Corporate Report

Published: Dec 29, 2021
Updated: Dec 29, 2021

Union Budget 2021-22: Tight Rope Walk For Madam FM

It is by now common knowledge that the Covid19 pandemic was disastrous for the country’s already struggling economy. However, green shoots were visible in Q3FY21, with November’s manufacturing PMI a healthy 56.3 and GST collections topping Rs 1 trillion.

The IMF has predicted a return to growth in fiscal 2022, while BNP Paribas feels inflation will be reined in with the CPI coming down to 3.8 per cent in fiscal 2022 as compared to 4.3 per cent in fiscal 2021.

Looking at the issue holistically, Bibek Debroy, chairman of the Economic Advisory Council of the Prime Minister, says a budget is not just about revenue and expenditure but also about policy content and intent. He feels the budget for FY22 can be as epochal as the one of 1991, provided it delivers on infrastructure, land, labour and capital market reforms, and enables private sector investment.

The final call, of course, rests with Finance Minister Nirmala Sitharaman. Will she deliver at the most crucial juncture in the country’s history?

Finance Minister Nirmala Sitharaman has gone on record as saying that the Union budget for fiscal 2021-22 will be “one like never before”. Brave words from the lady, but it is hardly going to be smooth sailing for her. The country’s economy has been shattered by the Covid-19 pandemic and no amount of optimism on the vaccine front can change that reality. Though the first confirmed coronavirus case in the country was reported from Kerala on January 30, 2020, the Centre did not take it seriously, caught up as it was in the razzmatazz of welcoming the then US President Donald Trump to India. Indicative of the government’s inattention to the looming danger of the virus, neither the last economic survey (2019-20) nor the previous Union budget for fiscal 2020-21 had any reference to the ‘Wuhan’ virus.

The pandemic has battered the Indian economy. Hundreds of MSMEs have been forced to close down and many more are struggling to stay afloat. Galloping unemployment and pay cuts have made the lives of millions of lower- and middle-class families miserable. After a 23.9 per cent slump during Q2FY21, the economy contracted by 7.5 per cent (yoy) in Q3FY21. According to the International Monetary Fund (IMF), the Indian economy is likely to contract by 10.3 per cent in the current fiscal ending March 2021, and BNP Paribas expects India’s GDP to contract by 11.4 per cent.

The pandemic has also set off an inflationary price spiral. According to leading Japanese brokerage Nomura, although retail inflation has risen, it is unlikely to come down enough for the Reserve Bank of India (RBI) to make rate cuts during all of 2021. Over the medium term, there are chances of inflation heating up again and the RBI may have to switch to hiking rates well into 2022.

Adds Nomura, “After remaining elevated through 2020, the consumer price index (CPI) peaked in October at 7.6 per cent, although the number cooled to 6.93 per cent in November. Even as food inflation corrects, core inflation will remain sticky at 5 per cent in 2021 as rising commodity input cost pressures amid firming demand lead to a gradual return of firm pricing power.”

Fortunately for the country, the situation has started coming into control from Q3FY21. During the quarter, the economy contracted by only 7.5 per cent as against 23.9 per cent in Q2. Thereafter, there have been tentative signs of steady recovery. November’s manufacturing PMI came in at 56.3, which was slightly lower than October’s decade-high value of 68.9, following the lifting of the lockdown restrictions. Meanwhile, GST collections topped Rs 1 trillion for the second consecutive month, indicating a broad pick-up in business activities. Acknowledging these signs of recovery in the Indian economy, the IMF maintains that the Indian economy, which is likely to contract by 10.3 per cent in fiscal 2021, will grow by 8.8 per cent in fiscal 2022. BNP Paribas feels the CPI will come down to 3.8 per cent in fiscal 2022 as compared to 4.3 per cent in fiscal 2021.

According to Mr Debroy, some points to note are: (a) We don’t know when Covid-19 will completely ease off and when sectors with significant human interfaces (trade, hotels, restaurants, travel, transport) will get to open up, which is required for a full economic recovery; (b) We can guess but don’t know the efficacy and costs of vaccination; (c) Recommendations of the 15th Finance Commission will have to be factored in, and a revamp of the central sector and centrally sponsored schemes undertaken (without consulting states, it can’t be substantially revamped); (d) There is a need to increase capital expenditure and support infrastructure; (e) Other than vaccine costs, health is a major concern and must be supported through expenditure (findings of the fifth National Family Health Survey underline this); (f) There are limitations on improving the efficiency of public expenditure immediately; and (g) There were fiscal restraints in 2020-21.

