With the Union Budget for the 2022-2023 financial year being announced in a few days, the ICRA estimates that the Government of India’s total expenditure at Rs 38.2 trillion. With the economic recovery lacking durability, it is imperative to kick-start the investment cycle, create employment opportunities and improve domestic demand.
With a view to take care of capital expenditure and infrastructure spending, the Union Budget 2022 should ring-fence the funds that can realistically be absorbed by the aforementioned expenditure. Such spending can be partly financed through a further pruning of centrally-sponsored schemes and central sector schemes.
In terms of the expectations of key sectors, the Union Budget may address some of the pending demands and concerns to broaden economic growth.
For the automotive sector, continued focus on rural infrastructure development and greater allocation for income support schemes may continue. Besides, emphasis on technology adoption, green vehicles adoption, local manufacturing to achieve ‘Make in India’, a thrust on sustainability technology are likely. The second wave of Covid-19 in Q1FY22 has derailed the sector’s demand recovery, which will need to be boosted through tax and other incentives. Also rising cost of ownership and the semiconductor chip shortage need to be addressed. Further announcements to promote local manufacturing in relation to production-linked incentives (PLI) cannot be ruled out.
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In the banking and finance sector, more clarity on impending privatisation of IDBI Bank and two PSBs will be welcome. While further capital infusion in PSBs in FY2023 is unlikely after the Rs. 3.36 trillion infusion over the past six years, operationalisation and scaling-up of the National Asset Reconstruction Company Limited (NARCL) and the National Bank for Financing Infrastructure and Development (NABFID) will help channelise more resources to productive sectors. Liquidity/funding schemes for non-banking financial companies (NBFCs), which account for 25 percent of the credit exposure in the country, will have to be examined. Also, the creation of a permanent re-finance window from the RBI should be looked into. The Budget is expected to continue with some of the liquidity and guarantee schemes to ensure near-term funding availability for the NBFCs and to provide guidance on the medium-term support framework for the sector. The Housing for All Scheme too is likely to continue.
In the agri sector, enhanced support for improving farmers’ income is likely. Budgetary allocation to meet the estimated fertiliser subsidy outgo of Rs 1,300-1,400 billion for FY23 amid elevated international prices may be necessary. Clarity on the roadmap for improving domestic production of phosphatic fertilisers through policy changes is required. In addition, rationalisation of the import duty on phosphoric acid, ammonia and natural gas to improve competitiveness of the domestic fertiliser industry is necessary.
Of the more significant sectors, infrastructure needs increased budgetary allocation for various sub-sectors and the NHAI for timely implementation of the National Infrastructure Pipeline (NIP). Further, steps to ensure long-term funds and capital infusion to the NABFID and the National Investment and Infrastructure Fund (NIIF) are likely to play an important role. Steps to attract private sector investments, including speedier resolution of claims/disputes etc., will go a long way in improving private sector sentiments, which is expected to play a crucial role in the NIP. The Government may allow select infrastructure companies/finance companies to raise long-term funds in the form of Infrastructure Bonds/Tax-free Bonds.
In the oil and gas segment, rationalisation of cess, which currently stands at an ad-valorem rate of 20 percent, needs to be considered. Also, there is a need for creation/provision of a floor for domestic gas prices governed by the modified Rangarajan formula, as the cost of producing gas is higher than the price of gas. The industry has been demanding exemption of royalty, cost petroleum and profit petroleum from GST levy and exemption of exploration and development activities. The crude oil, natural gas and petroleum products have to be brought under the GST cover to avoid stranded taxes. To encourage use and consumption of LNG, customs duty on imported LNG should be reduced.
In the real estate sector, continuation and expansion of income tax benefits for housing loans can improve affordability. Further, increased budgetary allocations for housing schemes such as Pradhan Mantri Awas Yojana (PMAY) and concessions on income from renting of housing properties and removing taxation on notional rental income can further boost demand for new properties. More augmentation of budgetary allocation for the SWAMIH fund will support completion of the large stalled real estate projects in the country. The government could do well if it sped up the process of unlocking land bank with the PSUs and government agencies. On the commercial real estate front, more initiatives towards improving the ease of access to debt capital and enhance retail participation can channel more investments into this segment.
ICRA estimates the GoI’s fiscal deficit at Rs 15.2 trillion or 5.8 percent of the GDP in FY23. Adding the state governments’ fiscal deficit, which is expected to rise to 3.5 percent of GSDP (cap set by 15th Finance Commission), in light of the planned ceasing of GST compensation, implies a general government deficit of ~9.3 percent of GDP in FY23, requiring gross market borrowings of Rs 22.6 trillion. This is likely to put pressure on yields in the bond markets.
-- The author, K Ravichandran, is Chief Ratings Officer, ICRA Limited.
