This year, as Finance Minister Nirmala Sitharaman gears up to present her fourth budget on February 1, two factors could have informed and influenced the financial document. One, the elections in five states, including the high-voltage battle in Uttar Pradesh; these were expected and would have been factored in. While collating the basic numbers for FY2022-23, the officials in North Block could have gone for a popular budget replete with promises and subsidies. The other states going for polls alongside UP between February 10 and March 7 are Punjab, Uttarakhand, Goa and Manipur. The counting for all five states will be on March 10.
The second factor that could have dominated Sitharaman’s budget-making exercise is the third wave of Covid-19 that began to sweep the country from December. The very nature of the new surge, fuelled by the Omicron variant, has not been fully understood by virologists, let alone economists and the babus in North Block. Yet the size and intensity of the wave could alter budget estimate numbers — therefore a near-accurate prediction would be pivotal to precise budgeting.
NITI Aayog Vice-Chairman Rajiv Kumar tells ET that the Omicron wave is a fast-rising and a fast-declining one and its economic impact could be limited to January and February. “Disruptions this time are much less. So, my assessment is the GDP (gross domestic product) growth for 2021-22 will be 9-9.2%, a tad lower than expected,” he says.
Omicron and election are two elements that will likely shape Sitharaman’s forthcoming budget. And between the two, elections could have an upper hand, making it a popular budget with a rural skew, according to officials and economists ET has interviewed.
While FM may stick to the elements of her last budget, i.e., a robust capital expenditure (capex) expansion — she earmarked Rs 5.54 lakh crore for the core sector during the current year — Budget 2022 may have a slew of promises. As the ruling Bharatiya Janata Party (BJP) has more stakes in UP, predominantly a rural state and considered a bellwether for the 2024 Lok Sabha election, the focus of the document could well be rural.
“I guess there would be a lot of promises in this budget,” says Pronab Sen, economist and former chief statistician of India. “BJP’s slogan for UP is ‘double engine’. That means there will be attempts at the central level to come out with some national schemes which will be seen as ones benefiting a state like UP,” he says, adding that the document will avoid a direct reference to any poll-bound state.
Rumki Majumdar, an economist in Deloitte India, says, “Recognising the need for demand creation, government is likely to focus on creating jobs and upskilling the workforce.” She expects the budget to be a good mix of pushing growth and maintaining stability.
Now, assuming that Sitharaman announces a job scheme for rural youth or enhances the subsidies of an existing scheme, she would not spell out — due to the model code of conduct — that the move would benefit youngsters in UP and Uttarakhand. The messaging would only be implicit; campaign managers will carry the slogans forward.
“I guess there will be a lot of promises in this budget. BJP’s slogan for UP is ‘double engine’. That means there will be attempts at the central level to come out with some national schemes which will be seen as benefiting a state like UP”
A LEAF OUT OF JAITLEY’S BOOK?
One can perhaps look for clues in former finance minister Arun Jaitley’s 2017-18 budget, presented just 10 days before UP’s first phase of assembly polls in 2017. “My overall approach, while preparing this budget, has been to spend more in rural areas, infrastructure and poverty alleviation and yet maintain the best standards of fiscal prudence,” he said in his budget speech. Jaitley divided his budget proposals into 10 distinct themes of which at least four were apparently meant for voters in poll-bound states. These were doubling of farmers’ income, providing employment and basic infrastructure to rural population, energising youth through education, skill and jobs, and strengthening social security, health care and affordable housing for the poor and the underprivileged. He also promised the completion of 1 crore houses by 2019 for the homeless and those living in kutcha houses and reiterated the Stand Up India scheme that supports Dalit, tribal and women entrepreneurs.
It won’t be surprising if Sitharaman takes a leaf out of Jaitley’s book.
But that may not be enough. The budget would have a positive impact on voters if the FM succeeds in creating a feel-good factor. Would she offer some relief to middle-class taxpayers although relaxations in personal income tax will have a limited appeal among rural voters in UP or Uttarakhand? Or, would she hike the tax on the super-rich (at present the highest tax rate, including surcharge, on income is 43%) , mainly as a political message rather than as a tax mop-up tool?
ET spoke to three senior tax experts. Vikas Vasal, national managing partner (tax) in Grant Thornton, says, “Despite economic compulsions, if no tax rates are increased or no new taxes are introduced, it would be a big relief this year.” He adds that it will be a tightrope walk for the government to meet the expectations of different stakeholders and to meet fiscal targets as well. “We are still not out of the pandemic and do not know what is in store for the next fiscal year,” he says.
“While we are optimistic about economic growth, the possible risks include a surge in infections, inflation and low job creation. These can dampenconsumer spending and derail business investments.”
Sudhir Kapadia, EY India’s tax leader, says massive tax buoyancy seen this fiscal will have an uncomfortable base effect, meaning GOI may not be able to repeat a massive percentage hike in tax collection next fiscal (e.g., direct tax collection in April-November 2021 was Rs 7.2 lakh crore, 63% higher than a yearago period and 27% higher than the same period in 2019). But crafting a populist election budget will mean a steep rise in total expenditure. “Though political considerations would steer the government towards short-term measures like subsidies, it will do well to stay focused on the salutary, longer-term reforms announced in last year’s budget,” says Kapadia. Instead of new taxes, he says, “There is scope for simplification of personal income tax and capital gains tax.”
Another tax expert and CEO of Dhruva Advisors, Dinesh Kanabar, concedes that an election budget would mean higher allocation of resources to agriculture, poverty alleviation and water and power in rural segments. This, he says, may not necessitate additional tax proposals due to robust tax collections and focussed implementation of disinvestment. “Every year, before the budget, there is speculation on the imposition of wealth tax and inheritance tax. The government will have to walk a tightrope between the need to augment tax revenues and having a robust capital market which is a necessity for foreign fund flow and disinvestment,” he says.
Foreign portfolio investors will give a thumbs down for a subsidy-loaded budget. But for long-term investors, the budget day by itself is no longer a significant event, says Deepak Bagla, CEO of Invest India, a national investment promotion and facilitation agency. “Long-term investors look at the budget only to pick up overall trends — for example, whether it has an agriculture or infrastructure push,” he says.
All eyes will now be on February 1.