Finance Minister Nirmala Sitharaman is anticipated to strike a careful balance between fiscal prudence and growth assistance when she presents her fourth consecutive budget on Tuesday, which is expected to include measures to increase expenditure in order to encourage investment and generate employment.

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The Budget for the fiscal year beginning April 1, 2022, is likely to increase infrastructure investment in order to put the economy on a more solid basis. The Economic Survey set the tone for the Budget presentation, indicating that the government has the budgetary capacity to do more to help the economy, which is expected to grow at a solid 8-8.5% in fiscal 2022-23.

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The budget is released only days before the first round of voting in Uttar Pradesh, which, along with four other states, will go to the polls to elect a new state government. Naturally, it is likely to include steps to increase rural and agricultural expenditure. The third-largest economy in Asia is expected to grow 9.2% in the fiscal year that ends in March, after contracting by 7.3% the previous fiscal year.

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Analysts believe the finance minister will have to strike a delicate balance between maintaining the momentum of the country’s promising but fledgling economic recovery and tax collections while also considering measures to boost demand, create jobs, and combat inflation as the country deals with the ongoing third wave of the Covid-19 pandemic.

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While being ‘fiscally prudent’ and ‘growth supportive,’ she is largely expected to pursue the growth agenda through increased CAPEX allocation, which will accelerate the investment cycle and employment while maintaining fiscal conservatism.

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With a target of reaching a USD 5-trillion GDP by FY25, capital expenditure allocation is projected to stay higher, although solid tax collections and a massive disinvestment pipeline may help limit the fiscal deficit to 5% in FY23. The buoyancy in tax receipts, relatively restricted expenditure, and faster nominal GDP growth are likely to keep the fiscal deficit in the current fiscal year to 6.3%, well below the 6.8% prediction.

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Higher allocations to roads, railways, and water are predicted in the infrastructure category. In addition, the emphasis would be on tax compliance, simplicity, and digitalisation, as well as ease of doing business. Measures to help small enterprises and the rural economy are also expected to be included in the Budget.

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The budget presentation may also include the government’s Production Linked Incentive Scheme (PLI), which is applicable to the telecom, pharmaceuticals, steel, textiles, food processing, white goods, IT hardware, and solar sectors. It is uncertain if Sitharaman would change income tax rates, although the exemption ceiling of Rs 2.5 lakh is expected to be hiked.

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Sitharaman plans to use the Budget as a springboard to bring the economy back on track following the pandemic’s devastation. Amendments to the tax structure to promote long-term growth, infrastructure investment, a focus on R&D expenditure, providing incentives to the core industries, including manufacturing and services, and capitalizing on the vast expertise of running captive centres are among the government’s top priorities.