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Infrastructure, Taxation, Welfare, Sectoral Incentives: What to Expect from Union Budget 2022

Jan 31, 2022 2:56 PM 6 min read

The Union Budget 2022 is set to be unveiled tomorrow. And, just like every Budget that preceded it, it is going to be a “historic” event.

In all fairness, though, a lot is riding on the FY22-23 Budget exercise. The coming fiscal will be critical for the Indian economy as pandemic-era stresses recede. The Third Wave à la Omicron is (seemingly) plateauing, three-fourths of the adult population has been fully vaccinated and GDP growth is picking up pace. At the same time, the bad loans crisis is easing, inflation remains within the RBI’s comfort zone (for now), tax revenues are up, and disinvestment performance is (somewhat) on the sunny side for a change.

That said, structural headwinds remain. FY22’s sanguine economic data was propelled by a low base effect and the recovery has so far nonetheless been haphazard and disparate. Economic inequality is surging, social indicators like food security and malnutrition are worsening, and the near-term outlook remains fraught with risks (that isn’t our assessment; it’s the Central Bank’s).

Moreover, the economy is on the proverbial crossroads. Strategic and exigent themes like electric vehicles, semiconductors, renewable energy, cryptocurrencies and data security, among others, are on the table. Their near-term prospects depend on policy decisions that will be made today. (Or rather, tomorrow.)

Budgeting in Brief

The general street view seems to be that Budget 2022 will be heavily focused on infrastructure. There are also rumours of increased welfare spending and renewed attention to fiscal consolidation.

Of course, that’s not to say there are leaked Budgetary excerpts making their way around the media. Besides being exhaustive and lengthy, India’s Budget-making exercise is also famously discreet. To ensure maximum secrecy, a 10-day lock-in period precedes D-Day (or should we say “B-Day”?). About 100 key personnel involved in making the Budget are quarantined in North Block.

In fact, North Block is converted into a fortress during this period, with 24x7 security and surveillance by the Intelligence Bureau. The people who are quarantined are not allowed any contact with the outside world, not even with their families. Only the top officials are allowed to return home, and even they are required to maintain secrecy. And the fabled Blue Sheet, a blue piece of paper containing key Budgetary numbers, is guarded "like the secret archives in the Vatican". (We covered the eccentricities, themes and rituals that guide Union Budget-making here.)

But, all said and done, there’s no harm in speculation! Let’s look at the main expectations from this year’s bahi khata via four lenses: fiscal metrics, infrastructure, taxation and sectoral motifs.


Fiscal Metrics

There seems to be a general view that we are headed for a period of increased Government spending. This may be warranted because (1) GoI's finances are presently in good shape, with economic growth and tax collections both climbing upwards, (2) many welfare and developmental programmes have been announced, and these need funding, (3) the fruits of disinvestment and asset monetisation are anticipated to start piling up in the near-term, and (4) a capex increase is anyway overdue: the pandemic-induced revenue crunch led to a mere 1% increase in Budget size last year vs the average 15% boosts in the four years prior.

Government spending may not be a panacea but it is indispensable for a pandemic-battered economy. That said, nobody wants to open the floodgates of fiscal adventurism. The FY21 fiscal deficit jumped from a Budgeted 4.6% to an actual 9.4% of GDP. The current annual deficit target is 6.8%, and Nirmala Sitharaman is eager for this to be narrowed down to 4.5% by FY26.

But the RBI warned recently that the 6.8% figure "may come under strain", citing GoI's second supplementary demand of grants in December. As such, North Block is reportedly eager to tread the "middle path", aiming to tame the deficit to 5.8-6.3% of GDP. Either way, it'll be a delicate balance to maintain.

This balance will largely depend on (1) tax collections (which are on the upside, but will this momentum continue?) and (2) disinvestments (two months to FY23, less than 7% of the ₹1.75trn ($23.36bn) FY21 disinvestment target has materialised, with a lot hanging on the looming LIC IPO). Speaking of the latter, expect important updates on new privatisation targets and the National Monetisation Pipeline. (BTW, how does the Government make money? Read this for insights.)



In August, the Prime Minister announced a lofty ₹100Lcr ($1.3trn) infra push under the Gati Shakti Yojana and National Infrastructure Pipeline to expand and build highways, airports, telecom connectivity, industrial corridors, power transmission networks, gas pipelines etc. Ms Sitharaman may shed more light on the financing of these projects tomorrow.

One may also expect revelations about 5G - which is expected to be rolled out this year, even as the spectrum auctions have been delayed.



Personal: As always, there's talk in the air about a reworking of income tax slabs and rates. There may also be an upward revision of the Section 80C deduction limit, which has remained unchanged for years now. Either way, GoI may be eager to signal further simplification and rationalisation of the tax system. After all, filings and collections are up and there can't be too much of this good thing, so it would want to keep the party going.

FYI: Budget 2020 saw the installation of a new and parallel income tax regime. Budget 2021 did not see any major changes.

Corporate: There’s no particular reason to expect a big change in the corporate tax rate. India already has a rate above the global minimum rate as stipulated by the recent G7 and OECD deal. Businesses may also be hoping for clarity on LTCG and the equalisation levy, which, after a November truce with the US, is in a state of limbo. Since Budget 2021, GoI has been reviewing c. 400 customs duty exemptions. The final updates on the same may be detailed tomorrow (at a time of high input costs and rising inflation, this may be more important than ever before).

Then, of course, there are GST rate revisions. Ms Sitharaman is expected to slash rates for key growth engines and future growth drivers. Speaking of which...


Sectoral Motifs

We must begin with EVs. This sector has been a happening one over the past few months, what with Tesla’s (still unrealised) India entry, the rising popularity of battery swapping tech and the new rules for charging stations. Import duties could be slashed, as may GST rates, with the goal of electric mobility in mind.

Another major highlight may be any indicators of which way GoI is leaning in the crypto regulation debate (there are conflicting reports and the crypto Bill may not even be introduced in this Session). Nevertheless, a digital currency akin to China's may soon be knocking on our doors.

Another underscore may be agri reforms. Especially after the farm law fiasco. The Union Government had set up a committee to look into agriculture-related issues, including zero-budget farming, fertilisers, MSP, crop patterns etc. Updates from this group’s findings may be revealed tomorrow.

Also, Personal Data Protection Bill, on whose provisions and passage the bulk of the digital economy depends. The Bill has been lingering in procrastination hell for a long time now. Its introduction - last expected during the Winter Session last year - may now be in the offing. 


Budgeting Fortune and Time

All in all, it’s safe to expect GoI to tread carefully. There are enough state elections on the horizon to anticipate a strong welfare push. 2021 announcements on infra warrant increased capex push. And with the recent bloodbath on Dalal Street, market reaction will be on every policymaker’s mind.

Furthermore, with the era of loose monetary policy - both from the Fed and the RBI - on the wane, the onus is shifting back to fiscal momentum and discipline. And as the pandemic bids adieu, the Union Government will find itself short of a patsy if the economy reverts to the pre-COVID status quo of slowdowns, doldrums, joblessness and missed opportunities.


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