When the Finance Minister presents the budget each year, it is normally quite easy to straitjacket the budget into one of the categories. You label the budget as reformist, bold, conservative, reactive etc. Budget 2021 was a bit of everything. It was reformist in that there were aggressive investments in the future. It was also bold because the decision to go aggressive on fiscal deficit is not easy when rating agencies are breathing down your neck.
The budget was also conservative in that it avoided too much of adventurism with respect to tax changes. The budget was also partially reactionary with enhanced healthcare allocations coming as a response to COVID-19. However, it was a transparent and honest budget that laid out the balance sheet of a stressed economy and offered the best solutions possible. It was a “Budget that did not mince words”. Here are some key budget themes.
Growth first, fiscal prudence later
Ahead of the budget, the expectations on the fiscal deficit were mixed. Economists estimated fiscal deficit for FY20-21 at 7% and for FY21-22 at 4.5%. In the Budget statement, Nirmala Sitharaman quelled all doubts pegging fiscal deficit at 9.5% for FY20-21 and 6.8% for FY21-22. Both the figures are, at least, 200-250 basis points above market estimates.
What is more important is that the Budget has charted out a path to reach fiscal deficit of 4.5% of GDP only by FY26, giving full 5 years for the Indian economy to gradually reduce the fiscal deficit lower without impacting the growth impetus. In the case of fiscal deficit, the real issue is not the deficit amount but how it is utilized. While setting a borrowing target of Rs12,00,000cr for FY22, the budget has also laid out BE of Rs554,000cr for capital expenditure. This comes on top of enhanced capital spending RE of Rs439,000cr for FY21. That is enough to convince stakeholders that fiscal deficit is being channelled productively.
Status quo on taxes for the fiscal year
There was a big debate on how the Budget would deal with direct taxes. The budget has also left direct tax rates intact while only focusing on procedural issues. For example, persons above the age of 75 need not file tax returns if income is only from pension and interest. Similarly, the advance tax liability on dividends will only arise after the dividend is declared and that is just more practical as dividends cannot be predicted. The budget has also sought to integrate details of income and TDS on salary, fees, interest etc into the pre-filled form for basic returns.
On the same lines, persons with income up to Rs50 lakhs and disputed incomes up to Rs10 lakhs can approach the special dispute resolution committee for speedy redressal. While direct taxes were left untouched, the budget has imposed an Agricultural Infrastructure Cess, especially to be levied on fuel and liquor. The rates of the agri-infra cess will be steep at Rs2.50/litre on petrol and Rs4.00/litre on diesel. Agri Infra cess on liquor will be 100%.
Farmers and depositors, rejoice
There is some good news for these two categories of people who have been in the news in the last few months. There is a very cryptic message for farmers. The budget has committed to link 1000 Agriculture Product Market Committees (APMC) via the electronic national market (e-NAM). A huge investment in APMCs pre-supposes that APMC and MSP are here to stay. What does that say about the Farm Bills? We will have to wait.
Let us turn to the depositors. The government is tweaking the agreement with DICGC such that if a bank fails then depositors do not have to wait for the bank window to open. Instead, depositors can directly access up to the limit of their deposit or Rs5 lakhs right away from DICGC. This does away with the risk of funds getting locked up.
COVID brings healthcare to centre stage
In the beginning we had spoken about some reactionary aspects of the budget, but they are positive, nevertheless. The Budget has enhanced the allocation to healthcare for FY22 to Rs223,846cr, a growth of 137% over last year. Out of this allocation, nearly Rs35,000cr is allocated for the COVID vaccination program. The enhanced healthcare allocation brings the share of healthcare allocation to just about 1.3% of GDP, which is still too low by EM standards. The idea must be to grow the healthcare budget to 3% of GDP.
Revamping the Indian banking system
For FY22, the budget has allocated Rs20,000cr for bank recapitalization. That is the smaller part of the story. The bigger announcement pertains to the ARC-AMC, also known as a Bad Bank. This Bad Bank will assume the stressed debts of banks at a discounted price after review and then look to sell out parcels or to securitize these receivables. There are enough high-risk investors in India looking for higher yields in riskier investments.
Strategic boost for Infrastructure
The budget has made two significant announcements on the infrastructure front. Firstly, budget has allocated Rs20,000cr to capitalize a new DFI with an infrastructure lending portfolio of Rs500,000cr in 3 years. Secondly, the NHAI and PGCIL will use the INVIT route to monetize specific projects based on future cash flows. This will also be partially funded with an elaborate Scrappage Policy for old cars in the form of a green tax.
Divestment, privatization, monetization; a bit of everything
While FY21 would fall short of the budgeted divestment targets, the budget has estimated Rs175,000cr from divestment revenues in FY22. This will include the high profile LIC IPO, which is expected to raise Rs100,000cr by hiving off a 10% stake. The divestment of CONCOR, BPCL, SCI and the strategic divestment Air India are likely to be done in FY22.
The budget has clarified that barring a few very strategic sectors, all other PSU companies would be privatized over time. This will include 3 large PSU banks and 1 PSU general insurance company. In an effort to boost privatization, the budget has also enhanced the maximum permissible foreign investment limit in insurance to 74% from 49%.
Finally, the government also plans to raise divestment revenues via monetization of infrastructure assets like roads, highways and pipelines, which we dwelt upon in the infrastructure section.
Centralizing capital market regulation
One proposal presented in the Budget is that regulations pertaining to the SEBI Act, Depositories Act and the Securities Contract & Regulation Act (SCRA) would be combined into a single umbrella Act to regulate the entire gamut of capital market activities. How the implementation actually happens and how the division of tasks is done, remains to be seen.
A boost for small businesses
Lastly, there is something in the Budget-21 for MSMEs also. The budget has introduced the idea of One Person Company (OPC) where the incorporation, compliance and subsequent conversion will be very simple. This could come as a boon for small businesses. The Budget has also made an allocation of Rs15,700cr for MSMEs in the budget, which will be a mix of capital support, easy finance schemes without collaterals and technological support.
The one objection that sceptics have voiced pertains to the huge allocations made to states that are going to polls in the near future. To be fair; in a budget that has made a huge effort on economics, some amount of politics is par for the course!