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Deficit spending by the Government to revive growth

Fiscal deficit for FY2022 at 6.8%, while deficit for FY2021 revised to 9.5%.

The Government surprised the markets with a bold budget which focus on reviving growth by deficit spending. Government expenditure for the year was revised to ₹34.5 lakh cr. from the budget estimate of ₹30.4 lakh cr. The Government surprised the markets and went for much needed deficit spending with the fiscal deficit for the year being relaxed to 9.5% from 3.5%. The fiscal deficit figure was significantly above market estimates of ~7% for FY21. Moreover the fiscal deficit figure for FY2022 at 6.8% was also well above market estimates.

Deficit spending by the Government is positive for the economy

Revenue expenditure for the year was increased to ₹30.1 lakh cr. from budget estimates of ₹26.3 lakh cr., while capital expenditure was also revised to ₹4.4 Lakh cr. from ₹4.1 lakh cr. The sharp increase in revenue expenditure by the Government was on account of increased spending on food and fertilizer subsidies which are expected to boost the rural economy. Total subsidies for FY2021 are budgeted to increase by 147% yoy to ₹6,48,736 crore as compared to budget estimates of ₹2,62,109 crore. The jump in subsides are on account of sharp increase in food and fertilizer subsidies as the Government has ramped up its spending and has tried to provide support to the rural economy in the aftermath of the Covid-19 pandemic.

Key focus areas on rural India, infrastructure, manufacturing and healthcare

The Government is clearly looking to stimulate the economy through increased spending. While overall spending is expected to grow by 1.0% in FY2022 due to 2.7% yoy decline in revenue expenditure, capital expenditure is budgeted to grow by 26.2% yoy. The cutback in revenue expenditure is driven by 43.0% yoy decline in subsidies to ₹3.7 lakh cr. in FY2022.

Key Highlights of the Budget

Significant increase in outlay for health and well being positive for healthcare sector

While rural economy, manufacturing, infrastructure and real estate continues to remain the key focus areas for the Government, this time around there is a focus on health and well being which has witnessed significant increase in allocation. Key measures announced by the Government are:

Tax breaks for affordable housing extended by one more year

Continued hike in import duties on various items positive for domestic manufacturing

* Increase in allocation for health & well being from ₹94,452 crore in FY2021 to ₹2,23,846 crore in FY2022.

* Additional deduction of ₹1.5 lakh on affordable housing extended till March 2022 along with Sec 80IBA which provides tax holiday to affordable housing projects.

* Increase in import duties on electronic components like Printed circuit boards, compressors, Inputs and parts of LED lights, solar inverters and solar lamps.

* Increase in import duties on various agricultural products, chemicals, plastics, leather and auto parts to benefit MSME and other domestic manufacturing sectors.

* Reduction in customs duty raw materials and inputs used by domestic manufacturers for reducing cost of inputs and correction of inverted duty structure.

* FDI Limit in insurance companies to be increased to 74% from current 49% subject to safeguards.

Tax revenue assumptions for FY2022 appear conservative

Gross tax collections for FY2021 are expected to grow at 16.7% yoy against degrowth of 5.5% in FY2021. Net tax collections growth is expected to be lower at 15.0% in FY2020 given that devolution to states are expected to grow by 16.7% yoy. Direct taxes are expected to grow by 22.4% yoy driven equally by personal income tax and corporate tax. Indirect tax collections are expected to grow by 11.1% yoy which is in below the nominal GDP growth estimates of 14.4% yoy.

GST collections are expected to grow by 22.3% yoy. Customs duties are expected to grow by 21.4% yoy due to increase in import duties on few items proposed by the Government in order to promote domestic manufacturing. Excise duties are expected to degrow by 7.2% yoy as part of the duties on petrol and diesel has been reallocated to the Agriculture Infrastructure and Development Cess (AIDC).

Tax revenue growth for FY2022 seems to be conservative given that it is in line with nominal GDP growth assumption of 14.4% and does not take into account any tax buoyancy due to rebound in growth in FY2022. Given the strong rebound in growth expected in FY2022, we believe that the Government should be able to achieve the tax collection figures

Government targeting significant sale of assets in FY2022

Non-tax revenues are expected to grow by 15.4% yoy in FY2022 post a contraction of 35.6% yoy in FY2021. Dividend income from PSU’s are expected to grow by 44% while dividend & profit receipts from RBI and PSU banks are expected to degrow by 13.5% yoy. It seems like the Government is not expecting any large surplus transfer from the RBI in FY2022 while dividends from PSU banks may not show any meaningful improvement given that provisioning is expected to remain high in the aftermath of the Covid-19 crisis.

Disinvestment targets for FY2022 has been pegged at ₹1,75,000 crore as compared to a revised target of ₹32,000 crore in FY2021. The disinvestment for FY2021 have been revised down significantly from the budget estimates of ₹2,10,000 crore as the Government was not able to compete the strategic sale of PSUs as per the plan.

While the disinvestment targets for FY2022 appear to be stiff they could be achieved if the Government is successful in its attempt to strategic sales PSUs like Air India, BEML, BPCL, CONCOR, IDBI Bank etc. and is able to push through the IPO of LIC. Moreover the Government has indicated that they are exploring the sale of two more PSU banks other than IDBI Bank. If the Government is successful in the strategic sale of assets in FY2022 then we feel that they should be able to achieve the disinvestment targets.

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