Budget expected to tread a fine line between populism and pragmatism

Come February and the whole nation wants to know how the Finance Minister intends to make the proverbial rupee come in and go out. Every stakeholder – from corporates to households - line up their expectations in the hope of a favourable verdict. Dalal street is no exception.

Talking of 2022, we are yet living in the shadow of the pandemic, although much better prepared in the wake of the second wave learnings and the majority of the population is already vaccinated. The economy is getting back on track and hence the Street expectations are linked to measures that will boost the economy on the way forward.

Given the challenges at hand, we expect the Budget to tread a fine balance between populism and pragmatism. Having said that, we also need to widen the tax base to ensure better collections rather than achieving them through frequent rate hikes. Fiscal consolidation is also an aspect to be focused on for long term sustainability.


From the stock market perspective, given the growing retail participation - both through direct investments and via mutual funds, ETFs, SIPs , ULIPs and other wealth building platforms - the most vocal of all expectations is the reduction in, if not removal of the Securities Transaction Tax (STT), besides a drop in stamp duty charges, GST levies, and taxes on dividend incomes. These measures would have a beneficial impact on retail investing.
Given the co-existence of both STT and long-term capital gains tax, investors would certainly expect some relief on this front which will also encourage them to put their long term savings into credible stock market avenues. A 80C incentive thrust besides a standard deduction hike may also have a beneficial effect on boosting the savings habit among households. Given that the pandemic has caused a serious dent in livelihoods, any relief in personal taxation will go a long way in boosting grassroots sentiments.

Sectors like Infra and housing might be focused as they help in job creation at base level. Tax benefits on housing loans and PPF limit hike are among the measures the middle class would look forward to for sure. Minimizing the cost of transactions would be one of the more prudent ways to boost the buoyancy of the bourses. It will also lure more foreign investors into India, as also encourage pension funds to invest into the stock market. More clarity on the tax on interest income will help the larger cause of FPIs who are paying a higher tax rooted in a conservative approach.

The budget is also expected to lend further clarity on the prior Budget announcement of the inception of a National Asset Reconstruction Company. If the Budget suitably tweaks the Insolvency and Bankruptcy Code, the retail investor will stand to gain in a big way. Given the time lag between filing and admission of insolvency applications, if disclosures to stock exchanges are mandated to be timely, it will help the larger cause of the retail investors, as would the resolution of financial service providers, which is a critical area seeking fast redressal.

Talking of the industry, we expect the announcement of Production-linked incentive (PLI) schemes across sectors as a seamless continuation of the PLI paradigm shift which happened in the pandemic debut year of 2020. The ailing MSME sector also needs a booster shot to lock horns with the challenges of an economy fighting hard to break the shackles of the pandemic.

We expect the government’s capex share in GDP terms to grow in key sectors like road, rail and port infrastructure, heavy engineering, housing, construction and building material space, electric vehicles, and consumer goods. The traction in tax revenue collections triggers some good news on the fiscal deficit front. Although the disinvestment target is still a far cry, we expect an aggressive government approach to disinvestments given that a conducive environment has already been created for the same, with the market at a mature phase to acknowledge the prudence behind India’s PSU disinvestment spree. This will also help the government arrive at a realistic fiscal deficit target to boost growth while keeping inflationary risks at bay.

The Budget is expected to make some announcement in the context of India's inclusion in global bond indices which is now imminent. Whether this announcement would be the withdrawal of capital gains tax on foreign bond investments remains to be seen. This will increase foreign investor participation in Govt. bond schemes. Another landmark decision for the financial sector would be the inception of the bad bank which is a sustainable way to resolve the sticky NPA issue.

The specialised agency with a more targeted set of rules and regulations for NPA resolution will augur well for the whole banking system which is currently grappling with the twin challenges of credit generation and loan recoveries at one time. The priority sector landscape can be suitably widened to include many other key sectors of the economy like health and education infrastructure especially in the wake of the pandemic.

Targeted measures can be introduced to ease the liquidity risks faced by NBFCs. For the metals industry, reduction in custom duty would help fight the sticky challenge of ballooning input costs. The hospitality and tourism sector will look forward to any announcement of tax incentives, cheaper loans, and capital expenditure concessions to cope with the pandemic pressures which have impacted their prospects in a brutal fashion. More FDI participation is key to sustainable economic growth, and a few relaxations in the FDI caps could pave the way for the seamless flow of capital for key domestic projects across different sectors. Infrastructure Investment Trusts and REITs would expect a supportive boost.

To lock horns with the rampant biological challenges, India needs to build a robust health infrastructure, and a more aggressive use of digital technology and tools. A hike in healthcare expenditure to around 2.5% of GDP is hence imperative. Given that the threat of mutations has not been countered as yet, India needs to invest in tech-enabled initiatives like predictive genomics to avert the large-scale havoc experienced during the second wave. We need more funds to be devoted to strengthen our capacities and capabilities towards preventing infectious diseases and other biological hazards.

(The author, Mr. Anshul Arzare, is Chief Business Officer, YES Securities)