. Edtech, although in nascent stage, has grown multifold in the past few years. Even though most major cities are well-equipped for online education, tier-2 and 3 cities lack the requisite digital infrastructure and internet penetration. The government is expected to invest in laying the digital infrastructure in such cities and rural areas. Edtech startups expect tax incentives, relaxation in regulatory framework and ease in fundraising norms, especially foreign funds. An overall increase in allocation is expected via increase in capex on infrastructure for digital literacy and practical skill development. Welfare schemes such as Sarva Shiksha Abhiyan and midday meals will continue to be a center of focus in budgetary allocations.
Agriculture sector is one of the few sectors that has remained robust throughout the pandemic. Being one of the critical sectors of the economy, it is expected that government will take steps to improve access to credit and widen the scope of crop insurance. Allocations in agricultural infrastructure, exports, retail, storage facilities and credit-related services could also feature on the budget. The fertilizer ministry had sought assistance of 1.4 trillion rupees, which is likely to be allocated, if approved.
The healthcare sector has been central to a range of development in the last two years, panning from innovations, healthcare, government initiatives, vaccination drive to a possible end to the pandemic. In the light of impact of COVID, the sector expects a 10-15% increase in budget allocation. In order to make healthcare more affordable, GST on healthcare products and insurance could be reduced. Investments in the National Digital Health Mission is also expected. Efforts to establish a sound digital infrastructure and incentivization of use of new technologies would be required. Tax exemptions and reduced import duties for modern healthcare technologies is expected.
Apart from growth, another major concern of the government is inflation. Incomes have gone down below pre-pandemic levels while the retail prices have surged by almost 10% in the last two years. With WPI in double digits, averaging at 12%, the retail prices are likely to surge. Higher allocations to welfare schemes such as MNREGA may be seen to help deal with lower per capita income.
India has also announced rather ambitious target of achieving net-zero emissions by 2070 at COP26. Hence, policies favorable for environment friendly practices across sectors could be introduced in the budget to achieve the goals. Construction of Green Buildings could be incentivized by providing tax benefits, green taxes on harmful environmental activities could be imposed, subsidies on green products and use renewable energy sources like solar panels, electric vehicles, carbon-neutral materials could be provided.
One of the key issues to be addressed before the budget is to maintain market confidence. The budget will be instrumental in nurturing business resilience and the government can boost market confidence by introducing sops in the budget. Overall, the taxpayers may look forward to a balanced and proactive budget that will be aimed at tackling the ongoing economic uncertainty.