Union Budget 2022: An analysis

The Union Budget of India, also known as the Annual Financial Statement in Article 112 of Indian Constitution, is the country’s annual budget. The cabinet presents it on February 1st in order for it to be implemented before the start of the new fiscal year in April. Until 2016, the Finance Minister presented it to Parliament on the final working day of February. The budgetary department of the finance ministry’s division of economic affairs is the main organization in charge of preparing the budget.

It is presented in the form of a Finance bill and an Appropriation bill, both of which must be enacted by the Lok Sabha before they can take effect on April 1st, the start of India’s fiscal year. ‘Vote on Account’ isn’t just about same as an interim budget. A ‘Vote on Account’ exclusively considers expenditures and receipts. An intermediate budget, like a full budget, presents the entire financial statement. While the law does not prevent the Union Government from adopting tax reforms during an election year, past governments have refrained from making large changes to income tax legislation during interim budgets. There have been 73 annual budgets, 14 interim budgets, plus 4 unique budgets, or mini-budgets, since 1947.

Union budget of 2022-23 was presented amidst a backdrop of nascent domestic economic recovery with significant divergence across sectors. While, on an overall basis, the domestic economy has seen strong rebound from a low base, impact on consumption, MSMEs and contact intensive services sector continue to linger. Further, the economy is likely to face increasing headwinds on external front with accelerated tapering and heightened pace of rate increases by US Fed, softening of global growth, risk of China slowdown and elevated global inflation.

Given this background, there was a need to continue to nurture growth while making fiscal progress, this budget has precisely delivered that. This budget ensures continuity in policy, stability in taxation and consistency in the strategic direction of the economy while taking steps towards fiscal consolidation.

Last few years’ budgets including the current one can be stringed together on 4 broad themes:

1. Aatma Nirbhar Bharat and Domestic Manufacturing

2. Accelerating Infrastructure and Logistics Development

3. Stability in and Simplicity of tax structure

4. Gradual fiscal consolidation

While this budget maintains continuity of aforesaid policy objectives, it also contains targeted measures towards developing digital ecosystem and supporting rural sector, social causes and pandemic impacted sectors.

India has lagged China in scaling up manufacturing in last 2 decades. The rise in wage costs as well as increasing compliance costs in China has provided a unique opportunity for India to establish itself in the global supply chain through boost in domestic manufacturing. Indian Government’s initiatives over last few years are an attempt to make most of the opportunity to establish India as a strong manufacturing hub globally. Key favourable Government policies include raising import duties under Phased Manufacturing Program to promote domestic manufacturing of high growth electronic items. PLI scheme for select industries (13 until now) to boost India’s manufacturing output by USD 520 billion in 5 years. A scheme for design-led manufacturing will be launched to build a strong ecosystem for 5G as part of the PLI Scheme.

Recognising the need for robust infrastructure and competitive logistics for improving manufacturing competitiveness, government has been aggressively taking steps over last few years including income tax exemptions for investment income of Sovereign wealth funds, abolition of dividend distribution tax, easing access to debt financing of REITs/INVITs by FPIs, housing for all, innovative model for road developments, privatisation of airports for operation & maintenance etc. Further, in Oct-21 govt launched ‘PM Gati Shakti – National Master Plan for Multi-modal Connectivity’ for integrated planning and coordinated implementation of infrastructure connectivity projects.

This budget builds on this vision and announced following steps towards achieving these objective

Contract for set-up of Multimodal Logistics Parks at four locations through PPP mode will be awarded in 2022-23

For road transportation, PM GatiShakti Master Plan for Expressways to be formulated in 2022-23.

In the next three years, a hundred cargo ports supporting multimodal logistics facilities would be built. Railways could provide effective logistics assistance to small farmers and SMSME, and take the lead in integrating postal and railway networks for smooth parcel movement.

In 2022-23, 2,000 kilometers of infrastructure will be put under Kavach, a native system for protection and expansion of existing. Bharat Vande Bharat During the following three years, trains with improved energy efficiency and ride comfort will be developed and constructed.

Contracts for eight ropeway projects under the National Ropeways Development Programme will be granted in 2022-23 through the PPP approach. The government’s commitment to infrastructure is reflected in anticipated capex of 2.9 percent of GDP in FY23, compared to an average of 1.7 percent in the five years preceding to the pandemic.

Over the last few years, the government has made a deliberate effort to streamline the taxation system and administration in order to improve compliance. The introduction of the Goods and Services Tax (GST), unaccountable interactions, the phase-out of outmoded exemptions and deductions, the option of an alternative tax regime, E-filing, and other initiatives are aimed at making it easier to do business, encouraging private investment, reducing tax litigation, and so on.

This budget stands out because, aside from minor revisions to the NPS exemption for state government employees, import taxes on electronics manufacture, steel scrap, chemicals, and other items, it has no major tax changes, which is a welcome development. The government has also imposed a 30% tax on income derived from the transaction of electronic cryptoassets such as cryptocurrency and non-fungible tokens (NFT). The budget also extended incentives previously offered to particular sectors, such as new manufacturing entities, start-ups, and custom duty assistance to small steel mills, chemical enterprises, and so on.

