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Budget 2021 – Budget like no other!

Few weeks before the budget, Ms. Nirmala Sitharaman, during one of her press interactions mentioned that she will announce a budget like no other.  It was met with the usual skepticism, as her last two budgets were not really show stoppers.  So, everyone went into the budget without any great hopes but it has turned out to be a pleasant surprise! She has delivered what she had promised, a budget like no other!! 

What’s special about this budget?  It has focused on growth for the first time in 7 years.  Thanks to the Fiscal Responsibility and Budget Management Act (FRBM Act), 2003, primary focus was always on maintaining fiscal prudence.  So, successive Governments have desisted from borrowing and investing towards stimulating economic growth.  But this time, they have bitten the bullet and has gone full throttle with the growth mindset. 

Honestly, the Government didn’t have much choice in front of it.  But to say that they will even amend the FRBM act, which stands in the way of spending for growth, is clear indication of where their priorities lie now.  In that way, this is a bold budget.  The Government has unshackled themselves and has taken many a bold steps. 

Some of the key highlights:

  1. Focus on Capital Expenditure in creating infrastructure: The Government has committed to spend Rs5.54 lakh crores, which is 26% higher than the last year. In addition another Rs2 lakh crores have been provided to State Governments to spend on Capital Expenditure.  Huge capital outlays on Railways & Roads to an extent of Rs2 lakhs crores.  A new development financial institution with a capital of Rs20,000 crores will also be set up, which will target to lend Rs5 lakh crores in the next 3 years.  They have also created a National Infrastructure Pipeline with more than 7400 projects. 

What it means: The last time in 1999-2004, when AB Vajpayee led NDA Government spent money on infrastructure development on building national highways, it resulted in a tremendous boom in economy.  A similar kind of spending is envisaged across different facets of infrastructure, which will trigger sharp demand across different industries and job creation at a massive scale. 

  1. PSU Bank re-capitalization: Another Rs20,000 crores committed to be invested in PSU Banks to revitalize them.   A bad bank (Asset Management and Recovery company) has been envisaged which will take over the NPAs of the PSU banks and will manage and recover the dues.    

What it means:  The PSU banks will be able to off-load NPAs from their books and focus on lending to productive areas.  Rather than managing NPAs, the Bank resources will be used towards fresh lending to the various sectors.  Historically, PSU Bank recapitalization hasn’t done much to improve their working, but with proper checks and balances, I hope they crack the code this time around. Keeping fingers crossed!

  1. Disinvestment of PSUs: The target is to raise Rs1.75 lakh crores in the next financial year by selling stakes or privatizing various PSUs. Two PSU Banks and 1 insurance company are going to be privatized in the next financial year. 

What it means:  It follows from the stated philosophy that the business of the Government is not to be in business!! Except for strategic industries like atomic energy, space, defence, banking etc., the Government will slowly start exiting from various businesses.  A long needed reform to exit from businesses which are not strategic from a Government perspective.

  1. Monetization of Assets: They are selling or monetizing the unproductive assets, primarily the land holdings of PSUs and various Departments of the Government.

What it means:  Most of the land holdings of the PSUs are lying underutilized, and this is a great way to monetize them.  There will always be questions about leaving things for the next generation, but the hope is they will find an effective way to manage current financial needs and leaving a legacy for the future.  With innovative holding structure through Investment Trusts (InviTs), the future needs can also be protected.  Awaiting more details on the structure.

  1. Higher foreign ownership in Insurance companies: Foreign companies can hold up to 74% of the Insurance companies from the current level of 49%. 

What it means:  When you open up your economy, you need large amounts of capital and higher FDI limit can help achieving that. Insurance is one sector which has been allowed the higher limit.  May bring in more serious multi-national insurance companies.

  1. No tinkering of Income tax rates or additional cess: There are no new taxes or cess announced!

What it means:  In this Covid impacted situation, there was an expectation that there may be newer taxes or cess to raise resources.  Rather, the Government has left the tax rates unchanged.  We believe some increase in the standard deduction limit, or the limits for health insurance etc., would have helped.   

  1. Other tax related changes: Any interest on contribution to Employee Provident Fund or Voluntary Provident Fund above Rs2.5 lakhs per annum will be taxable. 

