Budget FY22: Anchored to Growth

The budget announcement for FY22 was keenly awaited as it was declared against the backdrop of a global pandemic. The economic activity across the globe came to a virtual standstill owing to the lockdowns imposed to control its spread. On the one hand budget was expected to be growth supportive, but there were cautions being highlighted in terms of financing of the budget. The absence of any tweaking of direct taxes to bolster the finances came as a major relief for the taxpayers. The focus on capital expenditure was the key positive of this budget. The quality of expenditure determines the sustainability of economic revival and the budget scores highly on this aspect. The budgeted capital expenditure for FY22 has gone up by more than 34% as compared to budgeted estimates for FY21. The strong focus on growth and ease of doing business, we believe, are the key themes of this budget and the same have been aptly reflected by the response of the equity markets. The key features of the budget are listed below:

  1. Maintaining Continuity: The budget provides the quality of continuity as far as the broader proposals are concerned. The allocation to healthcare, education, nutrition, drinking water supply, textiles, infrastructure etc. The budget compliments the theme of “Atmanirbhar Bharat” packages announced during the year. The focus on revival of MSMEs, agri and labour reforms, privatisation of PSUs and production linked incentive schemes continues.
  2. Limited Inflationary: Bias The budget is explicitly inflationary to the extent that the Agri infra–Tax is going to be applied to the various products in differing percentages on a range of products of common consumption. The cess levied on several products such as gold, silver, alcohol, petrol and diesel; part of the burden of new cess may be adjusted by revision in excise duty.
  3. PSU Bank Recapitalization & Privatization The budget has provided for Rs.20,000 Crs for PSU bank recapitalization, and at the same time has indicated privatization of two banks and also a govt-owned insurance company. This is a step in the right direction because it helps in the more efficient allocation of the available resources and capital.
  4. Disinvestments The amount of disinvestments is pegged at Rs.1.75 Lakh Crs. Whatever was targeted for the current FY will also be carried forward to the next year to the extent it is not met this year. With the market conditions and the pickup in the economy this may be an achievable target.
  5. Increase in FDI Limit for Insurance Companies The permissible FDI limit for investments in insurance companies has been increased from 49% to 74%, thereby allowing foreign ownership. This will help the incumbent players to bolster the capital base and may also attract new companies in the burgeoning sector.
  6. Asset Reconstruction & Management Company This is the bad bank which will take over the bad assets of the banks and financial institutions. This will make management and administration of bad assets more convenient and easier and removes this perennial problem away from the banking system to a large extent.
  7. Monetization of Assets The proposal to sell off the land of some of the entities which has real estate assets is a move in the right direction. This will help conversion of existing assets into a useful and productive and would also help the government to move out of some of the non-core areas which may be best left to the private sector. Asset monetization is an efficient way to finance new infrastructure.
  8. Fiscal Deficit Fiscal deficit for 21-22 is estimated at 6.80%, which is against the 9.50% estimated for 20-21. Additional borrowing announced is Rs.80,000/- Crs. This may put some pressure on the long end yields, but the impact may be moderated by the way in which the RBI would carry out this additional borrowing program. The gross borrowing program for the next year is at Rs.12 Lakh Crs. The glide path indicated for fiscal deficit is a number below 4.50% by 2025-26.

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