What steps can make Budget 2021 a path-breaking one?

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What steps can make Budget 2021 a path-breaking one?


The Union Budget comes in at a time when the economy has just started to recover from the severest fall in GDP growth in recent years, and the fiscal situation has expectedly deteriorated sharply due to the pandemic.

The Finance Minister has raised expectations from the forthcoming Budget. While there is not much scope for reforms on the direct and indirect taxes fronts, the main focus of this Budget could be on boosting manufacturing through schemes like PLI to create jobs. We expect increased allocation for the social sectors: MNREGA, education, affordable housing and health ministries.



Spending by consumers and businesses (capex) could be given a boost to kickstart a quick recovery. To meet the Covid vaccine-related costs, the Finance Minister could introduce a ‘corona cess’. The disinvestment target for the next financial year is likely to be ambitious as certain planned disinvestments for FY21 may spill over into the next financial year.

We expect the fiscal deficit to rise to 7.6 per cent of GDP in FY21. For FY22, we expect the Centre’s fiscal deficit target at 5.2 per cent. Nominal GDP may be expected to rise 13-15 per cent in FY22. To come back on the fiscal correction path, the government has limited resources to boost spending by a large percent. A lot of the reshuffling may be undertaken among expense heads, so that the needy sectors get funds while the overall fiscal discipline is maintained.

The PSU sector could be in focus as the government may push them to perform in a market-like manner. This could be done by giving their managers more freedom, linking their pay to performance and/or stock price movement, making targets based on RoE/RoCE. This will help improve their performance and lead to better realisation for the government through disinvestment etc.

Industries expect a roadmap for scrapping of old vehicles, sops for the electric vehicle industry and increased import tariffs to encourage domestic manufacturing. Government is expected to recapitalise PSU banks to stimulate credit growth and offer fiscal support to Covid-hit sectors like hospitality.

In direct taxes, the fact that a new tax regime was introduced only last year, not many changes can be expected now. Even then from a capital market perspective, key expectations include allowing indexation while calculating LTCG on equity shares/equity mutual funds and/or allowing setting off of STT against the tax liability there on, reduction of LTCG period to one year for debt mutual funds, exemption of dividend income in the hands of recipient to the extent of Rs 2-3 lakh per annum, clarifying tax aspects on F&O trades etc.

Targets and assumptions made in the forthcoming Budget will be important from the perspective of sovereign ratings. Markets will look forward to a credible borrowing plan in the Budget, including raising of money internationally at lower yields. India’s public debt-to-GDP in FY21 will be in the upwards of 85 per cent of GDP.

India’s combined borrowing for FY21 is upward of 15 per cent of GDP eating away the resources available, hindering the credit offtake and pass through of accommodative monetary policy given that the net domestic household savings rate is just 6.5 per cent.

The key would be the steps taken to improve the sentiments of consumers/businessmen. Only if the Budget proves to be pathbreaking in terms of policies (government spending, divestment, revenue raising or capital market-friendly measures) will the current bounce sustain beyond a point. Having said that, the Budget can do only so much to spur economic growth or boost the stock indices. Policy tuning/changes through the year, whether proactive or reactive, can also contribute to the same purpose.

Global interest rates and inflation trajectory will be key to sustaining FPI inflows into India going forward. India as an emerging market offers a lot of potential to investors. However, after the rise in the indices seen so far, our economy and companies will need to deliver up to the promised or expected potential to keep getting the inflows.





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