It takes nearly six months to prepare the Union’s budget. The finance minister and her core team then devote a critical fortnight in January to freezing the document, usually a week before it is presented to parliament.

This year, as Finance Minister Nirmala Sitharaman prepares to present her fourth budget on February 1, two factors could have informed and influenced the financial document. First, elections in five states, including the high-tension battle in Uttar Pradesh; these were expected and would have been taken into account. Gathering base numbers for the 2022-23 fiscal year, North Block officials could have opted for a grassroots budget filled with promises and handouts. Other states that will go to the polls alongside the UP between February 10 and March 7 are Punjab, Uttarakhand, Goa and Manipur. The count for the five states will take place on March 10.

The second factor that could have dominated Sitharaman’s budgeting exercise is the third wave of Covid-19 which began sweeping the country from December. The very nature of the new surge, fueled by the Omicron variant, has not been fully understood by virologists, let alone economists and North Block babus. Still, the size and intensity of the surge could alter the budget estimate numbers – therefore, a near-accurate forecast would be essential for accurate budgeting.
NITI Aayog Vice President Rajiv Kumar told ET that the Omicron wave is a fast-growing, fast-declining wave and its economic impact may be limited to January and February. “This time, the disturbances are much less significant. So my assessment is that GDP (gross domestic product) growth for 2021-22 will be 9-9.2%, slightly lower than expected,” he says.

Omicron and the election are two things that will likely shape Sitharaman’s next budget. And between the two, the election could have the upper hand, making a popular budget with a rural bias, according to officials and economists interviewed by ET.

While FM can stick to the elements of its latest budget, i.e. a solid expansion in capital expenditure (capex) – it has earmarked Rs 5.54 lakh crore for the core sector over the past year. he current year – the 2022 budget may hold a multitude of promises. As the ruling Bharatiya Janata Party (BJP) has more interests in the UP, a predominantly rural state and seen as a proxy for the 2024 Lok Sabha elections, the document may well be campaign-focused.

“I guess there would be a lot of promise in this budget,” says Pronab Sen, an economist and former chief statistician of India. “BJP’s slogan for UP is ‘dual engine’. This means that there will be attempts at the central level to come up with national programs which will be seen as benefiting a state like UP,” he says, adding that the document will avoid direct reference to any state tied to the ballot.

Rumki Majumdar, Economist at Deloitte India, says: “Recognizing the need to create demand, the government will likely focus on job creation and workforce development. She expects the budget to be a good mix of growth and maintaining stability.

Now, assuming that Sitharaman announces a rural youth employment program or improves the subsidies of an existing program, she would not specify – due to the model code of conduct – that this decision would benefit the young people of UP and Uttarakhand. The message would only be implicit; campaign managers will carry the slogans.

“I guess there will be a lot of promise in this budget. The BJP’s slogan for UP is “dual engine”. This means that there will be attempts at the central level to come up with national programs that will be seen as benefiting a state like the UP”

– Pronab Sen, former Chief Statistician of India


One can perhaps look for clues in former finance minister Arun Jaitley’s 2017-18 budget, presented just 10 days before the first phase of the UP polls in 2017. “My overall approach, during the preparation of this budget, has been to spend more on rural areas, infrastructure and poverty reduction while maintaining the best standards of fiscal prudence,” he said in his budget speech. divided its budget proposals into 10 separate themes, at least four of which were apparently aimed at voters in up-and-coming states, which included doubling farmers’ incomes, providing rural people with jobs and basic infrastructure, energizing young people through education, skills and jobs, and to strengthen social security, health care and affordable housing for the poor and disadvantaged.He also pledged the completion of 1 crore of maize ons by 2019 for the homeless and those living in kutcha houses and reiterated the Stand Up India program which supports Dalit, Tribal and female entrepreneurs.

It will come as no surprise that Sitharaman draws inspiration from Jaitley’s book.

But that may not be enough. The budget would have a positive impact on voters if the FM succeeds in creating a feel-good factor. Will it offer some relief to middle-class taxpayers, even if personal income tax flexibilities will have limited appeal among rural voters in UP or Uttarakhand? Or would it raise taxes on the super-rich (currently the highest tax rate, including surtax, on income is 43%), primarily as a political message rather than a catch-up tool tax?

ET spoke to three experienced tax professionals. Vikas Vasal, Country Managing Partner (Tax) of Grant Thornton, says: “Despite economic constraints, if no tax rates are increased or new taxes are introduced, it would be a great relief this year.” He added that it will be a tightrope walk for the government to meet the expectations of different stakeholders and also meet the budgetary targets. “We are still not out of the pandemic and don’t know what lies ahead for the next fiscal year,” he says.

“While we are optimistic about economic growth, possible risks include increased infections, inflation and weak job creation. These can dampen consumer spending and derail business investment.

— Rumki Majumdar, Economist, Deloitte India

Sudhir Kapadia, EY India’s tax manager, said the massive fiscal momentum seen this exercise will have an uncomfortable base effect, meaning the Indian government may not be able to repeat a massive increase in the percentage of the tax collection in the next financial year (e.g. direct tax collection in April-November 2021 was Rs 7.2 lakh crore, 63% higher than a year ago and 27% higher than at the same period in 2019). But crafting a populist election budget will mean a big increase in total spending. “While political considerations steer the government toward short-term measures such as subsidies, it will do well to stay focused on the salutary longer-term reforms announced in last year’s budget,” Kapadia said. Instead of new taxes, he says, “it is possible to simplify personal income tax and capital gains tax”.

Another tax expert and CEO of Dhruva Advisors, Dinesh Kanabar, admits that an election budget would mean a greater allocation of resources to agriculture, poverty alleviation and water and electricity in the segments. rural. This, he says, may not require additional tax proposals due to strong tax collections and targeted divestment implementation. “Every year, before the budget, there is speculation about the imposition of wealth tax and inheritance tax. The government will have to walk a fine line between the need to increase tax revenue and having a robust capital market which is a necessity for foreign fund flows and divestment,” he says.

Foreign portfolio investors will lend a hand for a grant-laden budget. But for long-term investors, budget day itself is no longer an important event, says Deepak Bagla, CEO of Invest India, a national investment promotion and facilitation agency. “Long-term investors only look at the budget to pick up on broad trends — for example, whether it’s an agricultural or infrastructure push,” he says.

All eyes will now be on February 1.