What to expect from the most important Union Budget in the past few years?

The Union Budget this time will be particularly important for us as it has to take a call on several important issues which are clouded with uncertainties. Post-pandemic surprises can upset calculations and the government has to be prepared for extreme and unforeseen situations. The second wave came as a shock just after last year’s Budget was announced. But the third wave appears to have been less disruptive.

As individuals there will be expectations on several fronts. Expecting tax rate slabs to be changed may be a bit ambitious because there will always be the resource side constraint for the government. But given the evolving situation in the last two months, we may expect the standard deduction on income to be enhanced. It is supposed to cover for travel to work and medical expenses. These costs have gone up sharply in the last three years and are unlikely to relent even this year and hence can be justified on grounds of keeping pace with inflation. A doubling to Rs 1 lakh will be useful here.

Industry in general will again not really expect tax cuts as the corporate tax rate was rationalized in 2019 with two options, with the lower regime excluding exemptions. This time the interest will be on whether there is anything more specific on PLI or asset monetization plan. Also, the question would be as to by how much the government will increase its capex this year considering that the private sector is not spending much on capital formation. This has become a feature in the last three years where the Centre has to take the onus on capital formation.

The weaker sections will be looking to see if there are enhanced budgetary outlays in three areas. The first is food relief which was provided in the last two years. If the government works on the assumption that there would not be any severe lockdown even if there is a new wave of Covid, then there would less need to go in for any further allocations through subsidy for free food.

Second would be the MGNREGA programme, where the outlay in the last 2 years were on an average above Rs 1 lakh crore. It was necessitated on grounds of the large-scale joblessness and migration which took place due to lockdowns which in turn meant that the government had to support them by increasing this allocation.

The third is the PM Kisan scheme which gave Rs 6000 to the beneficiaries on an annual basis. This was introduced even before the pandemic and hence the call will be whether it should be continued or persevered with.

Specific sectors in the services segment will be looking for some direction in terms of assistance being provided by the government. The ECLGS has been a fairly effective scheme which channels funds seamlessly from banks to the borrowers as the government stands as a guarantor.

As industries like hospitality, entertainment, tourism, retail malls have been affected three times now due to the lockdowns, they would like to be included in the scheme. The government had already widened the allocation for this scheme to Rs 4.5 lakh Crore and as almost over Rs 1 lakh crore has not yet been utilized in the form of sanctions, there is room for inclusion of more sectors.

Economists will be looking out to the assumed GDP growth rate as this would form the edifice of the Budget on which all forecasts can be made as both revenues and expenditures get tied to this number. It is more likely to be around 13% which will form the base of revenue projections.

The market of course will be most concerned with the overall borrowing programme of the government. The deficit is likely to be still in the 6% plus range as the target of 6.8% for FY22 would be reduced gradually by the government. The FRBM norms stipulate a reduction to 4.5% of GDP by 2025-26.

Therefore, assuming that the four-step reduction will be there in the next four budgets, a reduction of 0.5% per year may be expected. However, this would also mean a substantially large borrowing programme of above Rs 12 lakh Crore for the third successive year. It is more likely to be around Rs 13 lakh crore for FY23.

What this means for the market is that if the borrowings are going to be high, then the pressure on interest rates will persist considering that FY23 will also see a revival in demand for credit which in turn will tighten the liquidity situation.

While presently there is surplus liquidity in the system the RBI is already thinking of rolling back these surpluses in a calibrated manner; there is reason therefore for one to believe that liquidity will tighten in the second half of the year.

Therefore, arguably this year’s Union Budget will be the most important budget in the past few years for all sections of the economy. It will also be a prelude to the RBI policy that will be announced subsequently where a call on interest rates will also be taken besides a commentary on the stance, which today is more important than the decision on interest rates.

(The writer is Chief Economist, Bank of Baroda and author of Hits & Misses: The Indian Banking Story. Views are personal)