Phillip Capital says FY22 Budget will be icing on the cake

Phillip Capital acknowledges the calculated measures taken by the government and RBI in the Covid hit FY21 which aided economic recovery. Phillip Capital expects similar policy momentum to prevail in the Union Budget FY22 scheduled on 1st Feb 21. Primary factor to highlight is that Phillip Capital now expects FY21 fiscal deficit to be lower at 7% of GDP vs. earlier/consensus expectation of 8%. Downward revision is led by better tax collections owing to economic reversal and well managed revenue expenditure (expected).

For FY22, Phillip Capital estimates a fiscal deficit of 5.0% - meaningfully lower vs. FY21 on account of economic normalcy, higher disinvestment, and higher GDP growth rate (low base). Phillip Capital maintains their long-held stance (since July’20) that infrastructure development will be the core thesis of the government's efforts to stimulate growth, focusing on railways, defense, and roads. Asset monetisation and disinvestment will offer funding support for infrastructure projects in FY22 and onwards.

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Amidst normalcy and progress in rural India, Phillip Capital expects the government to rollback most of the cash/subsidy benefits offered in FY21 during Covid-crisis. That said, policy measures and new investment to develop agriculture and allied activity, rural economy and its infrastructure are here to stay and will gather pace. As anticipated, revenue expenditure of certain ministries was impacted in FY21 due to fiscal stress (funds were re-allocated to priority sectors), this will likely normalise in FY22. Government is expected to recapitalise PSBs to stimulate credit growth and offer fiscal support to covid-hit sectors like hospitality. Higher allocations will be made to fund Covid vaccination – this can be offset by reduction in sops offered to rural India in FY21.

While fiscal deficit for FY22 is estimated to drop by 200bps to 4.8% in FY22, this drop is attributed to higher nominal GDP (14%) growth assumption. In terms of fiscal deficit and government borrowing, value stays elevated in FY22 as well, thus Phillip Capital does not expect softness in yields owing to fiscal consolidation.

Assumptions for FY22:

Phillip Capital expects reduction in excise duty on petrol and diesel for FY22, other tax revenue segments are estimated to normalise, gross tax revenue growth estimated at 3.5%.  Phillip Capital are optimistic on strategic disinvestment in FY22, our estimate is at Rs 1200 bn (possible upside risk if LIC IPO is executed). Accounting for reversal of cash benefits and food subsidies in FY22, revenue expenditure is estimated to rise by 7%. Sharp yoy growth (25%) is baked in Phillip Capital’s FY22E for capital expenditure. Phillip Capital thinks overall expenditure to rise by 6%. Phillip Capital thinks Gross borrowing is expected to dip to Rs 10.6 trillion.