Interactive | Budget FY22: An attempt to read FM’s mind

How could Budget FY22 look like: An attempt to read FM’s mind

This year's Budget is more significant than its predecessors

Finance Minister Nirmala Sitharaman. Credit: PTI Photo

Finance Minister Nirmala Sitharaman’s remarks of a “Budget like never before” may have raised hopes of a big spending plan in the Budget this year, but the resources at the hands of the government are too little to fulfil all aspirations. The stakeholders will look at her Budget for credible sources of revenue, which is hard to get when the economy has slowed to an unprecedented level due to Covid-19 pandemic.

The government cannot raise taxes across the board because the pandemic has hit the poor and middle-income group below the belt. It may increase taxes in certain categories and will have to depend largely on non-tax revenues and market borrowings for the post-Covid reconstruction of the economy. Whichever way the finance minister chooses to raise resources, one thing is certain that the crisis-ridden economy cannot move further without increased government spending. Only government spending can revive an almost muted demand as also the private investment and business sentiment.

Budget Focus

Rebuilding the Covid-19-infested economy, reviving growth.

Getting back lost jobs during the pandemic.

Looking for ways to generate revenues

without taxing the common tax payer.

Extending support to Covid-19-impacted sectors.

Key challenges

Reviving demand

Prioritising govt spending

Increasing investment in infrastructure with high employment elasticity

Setting right India’s creaking health infrastructure

Providing affordable healthcare

Building a safety net for India’s vast informal sector severely hit by the pandemic

Increasing avenues for rural jobs

Keeping banks healthier

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Major expenditure likely in the Budget

1. A 25 per cent increase in capital expenditure aimed at building infrastructure including health infra. Last year, capital spends were targeted at a little above Rs 4 lakh crore.

2.  A large chunk of revenue expenditure to go into the government’s vaccination programme, research and development. Up to 10% increase in revenue spends, which could be above Rs 26 lakh crore.

3. Among the three major subsidies of food, fertilizer and petroleum, food to get a large chunk of budget allocation due to pandemic related free food distribution to poor and migrant families. But a part of the large food subsidy to be offset by savings of around Rs 38,000 crore on account of fuel subsidy in 2020-21. The food subsidy bill may near Rs 1 lakh crore.

4. Allocation on rural employment MNREGS, which provided alternative employment to migrant workers in the midst of the pandemic, to see an increase. The Budget may allocate over Rs 1 lakh crore.

5. The banking sector, which is staring at bad loans accumulated due to Covid-related stress on various sectors and individual businesses, may see substantial recapitalization amount. The capital infusion may top Rs 35,000 crore.

6. More direct transfers or spendings on social welfare to economically weaker sections to fight the impact of a pandemic.

Major Budget allocations towards skilling nurses, paramedical staff, caregivers, development of telemedicine. This can be done through a public-private partnership more speedily and effectively.

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Major expectations

1. Tax incentives and tax holidays for pandemic-hit manufacturing and services sector.

2. Reduction in GST on severely impacted sectors like tourism, hospitality, retail, transportation and logistics.

3. According priority sector status to Healthcare.

4. A 10 year tax holiday for start ups in health, infra and healthcare sectors.

5. Tax exemption on domestic tourism. Incentives to promote domestic tourism while international borders are closed. Promotion of medical tourism.

6. Data suggests over 2 crores 50 lakh Indians travelled overseas in 2019. Generating interest among these travellers through tax exemption measures to explore their own country.

7. Work from home – enhance digital infrastructure

8. Tax Deduction for expenses incurred by salaried employees while working from home

9. Raise the Income Tax deduction limit under Section 80C of the Income Tax Act up to Rs 3 lakh to incentivise household savings, which has surged more than 20 per cent due to Covid curbs.

(Currently, a deduction up to Rs 1.5 lakh can be claimed for investments made in various instruments like PPF, Provident Funds, five-year bank fixed deposits, Life Insurance premium paid among others).

10. Increase income tax deduction limit from Rs 1.5 lakh to Rs 3 lakh per annum to put more money into the hands of salaried class, which in turn could raise demand for goods and services.

11. Real estate sector, which has yet not revived from the demonetization, GST and RERA, demands more tax rebate on affordable homes among other things.

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Manufacturing

1. Incentive to encourage Manufacturing to go local — raise in import duty of finished products in electronics, telecom sectors as also rubber, leather and plastic goods.

2. Tax benefits, including tax holiday to startups in the manufacturing sector.

3. Announcement of more production-linked benefits in manufacturing

Services

1. Tourism sector: reduction of GST to 5%.

2. Tourism infrastructure: Developing world-class tourism destinations

3. Tax exemption on domestic tourism

4. Incentives to promote domestic tourism while the international borders are closed

5. Medical tourism promotion

6. Restructuring loans to the hospitality sector

Health

1. Major tax relief to startups and manufacturers of health equipment

2. Tax benefits to frontline health workers and social welfare schemes for them

3. Provision to raise money for setting up solid health infrastructure. Issuance of long tenure bonds, Covid bonds, encourage public-private partnership in erect health infrastructure.

4. Budget allocations for Covid vaccination drive

5. Incentives to make health insurance affordable

6. Work from Home

7. Deduction or exemptions for additional expenses incurred by salaried employees during work from home

8. Tech investment for robust infrastructure in tier-1 and tier-2 cities to enable work from home

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Income Tax

1. Limited scope to increase income tax deduction limit under 80-C due to a fall in government revenues but a promise to bring the Direct Taxes Code (DTC) soon.

2. Limit of deduction on the investment made in various small savings instruments may be doubled to Rs 3 lakh per annum as govt’s borrowing from small savings likely to increase to fund the post-Covid reconstruction of the economy.

Rural focus

1. Increasing avenues for Rural employment and boost rural demand, which is an important driver of overall consumption.

2. Making rural India digitally advance

3. Renewed focus on farm gate infrastructure

Others

1. With the deadline for Housing for all nearing (2022), More incentives for the affordable housing sector

2. Relief for Telecom companies for laying infrastructure in rural areas

3. Incentives for bringing in 5G spectrum

4. Removal of inverted duty structure for the textile sector

5. Funding Budget promises

-Big ticket disinvestment programme of close to Rs 3 lakh crore

-In line for share sale: Air India, LIC, BPCL, Shipping Corporation among others

-Aggressive Asset Monetisation

6. Govt has identified six airports in Tier-2 and Tier-3 cities

7. International cruise terminal at Goa port

8. Close to 150 passenger trains

9. At least 50 railway stations and transmission lines valued over Rs 10,000 crore.

10. Telecom towers of BSNL and MTNL

11. Fiber network of BBNL

12. Private investment may be allowed in almost all sectors barring less than half a dozen strategic ones. – banking, nuclear, space and defence

13. Covid cess for affluent

14. Expected revenues from AGR payments by telecom companies

15. Savings by various ministries

What the Budget needs to do but may not do

Reducing Excise duty on petrol and diesel as it may shore up the government’s revenue kitty but may also contribute towards rising in inflation. The latest inflation print suggests inflation is higher by 40 basis points in December at 5 per cent. The spend on oil is gradually crowding out the spend on health, grocery and other utilities. This will in the long run also impact discretionary spends.