The Budget 2021, as promised by the finance minister, truly looks like a “never before budget" in the sense that all the temptations to tweak with taxes were resisted and focus was solely on reviving growth which was the need of the hour. The FM chose to focus on pump-priming of the economy and it understandably comes at the cost of fiscal discipline (Fiscal deficit at 6.8% is above most estimates) but is well justified given the unprecedented times we are living in. The revenue projections have been kept conservative and imply a risk to the upside as would be expected from an economy on the rebound. The key though, is implementation (especially formation of the DFI and ARC) but does not look like a challenge given the government has shown a clear intent to walk the talk.
It can be called a debt funded budget as most of the heavy lifting is done by expanding the balance sheet. Overestimation of revenues was avoided in an attempt to keep the calculations realistic, which lends credibility and should help us to achieve the 11% + GDP target. This implies a nominal GDP growth for FY22 at 13.9% as per our estimates. The key concern from relaxing the fiscal discipline is one of a potential ratings downgrade but the economic survey clearly addressed this topic and we expect rating agencies to hold back their horses and watch out for an earnings revival rather than take immediate action. In addition, the spending thrust is largely focused on infrastructure with a capex target of INR 5.54 trillion, which should serve the dual purpose of employment generation and having a multiplier effect on the economy.
Disinvestment once again remains the theme for FY22 but with a more determined mindset; at INR 1.75 trillion the disinvestment target is lower than that in FY21 but seems a lot more achievable and remains one of the primary sources of revenue for FY22. Disinvestment in this budget will largely be achieved by privatization, which should make the disinvestment candidates more efficient and thus attractive for prospective buyers.
High direct benefit transfers and infrastructure spending augurs well for rural spending while a lack of any further increase in taxes can be seen as a positive for urban and high-income consumers. Also, this policy is set to continue for not only FY22 but for four more years (as fiscal deficit target remains high) and thus this provides long term visibility on high domestic consumption growth to continue.
Continuing with their stated intent of simplifying the tax regime and adding predictability to it, the government has proposed a few more measures in this budget, the most important one being reducing the time frame for reopening of old cases from 6 years to 3 years and that too at the highest level of authority. There are no additional taxes being levied and the income tax payer will get pre-filled returns, which not only simplifies the tax filing for individuals but also indicates the progress the government has made in integrating data across various organizations such as the banks, depositories, etc. This will reduce litigation while simultaneously make it difficult to evade taxes.
To summarize, the Budget has already revived the animal spirits of participants in the capital markets and we expect the same to happen in the broader economy given the complete focus on growth. We credit the FM for being pragmatic and avoiding the lure of overestimation of revenues at any point, which should ideally be taken well by investors and rating agencies.
Sanjay Singh is Deputy CEO, BNP Paribas India. Views expressed are his own.
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