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The focus of the Union Budget 2022 is likely to be on investment-driven growth with a focus on infrastructure investment to generate multiplier effects to spur economic growth.

Morgan Stanley said in a report the focus will be on raising additional resources through strategic divestment and asset monetisation. Indeed, the overall focus of the government should be to utilise all revenue levers effectively (tax compliance to improve tax to GDP, strategic asset sales) to sustainably improve the health of the public sector balance sheet.

Fiscal data on a tracking basis has surprised positively, even as spending is tracking above budgeted levels due to the better-than- expected trend in tax collections. However, divestments have remained weak, and, as such, the eventual timing of the LIC IPO can have a bearing on the final fiscal deficit for F2022.

If the IPO goes through in Q4F22, as asserted by government officials, we opine the fiscal deficit would come in lower by 40bps (at 6.4 per cent of GDP) than the budgeted estimate at 6.8 per cent of GDP. If the IPO fails to materialise, we anticipate the fiscal deficit target would be in line with the government target of 6.8 per cent of GDP. In F2023, we anticipate slow-paced fiscal consolidation leading to a fiscal deficit of 6 per cent of GDP, driven by continued tax buoyancy, reduction in pandemic-related revenue spending and a pickup in divestment proceeds, Morgan Stanley said.

We expect the RBI to embark on policy normalisation with a 15-20bps hike in the reverse repo rate to normalise the policy rate corridor. We anticipate the impact on growth from the third-wave-led disruptions to be short-lived and concentrated primarily on the contact-intensive services sector. Moreover, the impact doesn't weigh on the future growth trajectory,and thus does not warrant a further delay in policy normalisation, in our view.

Further, we expect inflation to rise on a YoY basis till March-22,and to only moderate from 2Q22, helped by sequential easing in global commodity prices. Following the adjustment in reverse repo rates, we expect the RBI to take up repo rate hikes, which in our base case starts from the April meeting, with a cumulative rise of 150bps in fiscal 2023.