Union Budget 2021 Key Highlights

February 8, 2021 Budget 4 min read

Welcome to the 21st edition of our Weekly Musings!

Amidst a challenging macro-economic environment, FM Nirmala Sitharaman presented her third budget after taking over as the finance minister of India. As India’s nominal/real GDP declined for the first time in four decades, the budget 2021 announcement was a realistic step towards balancing out the fiscal math via disinvestments, asset monetization, and increasing investments in healthcare and infrastructure.

While there was no large fiscal stimulus, the absence of tax hikes and cess on the ultra-rich, coupled with the large capital expenditure outlay seems to have done the job for the stock markets, as the positive sentiments continue to uplift its performance post budget announcements.

Key takeaways from the Union Budget 2021-22

  1. Fiscal Measures (Neutral impact)

  • FY21 RE (Revised Estimate) fiscal deficit pegged at 9.5% of the GDP on account of taking the food/fertilizer subsidy in its own books rather than keeping it off-budget through the Food Corporation of India. The earlier consensus estimate for the fiscal deficit was 7% of GDP

Fiscal deficit in INR Billions

Source: Budget Documents, Tavaga Research

Fiscal Deficit as % of GDP

Source: Budget Documents, Tavaga Research

  • A tectonic shift in raising funds to propel economic growth – Asset monetization and privatization of public sector undertakings rather than hiking direct taxes or levying cess
  • Disinvestments continue to remain in focus as the government tries to achieve its fiscal consolidation objectives. The stake sale in Air India, BPCL, Shipping Corporation of India, and the LIC IPO remains crucial
  • FY22 fiscal deficit estimated to come down to 6.8% of the GDP
  • Nominal GDP growth (Real GDP + Inflation) for FY22 estimated to grow at 14.4%
  1. For corporates (Overall Impact: Positive)

  • No change in the corporate tax rate structure. Remains the same at 22%
  • For companies doing their majority business transactions digitally, get an exemption from tax audit (Restricted to companies having turnover up to Rs 10 crore)
  • Exemption of Capital gains tax on investment in startups extended by 1 year
  • No TDS on dividend payment to REITs/InvITs
  1. Tax Measures (Impact: Neutral)

  • No change in direct tax structure
  • Overall net tax revenue expected to grow by 16% in FY22
  • NRIs get relief from double taxation
  • No requirement of filing ITR for senior citizens aged above 75 years (Income source: Interest income and Pension only)
  • Dividend and interest income, capital gains to come pre-filled in all ITRs from FY22. The role of digitization comes into play
  1. Infrastructure (Positive impact)

  • National infrastructure pipeline projects expanded to 7,400 from the current 6,835 projects. The entire pipeline is worth Rs. 111 trillion
  • National Bank for Financing Infrastructure and Development to be set up as a development financial institution with lending capacity up to Rs. 5 trillion

Infrastructure Budget

Source: Budget Documents, Tavaga Research

  1. Healthcare (Very positive impact)

  • 137% rise in budgetary allocation for healthcare to ensure medical treatment access to all, job creation boost, and a better future outlook for various economic indicators
  • A budget outlay of Rs. 2.23 trillion in FY22 for healthcare and well-being as against Rs 94,452 crore in FY21
  • Rs 35,000 crore outlay for Covid-19 vaccination
  • Clean drinking water and sanitation again find a special mention
  1. Foreign investment measures

  • Continuity in PLI reforms
  • Insurance sector witnesses a hike in the FDI limit from 49% to 74%
  1. Other Key Measures

  • Provisions to enable higher borrowing limits to state governments
  • Coal mining to be commercialized
  • Cross-subsidies to reduce
  • Liquidity support for the stressed Indian discoms (already announced as a part of the fiscal package)
  • Setting up a bad bank to battle the NPAs

Key Misses

  • Fiscal deficit target of 3.5% of GDP in FY21, as per budget estimates against the revised estimate of 9.5%
  • Net tax revenue was targeted at Rs 16.3 trillion against the current mobilization of Rs 6.9 lakh crore up to November 2020.
  • Disinvestment target set for FY21 in FY20 budget = Rs 2,14,000 crore; Could achieve 7.1% of the targeted structure up to November 2020 (Only Rs 15,200 crore)
  • Indirect tax receipts – only 32.3% of the target achieved

A landmark budget in all aspects that surprised many pundits. The growth pitch by the government at a time when India’s fiscal deficit continues to stay at levels beyond expectations has generated a positive sentiment across the board. A manifold rise in capital expenditure and healthcare will ensure India’s smooth transition into the next cycle of economic boom.

Equity and Bond Markets

While the equity markets were buoyed by the budgetary announcements, the bonds witnessed a quick sell-off as investors remained cautious with the announcement of an aggressive borrowing program of the government. Generally, a rising fiscal deficit translates into a spike in yields with a sell-off in bonds.

At this juncture, India cannot afford the risk-free yields to spike as it could bring a temporary halt to the aggressive CAPEX plan of government and the borrowings by corporates. The RBI will have to play a crucial role in keeping the yields below the 5.9-6% mark and maintain an accommodative stance.

Investors must maintain caution and stay away from constant maturity funds for short-term goals. If the yields continue to spike and the RBI shows restraint/is unable to manage the yields, there are more chances of investors making losses in risk-free government bond funds. While for the long-term goals, regular investments in various asset classes must continue and the union budget must not be a deciding factor for you to invest.

Happy Investing!

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