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Budget 2022: fueling the recovery, prioritizing reforms

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Budget 2022: fueling the recovery, prioritizing reforms

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Budget 2022 comes against the backdrop of the third wave of Covid-19, critical state elections and a recovering economy. Revenue collection is good news for the government, but the rise in capital spending is expected to continue. While the scope of reforms in the 2022 budget looks positive, measures to boost domestic businesses and exports may lead to protectionism. The 2022 budget is expected to fuel economic recovery through continued reforms and capital spending.

Revenues and Expenses: Prioritize Divestments and Infrastructure Spending

Government tax revenues, especially direct taxes, have been impressive. But as the country suffers a pandemic surge, the fiscal deficit target is unlikely to see a major reduction in the 2022 budget. Reports indicate a fiscal deficit of around 6.3% to 6.5% of proceeds. gross domestic against 6.8% the previous year. The main method by which the government can seek to increase its revenue is through divestment.

Last year saw a record 34.5% increase in capital spending. As the economy rebounds amid the lingering pandemic, capital spending on infrastructure can serve as a tool to stimulate the economy. Social spending should also figure prominently in the budget. Welfare programs and infrastructure projects could target electoral states in hopes of electoral gains. As non-performing asset ratios of public sector banks (PSBs) improve, a welcome step for the government would be to jump on the recapitalization of BSPs this year.

Reform Expectations — Unfinished Business

Some reform measures in the budget announcement can settle unfinished business from last year’s budget. For example, the government has achieved around Rs 9,300 crore on its divestment target of Rs 1.75 lakh crore budgeted for the financial year 2021-2022. Pending divestments will continue and new entities may also be identified for divestiture. Last month, the Ministry of Finance issued guidelines for the implementation of the new policy for public sector enterprises in the non-strategic sector. The next steps are to identify the public sector companies to be divested. Here, the 2022 budget may offer a window into the potential pipeline for further divestment. In addition, the budget should allow for a course correction by announcing measures to resolve the obstacles in the regulatory framework surrounding the bad bank announced in the last budget.

Over time, the government has attempted to decriminalize offenses committed by small businesses. The decriminalization of violations of the Companies Act has been completed. The decriminalization of offenses under the Limited Liability Partnerships Act was announced in the last budget and completed in 2021. The next budget may announce additional offenses decriminalized under other remaining laws on the interface between businesses.

Reform Expectations — New Frontiers

Covid-19 has prompted the government to take reform steps and it is hoped that the reform trajectory will continue. As the repeal of the Farm Bills and elections approach in Punjab, observers will be watching the government’s agricultural reform strategy. Recently, there was talk that the government was working on a revamped version of the Financial Resolution and Deposit Insurance Bill. Therefore, there is a possibility of announcements related to the framework for resolution of bankruptcies of financial companies. Such a move can significantly strengthen the overall bankruptcy and resolution landscape in India and bring more stability to financial firms.

The Modi government has removed or increased many foreign direct investment ceilings. Therefore, there will be anticipation to see if there is further liberalization of the foreign direct investment regime. Notably, an increase in the PSB FDI limit is expected, primarily to facilitate PSB divestment. Further market-friendly and investor-friendly reforms may be needed to reverse the trend of recent months of decelerating foreign portfolio investment and FDI in India.

Clarity on cryptocurrency regulation and taxation of crypto assets will also be on the radar. A cryptocurrency regulation bill is expected to be tabled in the budget session. The Minister of Finance could offer guidance on India’s digital tax regime, possibly abolishing the equalization levy altogether, especially after India signed on to the BEPS 2.0 framework. Subsequently, India also reached a compromise with the United States on the equalization levy.

Will trade protectionism continue?

Tariff hikes have increasingly become a regular feature of the union’s budget. Last year, increases were seen for all products, and more than 400 customs exemptions were also reviewed for elimination. Exports have played an important role in India’s economic recovery. The government could provide a boost to increase exports through tariff hikes, local content mandates and other protections for domestic businesses. Notably, more production-related incentive programs could be announced, in addition to the 13 announced in the latest budget.

The budget is not simply a record of the government’s budgeted expenditures and revenues. It also paves the way for the country’s growth and reform trajectory. The 2022 budget will prioritize infrastructure, social spending and divestment while continuing to move forward on the path of reform.

— Kriti Upadhyaya is a research associate at the Wadhwani Chair in American-Indian Policy Studies at the Center for Strategic and International Studies (CSIS) in Washington DC. Opinions expressed are personal

(Edited by : Ajay Vaishnav)

Budget 2022: fueling the recovery, prioritizing reforms

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