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Expect a growth-oriented Budget with an eye on fiscal consolidation; healthcare spend to rise!

Union Budget FY22 is unlikely to have any major short-term impact on equity markets as we expect the Budget announcements to be largely within the range of market expectations with focus on boosting spend towards development expenditure and health and an eye on fiscal consolidation

* Upside risks for equities: Personal income tax rate cut on the lines of corporate tax rate cut announced in 2019, removal of STT, strategic disinvestment deal announcement.

* Downside risks: Slow fiscal consolidation driven by expansion in nondevelopment expenditure.

Base case expectations:

* Fiscal deficit to reduce from ~7.2% in FY21E to 5.5% in FY22E as GDP revives: FY21E fiscal deficit will rise significantly to ~7.2% of GDP largely on account of a sharp drop in resource mobilization (Tax as well as non-tax receipts from disinvestment and Telecom services) and contraction in FY21E nominal GDP base (Rs195trn) compared to modest rise in total expenditure over BE. However, normalisation of economic activity will mean a sharply higher nominal GDP base in FY22E (Rs224trn) and improvement in resource mobilisation, which will help lower the fiscal deficit to 5.5%.

* Deficit financing for FY22E will result in lower gross market borrowing compared to FY21E at ~Rs10trn (net borrowing of ~Rs8trn); small savings mobilisation will continue to be elevated at ~Rs2.6 trn.

* Focus will be on development expenditure while providing policy framework for promoting manufacturing and Infrastructure sector:

      * Finer contours of the PLI scheme for boosting manufacturing for the 10 sectors announced earlier and resources likely to be made available.

      * Focus on Infrastructure finance through the setting up of an ‘infrastructure development finance institution’, which can arrange finance for long-gestation infra projects

*Focus on reviving household consumption demand via tax incentives for spending.

     * Tax incentives for reviving household demand for discretionary goods and services and higher deductions on housing loans.

* Allocation of resources towards health could rise significantly in light of Covid vaccination drive. In FY21, Budget allocation for ‘Ministry of Health and Family Welfare’ was Rs671bn, or 0.3% of GDP.

Fiscal deficit to reduce from ~7.2% in FY21E to 5.5% in FY22E as GDP revives

FY21E fiscal deficit will rise significantly to ~7.2% of GDP largely on account of a sharp drop in resource mobilisation and contraction in FY21E nominal GDP base (Rs195trn) compared to modest rise in total expenditure over BE. However, normalisation of economic activity will mean a sharply higher nominal GDP base in FY22E (Rs224trn) and improvement in resource mobilisation, which will help lower the fiscal deficit to 5.5%.

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