DBS Research Group’s Radhika Rao feels that above-target revenue and strong nominal GDP are expected to help absorb the increase in spending, keeping FY22 deficit at -6.8 percent of GDP
Radhika Rao, Senior Economist at DBS Group Research, feels that besides managing the COVID-19 pandemic, this Budget will seek to strike a balance between growth and consolidation.
Near-term outlook
Rao said that while pandemic fire-fighting will dictate the near-term outlook, the priorities will be demand shifting from goods to services; restoring jobs; need for investment revival; and tighter global and local monetary policy.
She said that on-track vaccination, rollout of booster shots, and a peak in the current caseload are likely to allow service sector activities to return to pre-pandemic levels. “We also remain watchful that these might be accompanied in price adjustments among the sector players, after a two-year COVID-led disruption.”
On jobs, Rao noted that the CMIE database shows that the national unemployment rate is back to the pre-pandemic levels of 7 percent, but lower labour participation is 2 percent lower than that in January 2020.
For investment revival, Rao emphasised that the as thrust from reopening and pent-up demand fizzle out into FY23, they count on capex generation to surface as the next boost.
“Public spending will need to take the wheel initially, with the private sector participation to be drawn in on better demand visibility, deleveraging, healthier balance sheets, and benefits from accelerated formalisation,” Rao noted.
A mix of catalysts are likely to spur a multi-year capex push. These include the National Infrastructure Pipeline (NIP), tech start-ups and digital economy players, climate change commitments, manufacturing exports in electronics and machinery sectors, and localised production.
For policy, Rao noted that the US Fed is on course to taper its stance following strong balance sheet expansion and after two years of “extraordinary accommodative policy stance”.
She said many G10 central banks have also initiated steps to withdraw emergency policy settings and India’s own RBI has signalled “preference for normalisation”. The monetary and fiscal policies are likely to complement each other this year, dialling back on the stimulus bent demonstrated in the past two years.
Revenue and fiscal deficit
“The fiscal math of the first nine months of FY22 displayed strength in revenues, especially tax collections which outpaced spending. Total revenue receipts reached 76 percent of the budgeted target between April-November 2021, with tax collections (net) at 73.5 percent and non-tax at 92 percent,” Rao said.
For the rest of FY22, expenditure is likely to play catch-up as supplementary grants pointed to higher allocations required towards fertiliser/food subsidies, offset debt of the national airlines, GST compensation outlays to the states and interest payments (seasonally surges in late-FY, in Dec and Mar this year), she said.
Rao said that above-target revenue and strong nominal gross domestic product (GDP) are expected to help absorb the increase in spending, keeping FY22 deficit at -6.8 percent of the GDP.
“Despite the higher spending demands, we expect the Rs 2-2.5 trillion overshoot in revenues to help absorb the shortfall, apart from the government surplus cash position with the central bank and as well unspent balances with the ministries. An additional cushion is from the higher nominal GDP of 0.3 percent of GDP. Pulling these together, the FY22 fiscal deficit is likely to kept within the budgeted -6.8 percent of GDP,” she said.
“Risks to our view stem from; weaker growth assumption and higher divestments,” she added, noting that if the LIC IPO is completed by March 2022 and it surpasses valuation and stake assumptions, this would pose an upside risk to the fiscal deficit, while an absence of any late boost to divestments will widen the deficit v/s forecast.
The revenue-to-fiscal-deficit ratio questions quality of expenditure, Rao said, and thus, the FY23 focus is captured under three Cs – credibility, capex and consolidation.
She states that implications for markets include policy normalisation, in absence of support and further hardening of bond yields on higher borrowings.
Rao expects the FY23 assumption to be pegged at a double-digit pace of 13 percent YoY, factoring in slower real GDP as well as moderation in deflators; and FY23 fiscal deficit to be budgeted at -6.2 percent of GDP, narrowing from -6.8 percent in FY22 on back of increased spending.
She expects the FY23 deficit to back consolidation with higher allocations towards capital expenditure – over 30 percent, to prop growth through higher multipliers.
Other areas of interest
Social welfare: Higher allocations likely to be sought for the rural employment scheme (NREGA), housing programme in rural and urban areas (PMAY), credit guarantees for the worst-hit sectors, health insurance scheme, among others.
The total subsidy bill should be lowered in FY23 with food particularly brought down to Rs 2.5 trillion (from Rs 3.9 trillion) to meet existing demands, according to her estimates.
She expects one-year extension for the Emergency Credit Line Guarantee Scheme (ECLGS) facility beyond March 2022, as Rs 3.1 trillion has been sanction of the Rs 4.5 trillion outstanding amount. Requests also include need for a debt restructuring support for micro MSMEs with turnover of less than Rs 50 million).
Taxation: Not expecting outright changes in the rates/slabs on direct or indirect taxes (GST is under the purview of the GST Council) in Budget.
Their wishlist includes raising the limit of standard deduction (for taxpayers), lower customs duty on raw materials (corporates), lower tax compliance etc.
Infrastructure/ real estate: Measures to support the larger NIP framework alongside efforts to facilitate the planning, monitoring, and implementation through the Gati Shakti initiative in power, housing, urban transportation etc.
Real sector players are counting on the sector attaining an infra status, besides seeking GST cut/ waiver for cement and higher interest subvention/ subsidy, among others.
Green goals: Measures might be announced to back the government’s plans to lower the use of fossil fuels as well as increase the share of renewable power installation.
Regulatory changes to support the National Hydrogen Mission, expand Electric Vehicles industry, PLI scheme for related sectors (solar cell and solar module manufacturing), among others.
Financial markets/ tax: Clarity on plans to seek inclusion of government bonds into global indices will be sought, starting with
(a) any changes in the taxation framework for investors i.e., withholding tax and capital gains tax;
(b) clear the way for Euroclear eligibility of government bonds.
The government is expected to waive the capital gains tax.
Other expectations include lowering the holding period of REIT/InvIT for long term capital gains as well as regulatory overview on the cryptocurrency universe.
Concern points
Areas of importance include medium term growth (to a $5 trillion economy), meeting development goals, managing the fiscal glide path and a high public debt burden.
Market participants will look for medium-term macro-economic projections, including the revised Fiscal Responsibility and Budget Management Act (FRBM). “We expect the target to be maintained (-4.5 percent of the GDP by FY26) to signal that the authorities are keen to preserve ongoing fiscal consolidation, but without adverse cutbacks which will be negative for growth,” Rao noted.
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