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India Strategy - Union Budget 2021‐22 Preview

Although it is widely feared that India’s fiscal deficit could reach around 7.5% of GDP given the dislocation of the economy during the pandemic, we assess that the budgetary shortfall will be much lower than the consensus. We see that government has largely curtailed spending so far this year, when compared with the budgeted estimate of INR 30 trillion. We also do not see any spurt in spending during the remaining part of the fiscal year, considering that supply and demand side of the equation has started recalibrating and the economy is gaining traction. Though FY21 Govt Revenues are expected to contract 10%, expenditure growth will be relatively flat. As a result, we see a fiscal deficit of 11.9 trillion or 6.1% of GDP.

For FY22, we see the deficit falling significantly to 4.75% given the anticipated jump in economic activity and revenues. A favorable base effect for FY22 will also project the government finances in a much better picture. We project Corporate and Income tax to expand by 35.7% and 27.4% respectively. The thrust will likely be on non‐tax revenues as well, where buoyant equity market conditions and abundant liquidity will aid government rake in around INR 2 trillion from divesting stake in PSU mammoths like LIC, BPCL and additional CPSEs. Having said that, government will continue to strike a balance between growth and fiscal prudence. Reforms and stimulus has largely been an off‐Budget item, so the government will likely deliver measures to prop the economy whenever needed.

BUDGET EXPECTATIONS

* Hike in 80C exemption to Rs2.5 lacs ‐ Govt has already unleashed slew of measures to prop the supply side of the equation. On demand side, it is imperative to augment disposable incomes of households, which will recalibrate the economic equilibrium.

* No material change in the subsidy bill: Govt will avoid being too populist given that enough measures have been undertaken in the past

* More borrowing from Small Savings Schemes or External Loans to keep Net Market Borrowings and bond yields under check

* Further Incentives under Aatmanirbhar and PLI scheme to attract FDI in Manufacturing and create large scale employment in sectors like Auto, Textiles, Electronics etc

* Favorable policies to boost Real Estate Demand ‐ Increase in exemption for principal repayment on home loans (matching HRA limits for Salaried class)

* Hike in allocation to healthcare sector to increase capacity/infra.

* Higher allocation to Defence in wake of regional conflicts.

* Boost to Agriculture and Food processing.

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