GETTING SMARTER SERIES

HOW TO READ THE UNION BUDGET?

 So what is Fiscal Deficit and why does it matter?
Government spends more than it earns. The difference is call fiscal deficit and is financed by borrowing.
Inflation Interest Rates
Since high fiscal deficit, Due to its supposedly positive
especially when coming from correlation with inflation,
higher expenditure, is high fiscal deficit calls for
expected to increase tighter monetary policy.
aggregate demand, it is Fiscal and Monetary policies
considered inflationary aim to complement each
other, except in crises when
they supplement each other
Fiscal Deficit
Money Supply Exchange Rate Future Taxes
If the Government is Higher fiscal deficit is Higher fiscal deficit is
spending more money, associated with a weaker considered synonymous with
Money Supply tends to go up. Rupee due to higher money higher taxes in the future to
However, if Fiscal deficit rises supply, risk of losing some manage the debt. This is not
due to low revenues, chances foreign inflows and higher always true and there are
are that Money Supply is inflation other avenues for sustainable
already tight debt management.
Where does the Money come from?

Non-Debt Capital
Net Revenue Net Tax Revenue Non-Tax Revenue
Receipts
(INR 19.7 tn) (INR 15.5 tn) (INR 2.4 tn)
(INR 1.8 tn)

Gross Tax Revenue Majorly includes money to

(INR 22.2tn) Majorly includes dividend Don’t
be raisedput all
by disinvesting
from RBI and other public Government’s
your eggs in one stake in
Direct Taxes (INR 11.1 tn) sector entities, interest etc. PSUs/selling Government’s
o Corporate Tax(INR 5.4 tn)
basket assets
o Income Tax(INR 5.6tn)
+
Indirect taxes (INR 11.1 tn) - Warren Buffet
o GST(INR 6.3 tn)
o Excise(INR 3.3 tn)
o Customs, wealth tax etc

Transfers to States
(INR 6.7 tn)
All numbers are as budgeted for FY22
Where does the Money go?

Total Expenditure Revenue Expenditure Capital Expenditure

(INR 34.7 tn) (INR 29.2 tn) (INR 5.4 tn)

Interest Expenditure (INR 8 Don’t put all

tn), subsidies(INR 3.6 tn),
MGNREGA (INR 1.1 tn) are your eggs
This includes the money thatin one
some of the major heads. basket
is spent on asset creation
Essentially, revenue such as roads and railways
expenditure is the running etc. Essentially, this is like
expenditure of the - Warren
building of a house for the Buffet
government like groceries households
and utilities is for the
households.

While revenue expenditure is obligatory and mandatory in nature, it is the capital expenditure that has a higher
growth multiplier. Money spent on capital expenditure helps to create assets for the future and jobs in the present.
All numbers are as budgeted for FY22
How is the deficit financed?

Fiscal Deficit Net Market Borrowings Others

(INR 15 tn) (INR 9.2 tn) (INR 5.9 tn)

This includes Gross Market

Borrowings (INR 13.8 tn) - Don’traised
This includes money put all
Repayments(INR 4.6 tn) and your(INR
from small savings eggs3.9 in one
is one of the most key tn), short term borrowings,
indicator to look from bond
basket
external assistance etc.
markets perspective. Higher
market borrowing implies - Warren Buffet
more supply of bonds in the
market and leads to upward
pressure on the yields

Fiscal deficit should be credibly financed

All numbers are as budgeted for FY22
Watch for Quality, Not Quantity

Fiscal Deficit Total Total Headline

Expenditure Receipts numbers are one
• What’s the split
• Is the deficit needed?
between capital and
part of the story,
• Where is the
• Can it be credibly
financed?
= revenue expenditure?
- money coming
from?
they are NOT the
story
• How much of the
expenditure will fund
• Does it look
growth?
credible?
• How much of it is one-
off?

On budget day, it is important to understand the reasons behind the numbers. Mostly markets reward
all growth-focused budget moves, albeit at a higher fiscal deficit

All numbers are as budgeted for FY22

Current Policy Landscape

• India had signed the FRBM act in 2003 which calls for fiscal deficit to move towards 3% of GDP. However, in light
of the pandemic, such targets were temporarily suspended. FY21 fiscal deficit stood at 9.5% and FY22 is budgeted
at 6.8%. Going forward, fiscal consolidation will be slow and calibrated with Fiscal Deficit continuing to remain
elevated.

• With 7 state elections lined up in 2022, this year’s budget will need to be a fine balance between capital and
revenue expenditure

• More capital spend continues to be need of the economy for job/employment creation

• Monetary policy will guide after the union budget. A fiscal consolidation will give space to monetary policy to
remain accommodative for longer.

The upcoming budget is scheduled to table on February 1, 2022

Disclaimer

Disclaimer: In this material DSP Investment Managers Pvt. Ltd. (the AMC) has used information that is publicly available, including
information developed in-house. Information gathered and used in this material is believed to be from reliable sources. The AMC
however does not warrant the accuracy, reasonableness and / or completeness of any information. The above data/statistic are given
only for illustration purpose. The recipient(s) before acting on any information herein should make his/their own investigation and seek
appropriate professional advice. This is a generic update; it shall not constitute any offer to sell or solicitation of an offer to buy units of
any of the Schemes of the DSP Mutual Fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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