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Budget With a Motto to Under-promise and Over-deliver – Research & Ranking

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Hello and welcome back to the fourth edition of our Budget Analysis series.

The Budget was bold and beautiful – Bold because the Government did not pay heed to rating agencies’ advice for pruning fiscal deficit.

Beautiful because the wide array of reforms suggested in the Budget encompassed all areas of the economy and public life. We have shed light on the “beautiful” part through the earlier articles. Let’s focus on the “bold” part in this one.

This Budget had many “firsts” to itself –

  1. Raising revenues without raising taxes – A combination of strong GST collections and personal income tax is set to boost revenues for the Government. Corporate profitability has seen a huge turnaround from Q2FY21, which has improved fiscal situation dramatically.
  2. Higher than anticipated capex – The Budget set capex target at 2.5% of GDP for FY22BE against expectation of 2% of GDP and against the range of 1.6% – 1.8% seen over FY18-FY20.
  3. Setting a fiscal deficit target higher than even the most pessimistic street estimates – Analysts were expecting fiscal deficit target of 6% – 6.3% for FY22. However, the Government indicated it needed more fiscal space and set it at 6.8%, higher than any estimates.
  4. Not paying heed to rating agencies – FM did not pay heed to rating agencies warnings of high fiscal deficit, caused as a fallout of the pandemic. Instead, the Economic Survey lashed out at global rating agencies for their abysmally low sovereign ratings.

On the whole, the Budget’s motto was – “Under-promise and over-deliver”, “don’t promise the stars, neither the moon; remain grounded on earth itself”.

Let us take a look at these facets one by one.

Shoring up revenues without raising taxes

The Honorable Finance Minister (FM) did not raise corporate or personal tax rates, much to the relief of businesses and common people.  Corporates had already received a bounty in 2019, when the FM slashed corporate tax rate from 30% to 25%. The importance of this move was further realized in 2020 when companies reported miniscule profits or even losses due to effects of COVID-19 pandemic. The saving in tax outgo could be ploughed back into business for further growth or for shoring up the balance sheet.

For common people as well, there was no tinkering with personal income tax rates.  There was no imposition of COVID tax / cess, as was widely feared. Surprisingly, all of this came at a time when the Government was in dire need of boosting its revenues.

A combination of strong GST collections and personal income tax is set to boost revenues for the Government.

GST collections hit all-time highs in December, 2020 and January, 2021, indicating sharp recovery post lockdown and better compliance. Corporate profitability has seen a huge turnaround from Q2FY21, which has improved fiscal situation dramatically Analysts expect even higher GST collections in the new calendar year as recovery gains pace.

While most Budgets tend to over-estimate revenues and receipts, this one preferred to err on the side of caution.

Instead of burdening corporates or common people, the FM resorted to proceeds from disinvestment and privatization, asset monetization (roads, DFC, sports stadia, airports, transmission assets, etc.) and large market borrowings to fund its balance sheet.

We feel this was a big sentiment booster and conveyed the message that Government revenues can be shored up without taxing corporates or common citizens.

Leading from the front

What does a captain of any sports team do when the team spirits are down and players are demotivated? He / she takes the onus of performing on himself / herself and facilitates a victory or at least a fighting performance for the team. This is called “leading from the front”. India’s economy has hit de-growth levels, probably for the first time in recorded history. Consumer sentiment is down, as people have lost jobs or are unsure about job stability. Several companies have announced pay cuts. On the whole, consumers are a worried lot.

At such times, it would be unfair and unrealistic to expect consumers to come out of their homes, shop, then shop some more, keep shopping and stimulate demand for goods and services. Reading the pulse of the nation, the Honorable FM took it upon the Government to boost the economy.

The Budget set capex target at 2.5% of GDP for FY22BE against expectation of 2% of GDP and against the range of 1.6% – 1.8% seen over FY18-FY20.

Capex target for FY22BE was set at Rs. 5.54tn, a whopping 35% increase over FY21BE. FY21 capex target was revised to Rs. 4.39tn, 7% higher than FY21BE and 31% higher than FY20 actual. Consequently, Capex which is usually in range of 12-14% of expenditure was raised to 16%.

Most of this money would go into building infrastructure which will have two effects

  • Reduce (somewhat) the infrastructure deficit problem (over the longer term) that corporates have always complained about
  • Generate direct and indirect employment across a wide array of sectors
  • Have a multiplier effect on the economy

A closer look at the Capex (Rs. Bn.) Bounty


Capital Expenditure


FY2022BE vs FY2021RE


FY2022BE vs FY2021BE


FY2021RE vs FY2021BE


FY2021RE vs FY2020 Actual


Source:  Budget Documents


A fiscal deficit target that factors in the worst

The FM, in her Budget speech, outlined a moderate fiscal deficit target of 6.8% for FY22. We say “moderate” because we feel that this much is required to pump-prime to economy from record low growth levels in the current year (FY21). India has an opportunity to run a significantly high deficit for couple of years and spend money aggressively to push growth. Assuming a low double digit GDP growth, even if fiscal deficit touches the 10% mark, debt-to-GDP ratio will still remain close to last year level of 85%. This leaves some room for comfort and spending.


Fiscal Deficit – Government unafraid to paint a more realistic picture

 Expectations prior to Budget 2021






India Ratings




7.8% – 8.4%


Phillip Capital






Budget 2021



Source: Press articles sourced from web search


According to economists, India’s high fiscal deficit traditionally has been due to lower tax collections rather than high Government spending. Hence, kick starting the economy through higher spending on capex is the only way to improve GST collection. Also significant to note is the fact that there is nothing off balance sheet in the Fiscal deficit target, everything is on the balance sheet. This kind of transparency is more than welcome.

Fiscal deficit (as % of GDP) over the years

Source:  Budget Documents

We will spend — Global rating agencies can go take a walk

India’s sovereign rating has for long been a matter of debate between the Government and global rating agencies. For long, global rating agencies have kept India at lowest investment grade, despite it being the 5th largest economy in the world. Reasons that have been given for abysmally low ratings are – weakened growth outlook, high public debt, liquidity and NPA issues for NBFC sector, recent geo-political flare-ups and others. The Economic Survey, an exercise whose results are tabled before the annual Budget, slammed rating agencies’ methodology that determines India’s ratings.

According to the Economy Survey, “While sovereign credit ratings do not reflect the Indian economy’s fundamentals, noisy, opaque and biased credit ratings damage FPI flows. Sovereign credit ratings methodology must be amended to reflect economies’ ability and willingness to pay their debt obligations by becoming more transparent and less subjective

India’s willingness to pay is unquestionably demonstrated through its zero sovereign default history. India’s ability to pay can be gauged not only by the extremely low foreign currency denominated debt of the sovereign but also by the comfortable size of its foreign exchange reserves that can pay for the short term debt of the private sector as well as the entire stock of India\’s external debt including that of the private sector

Running high fiscal deficits are considered taboo by rating agencies. However, the FM refused to toe global agencies’ line and instead held her own. Fiscal deficit as % of GDP will run high at 9.5% in FY21 and 6.8% in FY22BE, with a plan to reduce it to 4.5% of GDP by FY26.

All in all, the Budget presented several “firsts”, intended to support and boost the economy. The FM was unafraid and experimentative. Results will be visible only after few years once data starts coming in.

This was it with Part 4 of the Budget Series. Thank you so much for reading it till the end.

Click here to check out the Part 3 of this Budget Series.


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