Mumbai:
Lauding the budget focus on nursing the nascent growth revival at the cost of fiscal consolidation, house economists at a Swiss brokerage have said budgetary math seems realistic but meeting privatization targets are key.
Without increasing taxes and imposing new levies, the budget is focused on strong CAPEX, which is the highest since FY08, and projected a fiscal deficit target of 6.8 percent for FY22 as against a consensual 5.5 percent and 9.5 percent for FY21 as against 7.5 percent and a budgeted for a Rs 34.5-lakh-crore budget expenditure, up from Rs 30.8 lakh crore in FY21.
FY22 budget math seems realistic, though privatization targets are key and therefore we maintain our base case of a strong recovery in FY22 GDP growth to 11.5 percent. We also believe the budget is laying the groundwork to help the country move towards a 7.5 percent-plus growth in the medium-term, Tanvi Gupta Jain, the economist at UBS Securities India, said in a note.
The revenue collection assumptions (revenue receipts projected to rise by 15 percent in FY22 as against the nominal GDP growth of 14.4 percent) used to arrive at the FY22 fiscal targets also look reasonable, she said, but adding the government continues to rely on one-off revenue receipts including dividend transfer (Rs 1,03,500 crore) and divestment (Rs 1.75 lakh crore) given the weak track record, it will be interesting to see if the divestment target is met this year.
Stating that the budget 2021 is all about growth, she notes the finance minister has pursued an expansionary fiscal policy to boost the nascent economic recovery with growth-boosting measures like the highest Capex since FY08 when the fiscal deficit was at the lowest on record at 2.5 percent), the higher allocation for healthcare, added focus on divestment and asset monetization, hiking FDI in insurance to 74 percent, increased allocation for PSB recapitalization (Rs 20,000 crore) along with a proposal to privatize two state-run banks.
Though highest since FY08, this is effectively is only 1 percent more than the FY21 estimate as FY21 saw 28 percent growth over FY20 due to the pandemic-related stimulus measures.
Significantly, the quality of government spending seems to have improved with Capex projected to remain strong at 4.6 percent of GDP, while revenue expenditure is seen to slow to 13.1 percent of GDP from 15.5 percent of GDP in FY21, as the pandemic-related relief measures are rolled back.
While on the receipts side, the tax structure is kept stable for corporates and individuals, there is some higher tax on savings/investments for the rich. There is some reallocation of welfare spends proposed among the various schemes, thus lending support for consumption.
However, Gupta Jain said the finance minister has inflicted a body blow to the bonds market. The budget is a big blow to the bond markets on three fronts: higher-than-expected borrowing at Rs 12 lakh crore (against the consensus of Rs 10.6 lakh crore); relaxation in medium-term fiscal deficit trajectory from 3.1 percent to 4.6 percent by FY26 implying elevated-for-longer market supply burden; and relaxation in states’ net borrowing limit to 4 percent of GSDP.
She is of the view that this special budget will need special RBI support on both bond purchases and the liquidity front, absent which yields can easily break out higher especially as risks of rating downgrade resurface over the course of the year.
She sees an upside risk to benchmark bonds at 6.5 percent as RBI is likely to come out dovish on CPI inflation later this week.
