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What to expect from the Union Budget 2022?

So, the Union Budget will be announced next week. What are the major expectations from this budget? We will try and discuss some of these in this week’s newsletter edition.

Usually, budgets have become less important over the past many years. Any major decisions can be taken outside of the budget as well – like Corporate Tax Rate Cut, or GST rationalizations. Last year was an aberration in this trend, since the government clearly suggested in the Budget that they are going to focus more on spending and growth, and hence let the fiscal deficit run high over the next few years. The markets liked it, since it meant more spending, after years of neither spending properly, nor being able to manage fiscal deficit.

Now what to expect in this year’s budget?

This year, the tax collections have so far exceeded the expectations – both on Direct and Indirect tax front. It remains to be seen if this was a jump after the last year’s dip, or if the earnings and economic activity are sustainable. If the government expects the economic activity to sustain, then the tax collection targets for next year will be higher. This may give the government 2 options – reduce the tax rate a bit, or increase the spending, especially on infrastructure.

We think the latter would be more beneficial in the longer run. On the tax proposals, no change is expected in corporate tax, while GST is picked up by the GST council outside of the budget. Some minor rationalization in income tax may happen, but we don’t expect large scale changes there. This may mean continued spending by the government, and more on the capital expenditure front, since revenue expenditure had been higher in the past 2 years, so may not be increased significantly this year. This could be good for the infrastructure and allied sectors in general.

There may be some populist measures in spending, since there are about 5 assembly elections this year, with Uttar Pradesh being the most prominent one.

On the disinvestment front, the government is likely to fall short of last year’s target, but we expect that to be made up by higher tax collections this year, and the targets may be achieved in the coming year. We expect continued activity on disinvestment and privatization of PSU entities.

Sectorally, we expect good policies for sectors that are important for India’s infrastructure story. In addition, export oriented sectors and import substituting sectors will see benign policy environment. Think of Capital Goods, Steel, Textiles, Autos, Electronics, Consumer Durables, Tourism amongst the sectors that the government is likely to focus on.

All in all, we do not expect anything major that may be a surprise. But then, you never know! Let’s wait for 1st February to see if these is something interesting in store. We will come back in the next newsletter with the major points from the budget.


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