Taxes are always a go-to option for a government when it wants to increase its revenues. It is the easiest option and saves the trouble of thinking of an innovative solution.
But, the situation this time around is quite tricky. While the expenditure commitments are abnormally high, there is an equally pressing issue of reviving the demand in the economy. It requires the government to put money in hands of people. In this situation, increasing the tax burden on the common man is not an ideal option.
This budget, say 'No' to fresh taxes:
The representatives from several sectors of the economy have urged the government to not impose any new taxes in the budget. There is a likelihood of the introduction of Covid cess on high-income groups. There is also a strong possibility of wealth tax making a comeback, after being removed in 2015. At the last applicable rate, wealth tax was at 1% on net wealth over Rs 30 lakh.
However, such measures can not be seen as long term solutions. At best, they could be introduced to fill in the revenue gap. Due to covid, the revenue is estimated to drop by 25-30% in FY21. Rather than increasing domestic taxes, the extensive focus is likely to be on increasing income by increasing custom duties, import duties, and anti-dumping duties on finished/semi-finished products to protect the domestic manufacturers. This will also be more aligned with the government's Aatmanirbhar vision.
Borrowing plans: Bond market needs to step up
If pre-budget talks are of any indicators, the government is going to put fiscal consolidation on the back burner for now. For that, the government
will need to raise additional funding. For that, it would be looking to increase FPI's participation in India's bond market. For that, the budget will need to provide a credible roadmap and regulatory relaxations. We expect the government to reduce entry barriers for FPIs in its bonds across the 5-year, 10-year and 30-year tenors.
We also expect the government to increase the number of bond issues for retail investors in FY22. It will help to channelize domestic savings into the economy. It will increase government spending and allow the banks to stay cautious while lending to the stressed sectors.
Divestment: Expecting a breakthrough on BPCL & LIC
This will be yet another year when the government will set an aggressive divestment target. The government had set a disinvestment target of Rs 2.1 lakh crore for FY21. Out of that, only Rs 15,000 crore could be achieved.
The execution will continue to remain dubious as several big bang divestment proposals continue to face hurdles. We are expecting the budget to provide a clear direction regarding the divestment of BPCL and LIC. The government will possibly try to push it through in FY22 itself. The work on another big fish -Air India- will continue to remain a work in progress.