What are the budget expectations?

The Union Budget 2021 is barely a few days away from now. This year, the budget holds all the more significance with rapid changes taking place in the market. Investors have either taken their respective positions or are doing the same as new developments come to the fore. This makes it important to have a look at what are the underlying dynamics as well as what the stock market is expecting from this year’s budget.

So, here are a few factors that will keep you posted.

The Curious Case of Fiscal Deficit

The key focus of the budget in FY2021 and even FY2022 is going to be around the fiscal deficit figures and whether there’s going to be a cutback on government spending or not. Sensibly speaking, it is going to be significantly higher than expected.

Last year, the fiscal deficit turned out to be 3.8% while the market estimate was around 3.6%. It goes without saying that it will be well above 3.8% this year. A few months ago, the market was expecting it to be around 8%. Thankfully, the figure has come down to 6.5% to 7% now.

In terms of growth in FY2021, the nominal GDP is expected to grow by 14% to 15% while the real GDP growth is pegged to be around 9% to 10%. The inflation estimate is about 5%. So, a good growth rate is expected next year.

However, the fiscal deficit is going to be high in FY2022 as well. The expectation is around 4.5% to 5.0%. As long as the deficit stays within 7% in FY2021 and 5% in FY2022, the market will react positively. Since we’re coming out of a pandemic, government spending is the need of the hour. People don’t expect any cutback on this front.

What is the market expecting?

1.       Infrastructure: First focus of the government is going to be on infrastructure. The government might continue to focus on building the infrastructure. We are not going to see any cutback on capital allocation in FY2021. In FY2022, there is expected to be a significant outlay for infrastructure. There is also a possibility of additional outlay for the National Infrastructure Pipeline in the budget.

2.       Housing: We could see greater allocation in the Pradhan Mantri Awas Yojana (PMAY) with a strong focus on its execution. In order to give the initiative a boost, the government can also increase the exemption on interest over housing loans for self-occupied property. It can perhaps be increased from the current INR 2 lakh limit.

3.       Rural and Agriculture: There is going to be continued thrust on the rural and agricultural space. So, we can see greater budgetary allocations for the rural sector. Certain provisions for the agriculture sector can be made.

4.       Income Tax: On the personal income tax front, it is likely that the government might restructure the tax slab and the deductions in Section 80C. However, the government might not have too much fiscal space to do so. It might be focusing more on the spending side.

5.       Manufacturing: In manufacturing, the government may continue introducing Production-linked Incentives (PLI) schemes for more sectors. It has already done that in the Atmanirbhar Bharat Abhiyan 2.0. We can also see a further increase in duties for imported items such as electronics, tires, etc. Various items also attract very low import duty. So, the government might impose import duties on them as well. The broader focus will be to give a fillip to domestic manufacturing.

6.       Cess and Surcharges: On the flip side, the government might introduce additional cess or surcharges to shore up its revenues. There is going to be a lot of expenditure due to COVID-19. Outlays will be made for the COVID-19 vaccination program. So, it can increase surcharges or include a COVID cess in this year’s budget. Such cess and surcharges could perhaps be targeted towards people earning above a certain threshold limit. If such introductions are made, their horizon can be one year to two years.

Now, it’s just a matter of time for our Finance Minister to come with her bahi-khaata and unveil this year’s economic roadmap of our nation. Let’s hope for the best!