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Budget Preview - 2021-22 - ICICI Direct

Posted On: 2021-01-27 08:59:25 (Time Zone: Arizona, USA)

With the Indian economy set to contract by 7-8% (real GDP) in FY21E and fiscal deficit to rise to 7% due to Covid induced pain, the focus of the government in this Budget would remain on growth with clear focus on capex revival and manufacturing, boosting healthcare and sanitisation. While FY22E real and nominal GDP is likely to bounce back at ~10% and ~15%, respectively, it will have an advantage of low base of FY21E. Hence, for sustained long-term growth, we expect the government to push for bigger reforms like PLI schemes to make India a preferred destination for manufacturing. Also, higher spending on infra with special focus on sectors like roads, railways, urban transport, water, green energy and housing that have higher multiplier effect would also remain the key theme of this Budget. This would set the tone for bigger directional change for inclusive growth. The sectors with high job creation potential would also remain under the focus for boosting employment that got severely impacted during the Covid era. Moves such as higher allocation towards MGNREGA, direct cash transfer of subsidies would not only spur rural economy but also plug in the loopholes in the old subsidy transfer mechanism.

In terms of tax receipts, some green shoots are now visible on the GST collections front with monthly collections crossing over Rs. 1.15lakh crore led by recovery in the economy along with increased anti-evasion vigilance. We also expect record disinvestment proceeds in FY22E with stake sale of LIC a key contributor to the overall proceeds. However, given the need for higher allocation of funds towards healthcare and infra spending, we expect the government to remain prolific rather than being prudent on the fiscal deficit front. Hence, for FY22IE, we build in fiscal deficit target of 5.0%. In turn, this would provide additional fiscal space of Rs. 3.1 lakh crore for revving up growth to the top gear.

Key expectations from upcoming Budget

Sectors such as housing, construction and infrastructure that have high multiplier effect will continue to remain key growth pillars. In the previous budget, the government had launched the National Infrastructure Pipeline (NIP), envisaging the completion of 7,300 projects valued at Rs. 111 lakh crore in the 2020-25. This would require annual spend of over Rs. 20 lakh crore every year. Hence, move to set up development finance institution (DFI) is much anticipated to support NIP funding. In addition to budgetary support of Rs. 4.95 lakh crore, internal & external budgetary resources (IEBR) from public sector enterprise could be at Rs. 7.7 lakh crore with aggregate capital expenditure estimated at Rs. 12.6 lakh crore for FY22E by the government.

Another big area that the government would focus on is healthcare. The black swan event, Covid-19, has served as an urgent reminder towards the need to increase government spending on healthcare infrastructure in India. Also, India remains one of the lowest spenders even among the BRICS nation on healthcare. In view of this, we expect the government to increase allocation (despite budgetary constraints) for healthcare sector by ~12% YoY to ₹ 75000 crore in 2021-22 Budget.

To boost manufacturing and job creation, we expect further extension of liquidity support to MSME segment. Also, sectors with high job creation potential like tourism and textile may see calibrated measures. We also expect government to tweak customs/import duty and provide further details on PLI schemes.

On the funding front, privatisation, asset monetisation policy would also remain under radar to partly offset a Covid induced shortfall in tax revenues thereby containing deficit to an acceptable level. Also, buoyant capital markets in the present fiscal (FY21E) are seen supporting government finances with an incremental tax inflow at ~₹ 45,000 crore (~₹ 38,000 crore as capital gains on investment/trading and ~₹ 7,000 crore as incremental STT).

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