Union Budget 2021-22

Finance Minister Sitharaman unveiled the Union Budget 2021-2022 on February 1, amid the ongoing COVID-19 pandemic and related economic shock. Though it increases the fiscal deficit significantly compared to the pre-pandemic levels, we believe it presents a credible policy framework for the coming fiscal year and timely shift from short-term disaster relief to medium- term economic recovery. The FY22 budget maintains the government’s expansionary fiscal policy, with a headline fiscal deficit of 6.8 percent in FY22, well above the baseline fiscal consolidation targets of between 3.0 and 3.5 percent though also well below the outlier deficit of 9.5 percent realized during this past year. The government will finance this deficit through a sharp increase in market borrowing, up 54 percent in volume terms from pre-pandemic levels. Importantly, the composition of this deficit spending has shifted somewhat, away from subsidies and toward capital expenditures that can have a greater positive impact on medium-term growth. After spending nearly 13 percent of GDP since last March on several rounds of extraordinary short-term relief, the FY22 budget focuses increased investment on medium-term priorities in public health, employment generation, affordable housing, support for small business, and development of the rural economy. Total capital expenditures are budgeted to rise by nearly 50 percent, to $71.3 billion, with significant capital outlays in defense, railroads, roads and bridges, public works, and power.
The FY22 budget maintains the government’s expansionary fiscal policy, with a headline fiscal deficit of 6.8 percent in FY22, well above the baseline fiscal consolidation targets of between 3.0 and 3.5 percent though also well below the outlier deficit of 9.5 percent realized during this past year. The government will finance this deficit through a sharp increase in market borrowing, up 54 percent in volume terms from pre-pandemic levels.
Importantly, the composition of this deficit spending has shifted somewhat, away from subsidies and toward capital expenditures that can have a greater positive impact on medium-term growth. After spending nearly 13 percent of GDP since last March on several rounds of extraordinary short-term relief, the FY22 budget focuses increased investment on medium-term priorities in public health, employment generation, affordable housing, support for small business, and development of the rural economy. Total capital expenditures are budgeted to rise by nearly 50 percent, to $71.3 billion, with significant capital outlays in defense, railroads, roads and bridges, public works, and power.
On the revenue side, the budget assumes the recent recovery of GST (Goods & Services Tax) receipts will continue and gross tax revenue will grow by a healthy 14.4 percent over last year, supplemented by a significant increase in privatization revenue. Though the government has a history of overpromising and underdelivering on its privatization plans, the heightened fiscal pressures this year increase the chance of actual asset sales in a number of non-strategic sectors. There no major new corporate taxes or tariffs announced, though customs duties were raised on some agricultural and electronic inputs.
The budget also includes a number of significant policy proposals. For the insurance sector are proposals to increase the cap on foreign direct investment to 74 percent, relax management control restrictions, and privatize one public general insurance company. For banking, the government announced a plan to recapitalize those public banks that are still struggling and to sell off controlling stakes in at least two public banks that are solvent and profitable. There are also plans announced to create a Development Financial Institution, with an initial investment of nearly $3 billion, plus a number of other initiatives intended to boost liquidity in the corporate bond markets and facilitate long-term debt financing for infrastructure. Other measures announced will simplify the corporate tax code and dispute resolution framework to improve the business climate and stimulate further investment, and a tax exemption for start-up companies has been extended for another year.
The long-term impact of each of these proposals will depend on the specific details of implementation, but on the whole we believe the FY22 budget presents a positive framework for economic recovery and greater foreign investment in India.

Union Budget 2021-2020 At A Glance ($bn)

2019-2020 Actual 2020-2021 Projected 2021-2022 Budgeted change
Revenue
233.7
213.5
263.5
23%
Expenditure
358.1
460.0
464.4
1%
Fiscal Deficit
124.5
246.5
200.9
% GDP
4.6
9.5
6.8
Total Capital Expenditure
51.69
47.91
71.30
49%
Of which Defense
14.81
17.93
18.01
0%
Of which Railways
9.04
3.86
14.25
269%
Of which Roads and Bridges
9.43
11.58
13.45
16%
Of which Public Works
0.17
0.23
0.35
53%
Of which Power Projects
0.10
0.08
0.10
19%
Of which Telecommunications
0.02
0.03
0.04
22%
Source: Ministry of Finance, Annual Financial Statement of the Central Government 2021-2022