“Faith is the bird that feels the light and sings when the dawn is still dark.” Finance Minister Nirmala Sitharaman quoted these words of Shree Rabindranath Tagore in her last budget speech. The quote was relevant at a time when COVID-19 pushed economic growth into the dark. However, after a very successful vaccination program, and with life almost returning to normalcy, economic activity in the country has been picking up.
GDP is expected to grow at historic high rates for the next two or more years, healing some of the scarring the pandemic left behind. Before Budget 2021, the FM said she would deliver a “budget like never before.” According to experts, it was a trendsetter budget in a way. It had many plans and schemes on which the growth of this decade would be based. Also, multiple schemes have been announced in the last two years. For Budget 2022, broadly, on one hand, there are expectations the government would focus on implementing the policies announced in the last two years. On the other hand, five states, including UP, has elections scheduled for February-March. So, we might expect a populist budget. A multitude of perks might be handed to the rural economy.
As always, the FM would not have an easy task. To maintain the growth momentum, continued fiscal support is a crucial requisite. At the same time, the FM might also consider a brief fiscal consolidation to be able to bring down the center’s fiscal deficit target to 4.5% of GDP by FY26, as per the proposed glide path.
Unpacking the Math
The fiscal deficit target for FY22 of 6.8% of GDP is expected to be achieved. Though there could be a shortfall from disinvestment receipts and excise duty cuts due to higher crude prices, revenue from tax collection would mostly come in 15% higher than budgeted. Capital expenditure stood at Rs 2.7 lakh crore or 49.4% of budget estimate, compared to 58.5% until October in the last financial year. The government can increase the pace here. For FY23, gross tax collection is estimated to grow 9-10%, but total revenue could grow ~10-12% due to higher collections from disinvestment. Based on the current trend, we expect GST collections to increase 12–15% in FY23. Considering the RBI’s GDP growth estimates(9.5%), an inflation rate of 4–5%, and expenditure set to increase around 12%, the fiscal deficit target for FY23 could be 6.2%.
Robust Tax Collection in FY22
Compared with the last few years, tax collection in April–November 2021 has been notably higher. For the current year, collections have reached 74% of the budgeted estimate through November.Tax collection was robust mainly due to the large amount collected from tax on fuel and higher GST collections with the rise in economic activity. GST collection exceeded INR 1.3 lakh core for three consecutive months (October–December). The higher collection is expected to continue in FY23 as well. However, with global crude oil price at ~$85 per barrel, there is no scope to increase tax collection from this source and might need to take excise duty cut if required.
Disinvestment Target can be INR 1.5 lakh Crore for FY23
According to the Department of Investment and Public Asset Management (DIPAM), the government received INR 9,329.9 crore through divestments and INR 35,116.72 crore through dividend receipts. Divestments of INR 9,329.9 crore were mainly from the sale of Specified Undertaking of The Unit Trust of India’s (SUUTI) stake in Axis Bank worth INR 3,994.33 crore, and the National Mineral Development Corporation (NMDC) OFS worth INR 3,651.37 crore.
With the current collection plus Air India’s sale, the government would only achieve 7–8% of the target. The rest depends on LIC’s IPO – if it can generate INR 80,000–90,000 crore. However, FY22 is nearing the close. It would be highly challenging to complete such a huge IPO before the end of March. Even if the IPO goes through, the disinvestment target would not be achieved. For FY23, the government may work actively to disinvest its stakes in BPCL, IDBI Bank, CONCOR, BEML, SCI, and others. The target can be INR 1.5 lakh crore through disinvestment in FY23. If the LIC IPO is pushed into FY23, the target could be even higher.
Clearing Roadblocks to List Bonds in International Markets
In Budget 2022, the FM is likely to consider a waiver of capital gains on bond transactions. This is required if India wishes to enter global bond indices. India’s inclusion in the Bloomberg-Barclays and JP Morgan emerging market bond indices can increase FPI in government securities and therefore in overall government debt. Currently, overseas investors are required to pay around 30% short-term capital gains tax if they sell the bond within a year. Depending on the weight assigned to India and the global benchmark in which the securities are included, the expected inflows could be $10–30B. If this happens, the Indian rupee could appreciate 5–7% against the dollar. In that case, exporters would take a hit. Exports have done well, and it is expected that the government would emphasize cross-border trade and investments. So, along with clearing roadblocks for bonds to go international, it would be crucial to manage the currency as well.
Standard Deduction Might Double
This Budget might increase the standard deduction. The figure could be doubled to INR 1,00,000 from the present INR 50,000. Budget 2022 might also introduce tax-free work-from-home allowances for salaried employees. Higher deductions for such expenses would increase the take-home salary. Also, direct tax collection has been robust in FY22. This can allow for greater limits for tax deductions.
With an Eye on Election, Rural Economy Could Receive Higher Allocations
Around 25% of the country’s rural population is in the five states going to polls in February-March. So, it is expected that the government would maintain elevated rural and agriculture welfare spending. The government could focus on welfare spending such as food subsidies, MGNREGA, PM-Kisan, and fertilizer subsidies. Employment has been a key issue. MGNREGA being a labor market shock-absorber, the FM could raise the wages and also the number of workdays. Despite several efforts, farmers’ income has not increased as expected. So the government could take further steps to improve the income of farmers.
Income Tax Cuts Could Come Home to the Exchequer as Indirect Taxes
In Budget 2021, the FM introduced a new tax regime. However, this regime offered no major benefits. According to consensus, most taxpayers are continuing with the old regime and were unwilling to move to the new one as they cannot avail of any investment benefits under the new regime. In Budget 2021, income tax slabs remained untouched. This time, there are expectations the tax-free slab could be increased from the current Rs 0–2.5 lakh. If personal income tax is reduced, there would be more disposable income, which in turn would encourage consumption. With increased GST-compliance, the government can thus certainly boost the share of indirect taxes collected.
Removing STT or LTCG?
In 2004, security transaction tax (STT) replaced the long-term capital gains (LTCG) tax. Budget 2018 brought back LTCG, levied again at a rate of 10% on annual gains of over Rs 1 lakh. However, STT was not removed. Many new investors have started their investment journey in last 12–18 months. Removing STT could encourage several of these investors to start trading. Although investors want LTCG to be removed,
the government, in the winter session of parliament, said there are no plans to abolish LTCG tax on equities and mutual funds. Thus, there are hopes that Budget 2022 would see STT removed. However, it is estimated that with increasing investors and trade volumes in the market, STT could generate more than Rs 5,000 crore in revenue. LTCG collection for AY 2019-20 and AY 2020-21 was Rs 3,460 crore and Rs 5,311 crore respectively. Looking at those numbers, it is unlikely the government would make a change here.
Raising Section 80C Ceiling for Tax-Saving Schemes
The government needs to leave more money in the hands of the taxpayer. Looking at the current numbers, if the government resists a change in tax slabs, there are chances that the ceiling of Section 80C for tax-saving schemes can be increased to Rs 2.0–2.5 lakh from the current Rs 1.5 lakh. This would not only leave more money in the taxpayer’s hand but also stimulate savings. This can be positive for asset-management companies as well.
Increasing Section 80D Limit for Individuals
The pandemic has highlighted the importance of medical insurance for families as they have incurred huge expenditure on treatment. Currently, the health insurance premium can be tax-exempted up to Rs 25,000 for persons under 60 years and up to Rs 50,000 for those aged above 60. The pandemic increased the volume of these claims and in the aftermath, insurance companies have been raising their premium costs. An increase in the deduction for medical coverage would help increase the penetration of insurance and bring relief to the layman.