In light of the recession caused by Covid 19, the issue of growth versus fiscal discipline for framing the Budget 2021 will be the most debated one by the Government and Finance Ministry. The winner is likely to be growth but given the ruling party’s past strong belief on fiscal discipline, it could well be a balancing act. While fiscal slippage due to the liquidity support provided to the economy will surely drag down the fiscal deficit to around 7.5%, it will be interesting to see if the measures taken by the Finance Minister would bring it back to the FY21 target of 3.5%. While the next stop would be at around 5.2% for FY22, the trajectory and measures around it could shape the way fixed income and equity markets react to the Budget 2021.

With the combined deficit of Central and State likely to be around 12% for FY21, the room for maneuverability seems limited. Because of low tax collections, GST and direct taxes are expected to be lower by 14% and 17% respectively.

Expectations of big bang reforms are building up but they have only a sentimental effect on markets as the reforms would take few quarters or even years to realise the intended benefit to the economy. Job creation, improvement in healthcare and its delivery, health insurance, credit flow and growth of MSME sector, pushing rural and urban consumption, specific push to affected sectors like travel, hospitality, big retail and housing, and the continuing focus on disinvestments in Navratna’s can be expected. Increased outlays on infrastructure spending such as roads, ports and railways would also help economic revival and steps to push such sector could be expected. As every year, there is an expectation of removal of LTCG tax on equity and tax on dividend income which could boost the capital markets. Individuals are hoping that no new tax is introduced such as Coronavirus Cess. In line with global trends, however, one could see an introduction of such a Cess, especially for the higher brackets of income.

To garner quick monies in 2021-22, Government could look at expediting stake sales in good quality PSUs and in settling large sums of monies stuck in direct / indirect tax litigation. While the ‘Vivad se Vishwas’ scheme is gaining traction, the intended impact is not as per expectations as nearly INR 5 lakh crores of tax remains stuck in litigation. Some more measures could be announced to expedite these settlements to boost revenue flows. The Government would also be conscious of rising NPAs in the banking sector if the economic growth is slower than expected and provisions to capitalize / expedite merger of weaker PSU banks could be on the cards along with other longer term banking sector reforms. Boosting exports through reforms in trade policy is an urgent ask. Even though India ranks in the top 5 economies in the world,its share in world trade is very minimal. Increased concessions to industries in their efforts to reduce the impact on environment can also be expected.

As the Government grapples with agriculture reforms, other large-scale reforms on Land and Labour could take a back seat. Overall, while the Budget is a mere financial statement, it remains an important statement for the public to gauge the efforts of the Government on fiscal prudence while setting the stage for rapid growth of the Indian economy.