The futuristic budget focussed on reviving growth in challenging times of pandemic through capital expenditure and structural reforms in financial year 2021-22 (FY22).
The industry captains and markets cheered the announcements with the Sensex closing 5% higher on the Budget day.
Markets remained on an upward trajectory for 2 weeks, gaining 10% and reaching a 52-week high during mid of February.
With the economy back on track after contraction in Q1 FY21, due to lifting of the lockdown, resumption of economic activity, and improvement in consumer sentiment, prospects for recovery in FY22 appeared brighter.
The Budget assumed a GDP growth of 11% for FY22 with tax revenues expected to increase by 15%, ambitious disinvestment target of Rs. 1.75 lakh crore, increase of 35% in capex and reduction of fiscal deficit to 6.8% from 9.5% in FY21.
A spate of downgrades for GDP growth for FY22 in the beginning of the year on account of a deadly second wave of coronavirus have made budget calculations go haywire. The downgrades average 1%-1.5%.
While Moody’s has cut GDP growth forecast to 9.3% for FY22, HSBC has cut it to 8% and Credit Suisse to 8.5%. And, we are only in Q1 of FY22, 10.5 months of the financial year is still remaining, we could see more revisions in projections.
At 8.5% growth India’s GDP in absolute numbers would be close to the value of our output in FY20, implying two years of zero growth.
While COVID cases have peaked in the second wave, this time the fatalities are quite high, impacting young people and sole bread earners. The virus has spread to semi-urban and rural areas which were the saviours during the first wave.
While supply side disruptions have been minimal except for in the auto industry, the rural demand has taken a hit as per commentary of FMCG companies.
In its monthly bulletin, the Reserve Bank of India has said that the biggest toll of the second COVID-19 wave is in terms of a ‘demand shock’.
‘Real economy indicators moderated through April-May 2021. The biggest toll of the second wave is in terms of a demand shock - loss of mobility, discretionary spending and employment, besides inventory accumulation, while the aggregate supply is less impacted,’ the RBI said.
Moody's, on Monday, May 17, said that if the second wave of the pandemic does not decline to more manageable levels and results in a prolonged and wider lockdown, it will have a more severe effect on companies' earnings recovery.
The gross GST collections for the month of April 2021 set a new record of Rs 1.41 lakh crore. However, given the muted economic activity in April, this trend is unlikely to sustain.
A 1%-1.5% lower GDP growth, is also likely to impact the income tax collections during the year. Tax buoyancy ratio has been above 1 since the year 2000.
The jinx with the disinvestment may continue. State wide lockdowns have delayed physical verification of BPCL assets as per reports.
Cairn suing Air India in the USA to recover $1.2 billion arbitration award is also likely to hamper the sale process of the Maharaja.
While the budget lays a lot of emphasis on privatization, monetization of assets, IPO of LIC, the second wave could impact all of the above.
The government may need to announce a stimulus package to help individuals, MSMEs recover from the shocks of the second wave. The Opposition parties are demanding a cash transfer of Rs 6,000 per household to tide over the crisis.
This could put pressure on the government's finances which is on a tight fiscal rope. With rating agencies breathing down on our neck and closely monitoring our road to fiscal prudence, any breach of fiscal deficit target would not be seen favorably by them.
Pressure on revenues could act as a double whammy for the government. The aggressive capex growth of 35% which is expected to provide jobs and provide a multiplier effect to the economy might need to be pruned.
The scale of the second wave of coronavirus (not factored in the Budget proposals), is threatening to derail the economy again.