Post the pandemic, economic growth was significantly impacted and there was need for fiscal intervention to support growth, especially given the backdrop of weak private investments, impact on unorganised sectors, soft consumption, etc. Keeping this objective in mind, Indian Government prudently delayed the fiscal consolidation and now targets to reduce fiscal deficit to less than 4.5% by FY26 instead of 3% by FY23. Further, government has provided leeway to States to keep fiscal deficit at 4% of GSDP in FY23 including conditional 0.5% of GSDP on doing power sector reforms.

The revised estimate of budget deficit for FY22 is 6.9% of GDP, somewhat higher than planned projection of 6.8%. In addition, fiscal deficit is expected to fall to 6.4 percent in FY23. Reduced food plus fertiliser subsidy (from 1.9 percent of GDP to 1.2 percent) are driving the fiscal deficit reduction, which is somewhat offset by increased capex investment (from 2.6 percent of GDP to 2.9 percent of GDP). Furthermore, fiscal deficit projections appear acceptable, with realistic revenue and expenditure assumptions.

India’s government debt level to GDP is anticipated to remain elevated (90 percent) in the short future, owing to limited consolidation. However, once growth picks up, it’s expected to moderate. Bond markets responded unfavorably, with Gsec rates rising 15-20 basis points, as a result of higher-than-expected borrowing and lack of clarity on unresolved difficulties over Gsec participation in global bond indices. Funding the budget deficit could be difficult given the projected increase in credit growth, rapid tapering by the US Fed, and the assumption of little incremental help from the RBI, among other factors. The borrowing program, however, can be supported by abundant liquidity and the prospect of resolving concerns related to entry in global bond indices. Furthermore, we expect that economic reform beyond FY23 will be dictated by recovery in growth, increased private sector investment, and increased credit demand, among other factors.

Following the recent surge, India’s market capitalization is now at 90% of GDP (based on CY 2023 GDP), that is fair considering the cheap cost of capital. Furthermore, the NIFTY 50 has returned 14.2 percent and 11.4 percent CAGR over the last ten and fifteen years, respectively, which is much in pace with ostensible GDP growth.

The Union Budget for the years 2022-23 is development plan with strong emphasis on investments. Continued improving economic activities, increasing growth prospects, high profitability, and other factors support good view for stocks in the midedium to long term. However, given the current values (PE of 18x based on FY24 earnings predictions), it’s a good idea to keep returns expectations in check. In the medium to long run, we expect equities to deliver returns that are in step with nominal GDP growth. The rising cost of capital, particularly in the United States, is headwind for capital markets. If rising inflation persists, monetary tightening and yield increases may be necessary.

The Union Budget for 2022-23 puts emphasis on facilitating growth through increased capital spending. Estimated fiscal deficits of 6.4 percent of GDP in FY23 & 6.9 percent of GDP in FY22 were somewhat higher than the market projections. As a result, the gross market borrowing program for FY23 is much larger, at INR 14.95 trillion, than it was in FY22RE, at INR 12 trillion. As a result, the 10-year G-sec yields increased by 15 basis points.

Furthermore, the Union Budget for 2022-23 is delivered at odds with the background of global fiscal policy normalization, which is expected to push yields higher. Unlike the previous two years, when RBI monetary policy aided the satisfactory conclusion of government borrowing programmes, this year is expected to be more difficult, as the RBI begins to normalize its monetary policy.

High supplies of markets borrowings, normalization of monetary policy, and lesser RBI intervention are all projected to keep rates rising in the future. The danger to this perspective is that the budget deficit for FY23 is smaller than predicted, either as result of decreased spending or higher-than-expected tax receipts. Further participation of India sovereign bonds in global bond indexes might greatly lessen yield pressure.

The Budget is being presented at a period when India’s unemployment rate is at an all-time low. In India, record instability and failing development not only increased income and wealth disparities, but also caused a spike in the actual amount of impoverished people – an unprecedented and humiliating reverse in poverty alleviation. There was lot of dispute about the government’s strategy in the years preceding up to Covid-led technical recession.

The Economic Survey, which was released only one day before Sitharaman is set to present the Union Budget for 2022-23, emphasized the need for government to offer a buffer against pressures such as global uncertainty, the cycles of liquidity withdrawals by major financial institutions, and so on.

According to survey, requirement actions alone will not suffice in government’s efforts to develop a post-Covid economy. This is due to the fact that a number of aspects such as customer behavior, technological developments, geopolitics, supply chains, and climate variability might socialise in unexpected ways, as well as India will have to create a resource-side strategy to deal with post-Covid world’s long-term unpredictability.

Previous year, govt decided to establish an asset reconstruction firm to take over banks’ bad debts, allowing them to fund economic recovery. This idea to create a “bad bank” was approved just days before Union Budget 2022-23. The proposed ‘bad bank,’ according to State Bank of India Chairman Dinesh Khara, has “now” secured all essential permits, as well as from the Reserve Bank of India. He said the company is ready to start operations, with 15 cases totaling Rs 50,335 crore to be deposited by March 31.

The views indicated here are as of February 1, 2022, and are based on the Honorable Finance Minister’s Budget recommendations presented to Parliament on February 1, 2022. When the Budget is passed by Parliament then notified by the Government, the Budget plans may change or diverge. The information is provided for informational purposes only and does not include a full disclosure of all material facts pertaining to the Indian Budget.

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