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Budget 2022: Pro-growth and Inclusive

To begin with, it was a tight rope to walk for the finance minister in this Union Budget as the economy, on road to recovery, needed a booster shot to strengthen the growth momentum. At the same time, the mounting fiscal deficit due to the pandemic continued to remain a cause of concern. Amid the challenging scenario and high expectations, the finance minister has done a commendable job, as the budget primarily focused on stimulating growth driven by higher spending allocation towards key employment generating sectors like Infrastructure and housing. Besides, the budget also lays out a plan towards inclusive development wherein the focus is on sustainable development, agriculture, support to MSMEs, healthcare, digitalization and education.

The budget also emphasizes developing an eco-system for new-age businesses/startups which is essential to be in sync with the global markets and prepare ourselves for future growth. This includes several measures announced in the field of organic farming, drones technology, electric vehicles(EVs) and digital currency. On the taxes front, we were not surprised to see the status quo on the personal income tax front as the government chose an expansionary fiscal policy, which focuses on increasing spending to stimulate economic growth

Much needed spending on Capex

The government continued to focus on social sectors by increasing spending on key employment generating industries to promote economic growth. Amongst the schemes, rural, housing, healthcare and infrastructure-related schemes witnessed a healthy increase in allocation. Moreover, the government announced several measures to ease compliance/supply-side issues and also promote domestic manufacturing.

The highlight of this budget is the capital expenditure estimate set for FY23, which is a whopping 35.4% higher than the budgeted estimate of FY22. The capital expenditure spending for FY23 is set at Rs. 7.5 lakh cr whereas the effective capital expenditure is estimated at Rs. 10.68 lakh cr which is nearly 4.1% of India’s GDP. The sharp increase in capex is a clear testament that the government is focused on strengthening the growth momentum

Modest Disinvestment target

As widely expected, the government lowered its FY22 disinvestment target from Rs. 1.75 lakh cr to Rs. 78,000 cr. Moreover, the government did not give much clarity on the exact timeline for the much-awaited LIC IPO. There is a possibility that it may or may not happen in FY22 or could be deferred to FY23. The government has set out a modest disinvestment target of Rs. 65,000 cr for FY23.

Little relief on the taxes front

The government provided no income tax relief for individuals in this year’s budget. However, the government announced measures to improve tax compliance namely ‘Updated Returns’ where individuals who need to correct the errors can again file the returns and pay tax. The government also announced the scheme for the taxation of virtual digital assets wherein any income from the transfer of any virtual digital asset would be taxed at the rate of 30%. For IFSC, the government announced a tax incentive with respect to LTCG wherein it has capped the surcharge at 15% arising on transfer of any type of assets

Fiscal deficit slightly higher

The government has pegged its FY22 fiscal deficit at 6.9% of GDP as against the original estimate of 6.8%. For FY23, the fiscal deficit target is expected at 6.4% which is largely in line with the estimate. The comforting factor is that the government has again been modest in estimating the growth in revenues (both tax and capital receipts). Over the medium to long term, the government has maintained its plan to stick to its fiscal consolidation trajectory and intends to reach a fiscal deficit of 4.5% by FY26.

The budget came in line with our expectations with a major focus on reviving growth through targeted spending in capital expenditure. Having said that, the government has not deviated much from its fiscal deficit trajectory set last year which is a key positive. From a stock market perspective, we believe the budget has all the ingredients to strengthen the economic growth momentum. However, the impact of the tightening monetary conditions globally amidst rising inflation would continue to remain a key monitorable for the markets.

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