Union budget FY22 will be announced on Feb 1, 2021 and will gather interest to get a signal on post-crisis fiscal temperament. Edelweiss expects FY21 fiscal deficit to be 7% of the GDP with a promise of glide path ahead. While fiscal austerity is not prescribed, the rising debt burden will limit fiscal counter-cyclicality. In that sense, the budget is likely to be a fine balancing act.

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On the macro front, Edelweiss will be on a lookout for:

a) An expenditure growth of at least 13% in FY22
b) Revenue expenditure (ex of interest payments, salaries and pensions) and capital expenditure
c) outlook on Non- tax revenues and disinvestments
d) a credible borrowing plan.

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Receipts: FY21 to see a shortfall of INR 5.5 trillion+, FY22 to see a normalization:

FY21 will see a fall back in tax revenues owing to the growth contraction. What is more worrisome is the fall in non-tax revenue (lower RBI dividends) and inability to meet disinvestments targets. While tax revenue will rationally normalize with economic activity coming back, it is the estimates of non-tax revenue and divestments that will be a key needle mover and must be closely watched.
In the Atmanirbhar packages, FM has also announced plans of privatization, delineating different approaches to “strategic” (16 such sectors are identified) and “non-strategic” sectors, creating an expectation of higher disinvestment projections for FY22. As per the 15th Financial Commission, the share of states in the centre’s taxes is recommended to be decreased from 42% during the 2015- 20 period to 41% for 2020-21, which will further give some buoyancy to net revenues.

Expenditure: A fine balance, but austerity not an option:

High interest costs, salaries and wages plus commitment to existing schemes leaves little scope for discretionary revenue spend and capital expenditure which has a higher fiscal multiplier. While this vicious circle will continue onto FY22, Edelweiss does prescribe an expenditure growth of at least 13%, taking FY22 expenditure to INR 34 trillion+. This will bring India’s expenditure to GDP ratio to 15% (from the last 3-year average of 13%), but is owed largely to contraction in GDP and remains significantly below peers. The continued support to the rural economy via PM KISAN and MGNREGA to allay farmers is likely but stressed sectors such as hotels and tourism will also need fiscal push to revive.

Tricky debt dynamics will demand a looser monetary policy:

FY21 state and central borrowing will be 12% of GDP. For FY22, this number still will be close to 10% of GDP (5.3% for centre and 4.5% for states). Such high government borrowings crowd out private investments and hinder the credit offtake in the economy. Having said that, financing expenditure through borrowing is the need of the hour.

Markets will be on a lookout for a credible borrowing plan, prescriptive options could be:

a) tax free COVID bonds
b) setting up of SPV via RBI
c) raising of money internationally at lower yields

India’s public debt to GDP in FY21 will be upwards of 85% of GDP and for sustainable debt management interest rates need to be kept lower while expenditure should be such that it revives Nominal growth. At the frontend, it requires a close monetary and fiscal coordination