A bold budget in many senses. The central intent has been to use expansionary fiscal policy to support growth sidestepping concerns over debt sustainability and sovereign rating. The fiscal deficit is pegged at 6.8% of GDP in FY22 compared to a revised estimate of 9.5% for FY21. The focus has been on increasing capital expenditure both by the centre (+35% y-o-y) as well as states. Moreover, the budget introduced new institutional structures (like the Development Finance Institution, asset reconstruction company) and provided greater detail on asset monetisation to finance infrastructure needs in the economy. In light of the COVID-19 health crisis, the budget’s focus on health and sanitisation with increased allocations and introduction of a new health scheme are also welcome steps.
That said, the budget does not adequately address concerns over inequitable growth which has been a worry across the globe due to the pandemic. There has been no specific support for sectors stressed due to the pandemic like the hospitality sector. While the government did not increase any direct taxes, as some sections of the market feared, there has also not been any cushion provided for households – especially in the informal sector that has been hit the most by the pandemic. Therefore, while the budget focusses towards pushing the long term growth potential it does little to prevent a K-shaped growth recovery.
For the bond market, a higher than expected market borrowing estimate (INR 12 trn) in FY22 and additional borrowings of INR 80,000 crores in FY21 are likely to add pressure on borrowing costs. The 10-year yield is up by 16bps since the budget announcement crossing 6%. Over the coming year, higher market borrowings, concerns over inflation and a move towards normalising liquidity conditions by the RBI could maintain pressure on yields. We see the 10 year between 5.95-6.10% by the end of H1 FY22.
Mr. Abheek Barua, Chief Economist, HDFC Bank
