ICICI Securities Strategy after Budget 2021 II Counter-cyclical fiscal policy with focus on reviving investments

As per the need of the hour, Union Budget FY22 delivered by being expansionary and provided a counter-cyclical fiscal policy with focus on reviving growth while ensuring adequate resources for tackling the pandemic by expanding the fiscal deficit to a higher than expected level of 9.5% for FY21 and 6.8% for FY22.

Progressive reforms: 

Key steps include mooting of a bad bank or ARC and AMC for taking over stressed assets, increase in FDI in the insurance sector to 74% and Development Financial Institution (DFI) for financing infrastructure projects, amongst others.

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Quality of spending improves: 

There is a clear focus on improving the quality of spending with FY22 capex budgeted at Rs 5.54 trn (YoY growth of 26% over an upward revised number of Rs 4.39 trn for FY21RE) with emphasis on transportation infrastructure (roadways and railways). Overall expenditure remains flat in FY22BE over FY21RE at Rs 34.8 trn indicating rationalisation of revenue expenditure with subsidies are expected to fall by 44% to Rs 3.36 trn in FY22BE against FY21RE of Rs 5.95 trn. Recent spike in government spending seen in Q3FY21 will sustain as till Dec 2020, the government has spent Rs 22.8 trn, implying it will spend a significantly higher Rs 11.7 trn in Q4 FY21.

Revenue receipt expectations achievable: 

Overall revenue receipt expectations are modest with gross tax / GDP expected to remain constant at 9.9% while disinvestment target has been revised lower to Rs 1.75 trn from the FY21BE. Non-tax revenue (largely dividends and telecom receipts) is budgeted at a modest Rs 2.4 trn for FY22 against a FY21BE of Rs 3.85 trn.

Borrowing programme for FY22 lower than FY21: 

Fiscal expansion would mean additional borrowing in FY21 at Rs800bn and FY22 gross borrowing remaining a bit elevated but lower than FY21 at Rs12trn. Given the excess liquidity in the banking system, the higher borrowing programme should not be an issue especially in an environment of higher government spending and foreign flows which can augment banking system liquidity further.

Other key highlights include:

Higher spending towards health and well-being: Increased allocation towards health and well-being from 0.9 trn in BE21 to 2.2 trn in BE22, which includes Covid vaccination costs of Rs 350 bn and higher spending towards drinking water and sanitation.

Scrappage policy: Working towards cleaner air and better fuel utilisation, to phase out old and unfit vehicles.

PLI scheme outlay of Rs 5 trn over 5 years; scheme for mega investment in textiles

To float a DFI with Rs 200 bn capital; to lend at least Rs5trn in 3 years.

 Asset monetisation: Infra assets such as NHAI roads, PGCIL transmission assets, O&G pipelines (OMCs), airports, and warehousing assets.

Enhanced agri lending target of Rs16.5trn

Migrant workers and labour – One Nation, One Ration Card is under implementation by 32 states and UTs; remaining 4 in next few months. Social security benefits to gig and platform workers as well, including minimum wages and ESIC.

Financial inclusion: MSME allocation doubled to Rs157bn.