The FY22 budget prioritized reviving economic growth over fiscal prudence in line with our expectations. An ambitious expenditure target for FY22 entails a significant jump in capital spending, marking a shift towards more productive spending. The government refrained from any major tax changes, except custom duty hike and an agriculture cess, instead focused on non-tax revenues through a renewed push to divestment programme and asset monetization. While conservative revenues assumptions leave the possibility of a positive surprise, the government presently projects high deficits in FY21 and FY22. Resultant sizeable market borrowing would need RBI’s continued support into next year. Intending to attract capital to fund the ambitious infrastructure investment plan, the government proposed setting up a Development Bank, strengthening the financial system by setting up ARCs/AMCs and recapitalizing PSBs, furthering capital market reforms, and increasing the FDI limit for insurance. Execution of an ambitious investment plan and success of related enabling measures is critical to lift economic growth and ensure debt sustainability. Key disappointment in the budget was the absence of steps for the stressed sectors which are still witnessing a laggard recovery.
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