Union Budget 2021 comes in at a time when the Indian economy has just started to recover from the severest fall in GDP in recent times and the fiscal situation has expectedly deteriorated sharply due to the pandemic. Many of the key themes in the Budget will revolve around COVID-19, either directly on health issues (vaccines), or regulatory support to sectors most affected (e.g. hospitality, retail, aviation). The FM has raised expectations from the forthcoming Budget. While Direct and Indirect taxes may not offer much scope for reforms, the main focus could be on boosting manufacturing through schemes like PLI and to create jobs.

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HDFC Securities expect increased allocation for the social sector: MNREGA, education, affordable housing and health ministries. Spending by Consumers and Businesses (capex) could be given a boost to kickstart quick recovery. To meet the covid vaccine related costs, the FM could introduce a “corona cess”. Disinvestment target for next year is likely to be ambitious as certain planned disinvestments for FY21 spill-over into the next fiscal. Non-tax proceeds are set to disappoint hugely in FY21. For FY22, taxes should bounce back as activity revives and inflation perks up. Non-tax proceeds should see a large jump, led by disinvestment.

Tax revenue is estimated to further recover in the coming months, more recovery in direct taxes, indirect taxes faring fine. We expect the fiscal deficit to rise to 7.6% of GDP in FY21. For FY22, HDFC Securities expects the Centre's fiscal deficit target at 5.2%. Nominal GDP may be expected to rise 13-15% in FY22. To come back on the fiscal correction path, the Govt has limited resources to boost spending by a large percent. A lot of reshuffling between expense heads may be undertaken so that needy sectors get funds while overall fiscal discipline is maintained.

The US may go for a big stimulus (Biden’s plan), which may offset the need for heavy domestic pump-priming in India. The PSU sector could be in focus by pushing 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 etc. This will help improve their performance and lead to better realisation for the Govt upon divesting stakes in them.

Industries expect a roadmap for scrapping 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.