What it means:  The upper middle class salaried employee who has been enjoying this benefit for a long time of contributing towards VPF/EPF and enjoying tax free income has been plugged.  This is one of the cringe-worthy proposals for the salaried class in particular. 

  1. Maturity benefits of ULIPs with contribution above Rs2.5 lakhs p.a is taxable: The maturity will be taxed just like the other equity related product like Mutual Funds.

What it means:  The people investing in ULIPs were getting the undue advantage of tax exemption while the Mutual Funds and Direct equity stocks were not given the exemption. This loophole has been plugged and a level playing field has been created for the investors across products.  A negative for life insurance company share prices!

  1. Auto scrappage policy:  The Government is going to notify rules for voluntary scrappage of private and commercial vehicles after 20 and 15 years respectively.  

What it means: The policy can help the auto industry to some extent as it will result in fresh demand for vehicles.  It is expected that consumers will gain some benefit (maybe in road taxes) when they go for the scrappage of the vehicles.   

  1. Focus on PLI scheme and textile manufacturing:  The Government has committed to incentivize 13 sectors under the Production linked Incentive (PLI) and a new scheme for Textile Manufacturing under MITRA scheme.

 What it means:  PLI scheme is fundamental to the Atmanirbhar Bharat proclamation of our Prime Minister and helps to reduce the import of non-essential goods from abroad.  The MITRA scheme for textile industry is a long overdue one, and it will help to improve job creation in the manufacturing sector.   The hope is that it will also help to take back some of the export markets garnered by countries like Bangladesh and Vietnam in the recent past. 

Okay, all this is good.  But is there nothing which you see to derail the budget benefits.  Yes, we do!

What can go wrong?

  1. Higher borrowing leading to crowding out private debt: The Government will be borrowing Rs12 lakhs crores over the next financial year.  The additional borrowing can crowd the debt market and lead to increase in the interest rates.  Already, the debt markets has sensed that and the 10 year G-Sec yield went up 15 bps on Monday, from 5.90% to 6.06%.  Your housing, personal and vehicle loans may be priced higher in the next 6 months!
  2. Poor execution or delay in disinvestment: There is a lot riding on the disinvestment and monetization of assets. If the Government couldn’t complete it, it will lead to higher fiscal deficit and further pressure on fiscal position.  The Staff unions of these PSUs will sit in dharna and protest privatization.  The Government should be decisive in handling these issues. 
  3. Downgrade of country ratings: The increased fiscal deficit of 9.5% for FY 2021 and 6.8% for FY 22 is way above the targeted levels of deficit management. The hope is that the Global rating agencies have been briefed about it and taken into confidence.  Otherwise, any downgrade of the country rating by the global rating agencies can have an adverse impact on the economy with exodus of foreign capital, particularly from the debt market.
  4. Threat of inflation: Currently, we are facing higher inflation without any meaningful economic growth. The bigger worry now is to bring back growth than inflation.    So, the stand taken by the Government now is that inflation is acceptable but not the lack of growth.  And for a country like India, inflation is perennial. 
  5. Second wave of Covid: We have seen that we are behind Europe by 2 months or so.  With Europe shutting down almost completely, if we also face a second wave of high Covid cases, then it can lead lot more stress.  Let’s hope not!

Overall, the budget is a pro-growth one.  The Government believes that by supporting the growth across sectors through high capital expenditure and focus on infrastructure building, the economy will bounce to create more jobs and start a virtuous economic cycle. 

The Government’s intention can’t be faulted and in the current situation, the best thing to do is to revive growth. 

What’s the expected impact on investments?

We have seen very contrasting reactions from the equity and debt markets since yesterday.  The Equity markets has welcomed the budget with markets going up over 7.3% in the last 2 days.  The debt markets has done the exact opposite with yields on 10 year G-Secs raising by more than 23 basis points.   This is a natural reaction considering the fiscal expansion.

We believe that the budget will have positive impact on companies across many of the sectors.  There is no industry which has been negatively impacted on the face of it.  The Q3 2021 earnings growth of the companies has been positive so far.  It will continue to surprise on the upside in the coming quarters resulting in positive equity market movements.  The equity valuation which appears expensive today may get into a reasonable valuation zone, if the earning momentum is maintained. 

Having said that, it is important that adherence to asset allocation is a key to long term wealth creation.  We should be constantly evaluating our asset allocation and re-balancing as the market moves happen. 


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