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Union Budget 2022: FM must curb rising budget deficit and address key industry issues

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Union Budget 2022: FM must curb rising budget deficit and address key industry issues

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While the Union budget for the financial year 2022-2023 will be announced in a few days, ICRA estimates that the total expenditure of the Indian government stands at 38.2 trillion rupees. With the economic recovery lacking sustainability, it is imperative to revive the investment cycle, create employment opportunities and improve domestic demand.

In order to support capital expenditure and infrastructure expenditure, the Union budget for 2022 should set aside the funds that can realistically be absorbed by the above expenditure. These expenditures can be partly funded by further pruning of centrally sponsored schemes and central sector schemes.

As regards the expectations of key sectors, the Union budget could respond to some of the outstanding demands and concerns regarding the broadening of economic growth.

For the automotive sector, the continued focus on rural infrastructure development and greater allocation for income support schemes can continue. Also, emphasis on technology adoption, adoption of green vehicles, local manufacturing to achieve ‘Make in India’, a push 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 by fiscal and other incentives. The rising cost of ownership and the shortage of semiconductor chips must also be taken into account. Further announcements to promote local manufacturing in relation to the Production Linked Incentives (PLI) cannot be ruled out.

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In the banking and financial sector, more clarity on the imminent privatization of the IDBI bank and two OSPs would be welcome. Although further capital injection into PSBs in FY 2023 is unlikely after the Rs. The scale of the National Asset Reconstruction Company Limited (NARCL) and the National Bank for Financing Infrastructure and Development (NABFID) will help channel more resources into the productive sectors. Liquidity/funding arrangements for non-bank financial corporations (NBFCs), which account for 25% of credit exposure in the country, will need to be reviewed. In addition, the creation of a permanent refinancing window from the RBI should be considered. The budget is expected to maintain some of the liquidity and collateral regimes to ensure the availability of short-term funding for NBFCs and provide guidance on the medium-term support framework for the sector. The Housing for All program is also likely to continue.

In the agricultural sector, increased support for improving farmers’ incomes is likely. A budget allocation to meet the estimated fertilizer subsidy expenditure of Rs 1.3 trillion to 1.4 trillion for FY23 amid high international prices may be required. Clarity on the roadmap for improving national phosphate fertilizer production through policy changes is needed. In addition, the rationalization of import duties on phosphoric acid, ammonia and natural gas to improve the competitiveness of the domestic fertilizer industry is necessary.

Among the most important sectors, infrastructure needs increased budgetary allocation for various sub-sectors and the NHAI for the timely implementation of the National Infrastructure Pipeline (NIP). In addition, measures to secure long-term funds and capital injection to NABFID and the National Investment and Infrastructure Fund (NIIF) are likely to play an important role. Measures to attract private sector investment, including faster resolution of claims/disputes, etc., will go a long way to improving sentiment from the private sector, which is expected to play a crucial role in the NIP. The government may authorize certain infrastructure companies/finance companies to raise long-term funds in the form of infrastructure bonds/tax-exempt bonds.

In the oil and gas segment, rationalization of the tax, which currently stands at an ad valorem rate of 20%, should be considered. In addition, there is a need to create/provide 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 demanded the exemption of royalties, oil cost and oil profit from the tourist tax and the exemption of exploration and development activities. Crude oil, natural gas and petroleum products must be covered by the GST to avoid blocked taxes. To encourage the use and consumption of LNG, customs duties on imported LNG should be reduced.

In the real estate sector, maintaining and expanding tax benefits for housing loans can improve affordability. In addition, increasing budgetary allocations for housing programs such as Pradhan Mantri Awas Yojana (PMAY) and concessions on housing rental income and removal of taxation on notional rental income may further boost the request new properties. A greater increase in the budget allocation for the SWAMIH fund will support the completion of major property projects stalled in the country. The government could do well if it accelerated the process of releasing the land bank with the UAPs and government agencies. On the commercial real estate front, more initiatives to improve ease of access to debt capital and increase retailer participation can channel more investment into this segment.

ICRA estimates the Indian government’s budget deficit at 15.2 trillion rupees or 5.8% of GDP for FY23. (ceiling set by the 15th Finance Committee), in light of the planned discontinuation of the GST offset, implies a general government deficit of approximately 9.3% of GDP in FY23, necessitating gross market borrowings of Rs 22.6 trillion. This should put pressure on bond market yields.

The author, K Ravichandran, is Chief Ratings Officer, ICRA Limited.

Union Budget 2022: FM must curb rising budget deficit and address key industry issues

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