Budget 2022 arrives in the backdrop of the Covid-19 third wave, critical state elections, and a rebounding economy. Revenue collections hold some good news for the government, but higher capital spending is likely to continue. While the scope for reforms in Budget 2022 is looking positive, measures to boost domestic businesses and exports can lead to protectionism. Budget 2022 is likely to fuel economic recovery through continued reforms and capital spending.

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Revenues & expenditures: Prioritizing divestment & infrastructure spending

The government’s tax collections, especially direct taxes, have been impressive. But as the country undergoes a pandemic surge, the fiscal deficit target is unlikely to see a major trim in budget 2022. Reports indicate a fiscal deficit of around 6.3 percent to 6.5 percent of the gross domestic product against the previous year’s 6.8 percent. The primary method through which the government can look to augment its revenues is through divestment.

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Last year saw a record 34.5 percent increase in capital expenditure. As the economy rebounds amidst the continuing pandemic, capital expenditure on infrastructure may serve as a tool to stimulate the economy. Welfare spending is also likely to feature prominently in the budget. Welfare schemes and infrastructure projects could be aimed at poll-bound states in hopes of electoral gains. As the non-performing asset ratios of public sector banks (PSB) improve, a welcome step by the government would be skipping on recapitalizing PSBs this year.

Reform expectations — Unfinished business

Some reform measures in the budget announcement may take care of unfinished business from last year’s budget. For example, the government achieved about Rs 9,300 crores of its budgeted Rs 1.75 lakh crore divestment target for fiscal 2021-2022. Pending divestments will continue and new entities may also be identified for divestment. Last month, the Finance Ministry released guidelines for implementing the new public sector enterprises policy in the non-strategic sector. The next steps involve identifying public sector enterprises for divestment. Here, Budget 2022 can offer a window into the potential pipeline for further divestment. Furthermore, the budget should allow for course correction by announcing steps to resolve the regulatory framework hurdles surrounding the bad bank announced in the last budget.

The government has over time tried to decriminalise smaller business offenses. Decriminalisation of offenses under the Companies, Act is complete. Decriminalisation of offenses under the Limited Liability Partnership, Act was announced in the last budget and completed in 2021. The upcoming budget may announce additional decriminalised offenses under the other remaining business interfacing laws.

Reform expectations — New frontiers

Covid-19 prompted the government into reform action and it is hoped the reform trajectory will continue. With the repeal of the farm laws and elections in Punjab approaching, observers will be all ears for the government’s agricultural reform strategy. Recently, there has been chatter about the government working on a revamped version of the financial resolution and deposit insurance bill. Hence, there is a possibility of announcements related to the bankruptcy resolution framework of financial firms. Such a measure can considerably bolster the overall bankruptcy and resolution landscape in India and provide more stability to financial firms.

The Modi government has removed or increased numerous foreign direct investment caps. Hence, there will be anticipation to see if there is any further liberalisation of the foreign direct investment regime. Notably, there are expectations of a hike in the FDI limit of PSBs, mostly to aid PSB divestment. Other market and investor-friendly reforms may be needed to upend the recent months’ trend of decelerating foreign portfolio investments and FDI into India.

Clarity on cryptocurrency regulation and taxation of crypto assets will also be on the radar. A cryptocurrency regulation bill is expected to be tabled in the budget session. The finance minister may offer direction on India’s digital tax regime, perhaps abolishing the equalisation levy altogether—especially after India signed on to the BEPS 2.0 Framework. Subsequently, India also reached a compromise with the United States on the equalisation levy.

Trade protectionism to continue?

Custom duty hikes have increasingly become a regular feature of the union budget. Last year saw increases across products, and more than 400 custom exemptions were also reviewed for elimination. Exports have played an important role in India’s economic recovery. The government could provide a push to increase exports through custom duty hikes, local content mandates, and other protections to domestic businesses. Notably, more production-linked incentives schemes may be announced, in addition to the 13 announced in the last budget.

The budget is not merely an account of the government’s budgeted expenses and receipts. It also sets the stage for the country’s growth and reform trajectory. Budget 2022 will prioritise infrastructure, welfare spending, and divestment while continuing to tread on the reform path.

— Kriti Upadhyaya is an associate fellow with the Wadhwani Chair in US-India Policy Studies at the Center for Strategic and International Studies (CSIS) in Washington DC. Views expressed are personal

Read more from CNBC-TV18's budget coverage here

(Edited by : Ajay Vaishnav)