The Union Budget is around the corner and encouraging news on the economy continues to pour in. The National Statistical Office’s (NSO) first advance estimates of India’s gross domestic product (GDP) for fiscal 2021 pegs contraction at a better-thanexpected -7.7%. It suggests GDP growth could be near-zero (i.e., neither contracting nor expanding) in the second half of the fiscal, as against -15.7% in the first half. Consistently good agriculture performance and expectation of higher government spending (some of which has already been realised) in the second half, appear to have tamed the downside to growth.

Sector-level GDP data, though, confirms our fears of a greater hit to services than manufacturing, due to the pandemic. Manufacturing is projected to contract 9.4%, while services such as trade, hotel, transport and communication, by as much as 21.4% this fiscal. The second shot of good news comes from the retail inflation front. From highs of 7.6% in October 2020, it has dipped to a lower-than-expected 4.6% for December, with a sharp correction in food prices. Last but not least, India’s Covid-19 curve continues to taper, with recovery rate surging to 97%. A massive vaccination drive is underway.

Not everything is hunky dory, though. This fiscal’s expected GDP contraction is the worst ever India has seen annually. Stress in some sectors are at an all-time high. Knowing this, the Reserve Bank of India (RBI) has raised the red flag on non-performing assets of banks, which they see spiking to 13.5% of the advances by September 2021 from 7.5% a year ago. Besides, newer strains of Covid-19 remain a key monitorable.

Against this backdrop, the Union Budget 2021-22 will continue to give thrust to spending on health. Defence will also remain a high spend area, as border concerns remain. Beyond that, we expect / recommend the budget to focus on providing support for services such as airlines, hotels and tourism; actively supporting smaller firms andmicro enterprises; supporting urban poor who have been hit hard as well, and have received little support; and providing a road map on reviving public investment,especially in infrastructure, as private investment will be slow to pick up

Given the extraordinary demands on the fisc, we expect the commitments under theFiscal Responsibility and Budget Management Act to be in abeyance in fiscal 2022 as well. The monetary policy announcement that follows the budget should gain breathing space from low inflation. We expect it to remain accommodative, but hold rates.