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What to expect from the budget?

We are in the second half of January and the countdown for the Budget has begun. Along with that people’s expectations from the budget too will start rising, especially in view of multiple issues the economy is currently facing. No doubt the economy is in far better position than it was last year before the budget though still it cannot be called normal.

Tax collections may exceed budget estimates

Further, fresh restrictions being introduced by several states to curb the spread of Covid-19 may temporarily interrupt the economic recovery and moderate the growth of tax collections in December-March FY2022 relative to the trend seen up to November 2021. As a result, flattish personal income tax collections in the last four months of this fiscal may be expected, given the high base of March 2021, related to the taxes received under the Vivad se Vishwas scheme. On the other hand, corporate tax collections may grow by 5-10% on a YoY basis in the remainder of this fiscal, benefitting from the continued formalisation of the economy amidst the uncertainty engendered by Omicron. On the whole, corporation tax and personal income tax collections may exceed the FY2022 BE by 17% and 3%, respectively, aggregating to Rs. 1.08 trillion led by corporation tax.

Last year the Govt. had announced multiple stimulus packages to rejuvenate the economy impacted by the COVID pandemic and to a large extent, these policies helped the Indian economy to recover from the recession. The government followed the counter-cyclical fiscal policy to stabilise the business cycle which proved to be successful.

A closer scrutiny reveals that technology and large capital firms have recovered faster than small businesses and industries directly affected by COVID-19, such as hospitality. Though these stimulus packages have given a pace to the recovery, it also resulted in a higher inflation rate.

Despite the heavy odds (posed mainly by the resurgence of Covid-19), the expansion in FY2023 is expected to be more meaningful and tangible than the base effect-led rise in FY2022.

Budget may focus growth-supportive expenditure

The FY2023 Union Budget may focus on maximising growth-supportive expenditure, including a pickup in capex and infrastructure spending and adequate allocations for the PLI schemes. It’s reasonable to anticipate a step-up in the allocations for health infrastructure and healthcare spending, a slight increase in the outlay for vaccinations, amidst a rationalisation of CSS schemes to ensure continued fiscal consolidation.

No major changes in direct taxes expected

In terms of tax policy, it may be too much to anticipate any major changes in direct taxes, in pursuit of a stable and predictable tax regime. However, one can foresee a continued move to correct inverted duty structures given the government’s recent efforts to support local manufacturing of goods, while at the same time focusing on reducing evasion as well as the compliance burden on businesses and individual taxpayers. However, with recovery in private consumption still lagging pre-pandemic levels, one can expect some support at the margin for private consumption. Incentives to support domestic personal consumption may include higher standard deduction and Leave Travel Concession cash vouchers for central government employees to support domestic travel.

The continued shift towards prioritising capital expenditure by the government suggests that Centrally Sponsored Schemes and Central Sector Schemes are likely to be rationalised to further improve the quality/efficiency of expenditure. While the latter is fully funded by the Union government, the former set of schemes such as MGNREGA, PMGSY, etc. involve funding by both the Centre and the States.

Globally, the US Federal Reserve meeting minutes signalled the central bank might raise interest rates sooner than expected. This is a signal that the Indian Government might also think about lessening the liquidity from the market. Above all, the MSME sector, one of the main job creators in the country, is drifting and needs government protection for survival. The budget should contain some concrete measures to revive the sector. An early analysis suggests that the impact of an Omicron wave may be limited to Q4 FY2022 in terms of the duration of the surge in fresh cases, as well as the economic impact given the better preparedness of governments, the health care system and households. It’s most likely that the impact of Covid-19 may start receding from the beginning of next financial year and as a result, we may get to see normal busy season after a gap of two years. This in itself may be a great news for the economy.

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