‘PSU SALES IS KEY’

Mr Debroy points out that a rosy growth scenario in 2021-22 doesn’t contradict the assertion that India’s absolute gross domestic product (GDP) level at the end of March 2022 will still be below that in end-March 2020. “Pre-Covid, what was the trend rate of growth? Depending on the timeline used, something between 5.5% and 5.8%. That’s not good enough for India to meet its sustainable development goals, achieve a $5 trillion economy (with a new timeline), reduce poverty, ensure employment, or formulate a credible debt management plan. It’s axiomatic that, 2022-23 onward, we need to achieve 7%-plus real growth, and, having moved away from fiscal rectitude in 2020-21, public expenditure must support this. This brings up the question of a credible fiscal consolidation strategy, articulated in the budget for 2021-22. The Centre’s fiscal deficit in 2020-21 will probably be around 6.5% of GDP. It can be projected at around 5.5% in 2021-22, provided assets are monetized. In 2020- 21, the budget introduced transparency by identifying offbalance sheet borrowing; ideally, this should be included (around 0.8% of GDP) in the deficit number. But this can only be done if public sector unit disinvestment and strategic sales take place,” he notes.

According to him, “this will shape the budget’s contours. Indirect taxes are in the Goods and Services Tax Council’s purview (Cesses and excise on petroleum products are outliers). Any real rationalization of GST rates will lead to a rise in average rates from 11.5% to a revenue-neutral rate of at least 16%. Amidst a tentative recovery, I don’t see that happening. Any real rationalization of direct taxes, with the removal of exemptions, will also mean an increase in average tax rates for several segments. I don’t see that happening either. But any budget, not just one setting out a path to recovery, is not only about revenue and expenditure. It’s also about policy content and intent — about messaging. In that respect, this budget is as important as 1991’s. It should shape public expenditure in social and physical infrastructure, state a medium-term fiscal policy, detail an environment for private-sector investment, introduce reforms in land, labour and capital markets, and incorporate technology to improve governance. This sounds like a tall order. But that’s what big bang budgets are about — setting the tone for the next ten years. They aren’t about giving tax concessions to one sector or another. The exogenous shock of Covid has provided an opportunity to do just that.”

Will budget end the bull run in stock markets?

A large number of observers feel that the FY22 Union budget, to be presented by Finance Minister Nirmala Sitharaman on February 1, will put the brakes on the runaway rise of the stock market.

Interestingly, much to the surprise of everybody, despite the disastrous pandemic crippling the country’s economy very hard, the stock market has shown unprecedented buoyancy, with popular indices scaling all-time high levels in the centuryold history of the market. In fact, if the Pandemic year was the worst for the economy, it turned out to be the best for stock markets with wealth of the investors almost doubled during the calendar year 2020.

On a year-to-date (YTD) basis, till December 21, 2020, the S&P BSE Sensex and the Nifty50 have gained 13.4 per cent per cent and 12.8 per cent, respectively. The one-sided rally since March has pushed the 12-month forward price-to-earnings (P/E) multiples for the Nifty50 index up by nearly 20 per cent during the same period, prompting Credit Suisse to point out that Indian equities are no longer cheap, and only a short distance away from being the most expensive they have ever been.

The pandemic has drained the Centre’s resources and there is a huge need for funds to be raised via the budget. But the visibly available avenues to raise resources are negligible. Needless to say, the government’s attention has been drawn to the unprecedented spurt in the wealth of investors. So much so that the Prime Minister has even opined that those who make large windfall gains should contribute to the nation when it is facing difficult times. The FM needs a lot of funds to meet the postCovid-19 urgent requirements and cannot turn the eyes from a record spurt in the wealth of investors during the Corona times. Little wonder a well-known market analyst Ambareesh Baliga isn’t expecting an investor-friendly budget in 2021. “The government is clambering for funds, and so one shouldn’t expect an investor-friendly budget. After reducing corporate taxes last year, we could see a Covid-19 surcharges being introduced,” he adds.

Observers fear that Ms Sitharaman may go for dividend tax or capital gains tax or a hike in STT. Though marketmen have strongly represented that any fresh tax burden on investors may retard the growth of capital formation in the country and also harm the growth of the equity cult, the Finance Minister has limited avenues to raise fresh funds and the stock market is one of them. It is increasingly felt that she may not be able to spare investors this time.

Mr Nayak adds, “Lifting the tax on dividend will not only give a further fillip to investment in stocks but will also help sustain the current momentum in the market. Investors in stocks do take risks and they should be rewarded, not taxed.”

HOBSON'S CHOICE

All said and done, it will be a tough task for the Finance Minister to raise funds in order to meet the huge expenditure needed - substantially higher than what was budgeted in recent years -- on account of the pandemic. She will have to take certain steps beneficial for the public even as the pandemic has drained government resources. She will have no alternative but to hike taxes in both spaces - direct and indirect -- much to the chagrin of trade, industry and the public.

However, at the same time, she will have to pay attention to the revival of small and medium enterprises which are facing a bleak future and in urgent need of stimulus packages. How Ms Sitharaman manages this tight-rope walk will be known on February 1, when she is scheduled to present the Union budget for fiscal 2021-22.