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Budget 2022: Balancing growth and fiscal prudence

We’ve again reached the time when expectations run high from the government to fulfill the aspirations of all sections of society. Yes, you’ve guessed it right! We are referring to the Union Budget, scheduled on February 1. The last two years have been challenging for all of us and the economy as well and the government has time and again announced several measures in the Union Budget and outside as well to revive the economic growth. Government measures combined with timely support from the RBI has helped the economy to witness a decent recovery over the past few quarters.

We expect the government to continue its focus on reviving economic growth by increasing spending on key sectors. We believe the underlying theme would be similar to last year wherein the focus would be on increasing capital expenditure in key social sectors like infrastructure, housing and healthcare space. Employment generation and kick-starting the private investment cycle would continue to remain key priorities for the government.

At the same time, we also expect the government to begin its fiscal consolidation journey albeit at a gradual pace as it would not want to hamper the ongoing economic recovery. We believe that the budget would be largely growth-driven but it would also lay the path for fiscal consolidation.

Disinvestment / Privatization to continue

The government could miss the tall disinvestment target of Rs. 1.75 lakh cr for FY22 if the LIC IPO gets pushed to next fiscal. In the upcoming budget, we expect the government to give more clarity on the much-awaited LIC IPO. We expect a similar target for disinvestment in FY23 and we may see a few new names adding to the existing list of disinvestment / privatization candidates.

Fiscal Prudence – A step in the right direction

The fiscal deficit picture took a hit in FY21 & FY22 as the pandemic-induced lockdown impacted government finances. However, buoyancy in tax collection could help in posting a lower fiscal deficit than the original estimate of 6.8% of GDP. Going forward, we expect the government to target a lower fiscal deficit target for FY23 which would be led by robust tax collections

Personal / Corporate Taxation – Minor tweaks likely

The government had announced a cut in corporate tax in 2019 and expecting further relief, especially when the dependency is high on tax revenues, seems unreal. In fact, there is a possibility that the government may announce phasing out of certain tax exemptions applicable to corporates. On the personal income tax front, the government may not tinker with the personal income tax rates however an increase in the standard deduction would help aid growth for private consumption which has been lagging.

To conclude

From the stock market perspective, the recent correction is largely due to concerns over anticipation of faster than expected interest rate hikes due to high inflation. The government’s focus on fiscal consolidation would be an important factor for market participants. Moreover, targeted spending towards employment generating sectors would aid economic growth and kick-start the private investment cycle.

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