The countdown for the Union Budget 2021 has started and all eyes would be on the government on how they have planned to address the challenge to reinstate the economy on a growth path while the fight with a global pandemic is still on.
To give a backdrop, the Indian economy has had its share of problems even before the COVID-19, triggered by a combination of factors including consumption slowdown, NBFC crisis, and tepid rural demand, etc. However, just as when some green shoots of recovery were visible, the economy got hit by the pandemic which led the government to announce a strict lockdown, which we had never experienced before.
This not only brought the entire economy to a halt but also led to a loss of millions of livelihood across sectors.
The strict lockdown had severe ramifications on the economy like India's GDP contracted by 23.9 percent in Q1, which was one of the worst amongst developed as well emerging nations. To control further damage, the plateauing out of COVID cases prompted the governments globally including India to focus on easing restrictions and resuming economic activities.
Additionally, the government and the RBI have been proactive in handling the economic crisis, as they both announced a series of measures amounting to nearly Rs 20 trillion to get the economy back on track. While very little was done in terms of handing out cash to people, the package largely focused on providing adequate liquidity and credit support to businesses which seems prudent considering the limited fiscal space and as the quantum of the impact of the pandemic was still unknown.
Nonetheless, easing restrictions, pent-up demand and festive season coupled with support from the government and RBI has led to decent economic recovery however, sustenance of the same continues to remain a key question. Despite facing fiscal challenges, we believe the focus of the government would be to provide multiple demand boosters to get the economic growth back on track.
Increased spending is the way forward
With growth still below normal, the upcoming budget is likely to focus more on increasing spending especially in priority sectors like Infrastructure, Rural, and Healthcare. This would not only aid in employment opportunities for low and semi-skilled workers but also improve demand for goods and services offered by MSMEs and increase overall consumption. Additionally, to build on India's mission to become 'AtmaNirbhar', we expect several measures to be announced on structural challenges obstructing MSMEs' growth; skill development opportunities, including upskilling and reskilling talent, as well as announcing more schemes and incentives for the agriculture sector.
Little scope for tax relief
Just like in every budget, this year as well the expectations are rife for a tax cut both on the indirect and direct tax front. Given that the government is already running a high deficit owing to lower tax collections, we believe any large cuts would be unlikely. However, some relief in tax breaks on Health Insurance will be welcomed by the salaried class.
In Budget 2020, the government announced an alternative tax regime for individuals but that didn’t appeal much to the taxpayers especially individuals in the higher income slabs as it requires forgoing several exceptions and deductions and consequently increasing their tax liability. We feel measures like reduce surcharge rates and increase slab limits for high-income individuals would help in the transition to the new regime. Besides, they may announce some measures for certain distressed sectors.
Rollover of disinvestment target
The government’s disinvestment plans for FY21 took a big hit due to the pandemic as the government only managed to garner Rs 22,000 crore as against an ambitious target set by the government of Rs 2.1 lakh crore. We expect the government to roll over its disinvestment plans to FY22 which would provide support to funding infrastructure projects. The government disinvestment plan would include privatisation of Air India, BPCL, Container Corporation, Shipping Corporation, etc. Besides, the listing of LIC IPO is also on the cards.
Time to overlook fiscal deficit
The government’s fiscal maths has gone south as the pandemic has significantly impacted tax collections. Even though the recent recovery in the economy has improved tax collections, the government is likely to end the year with a deficit of over 7 percent as against the original estimate of 3.5 percent. Going forward for FY22 as well, we expect the government would continue to focus on improving economic growth and follow an expansionary fiscal policy.
From the stock market perspective, investors and businesses are pinning high hopes on the budget and any disappointment could lead to profit-taking. While we do believe the focus would be on growth however the approach would be gradual considering tight fiscal space. We expect the underlying theme of the budget could be a greater push towards Infrastructure, the “Make in India” initiative, distressed sectors and digitalization, with the aim of job creation, support to rural and consequently to bring back the economy on the growth track.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.