BFSI sector eyes privatisation of PSBs, boost in infra, internet connectivity, others in Union Budget 2021

By Siji Philip

Indian Union Budget 2021-22: Expectations from the upcoming Union Budget 2021 are sky high, with the indicators from the government of it being a “never before” budget. This being in the backdrop of a Covid impacted economy gradually getting back to normalcy. Declining revenues and higher budgetary expenses has strained the budgeted fiscal deficit target of 3.5% for FY21. So, it is a tight-rope walk as a mid-term Budget, setting long term goals and aspirations for economic revival and hence, a crucial one.

The banking and financial sector so far with support from RBI and the government has dealt with Covid crisis quite well, but the costs of deferring interest and principal payments under moratoriums schemes could require some additional relief which could get addressed in the budget.

Another key expectation is privatization of public sector banks. The government has already taken up reforms in this sector through consolidation of larger banks, recapitalization etc. in its earlier budgets. A roadmap could be expected for privatization of the bottom tier PSU banks. RBI had recently also suggested corporate entities getting banking licenses which pave the path for getting suitors for such banks, once the due diligence is in place.

While measures to boost consumption are one perspective for the budgeting measures, support for production related measures to increase income levels will aid better recovery and growth sustainability. Production Linked Incentives are a powerful tool to encourage manufacturing, and can expect higher budgetary allocation. Infrastructure boost is required to kick-start the economy and needs access to low cost capital. This could be through infrastructure bonds, encouraging private participation and reinstituting an infrastructure development bank for long-term funding of projects. Real Estate is another high employment generator and benign interest rates coupled with lower prices will drive a renewed interest in real estate and hence get a fillip in the budget. All such cumulative measures will have a multiplier impact and boost lending in the economy.

Covid has impacted the MSME segment considerably as they have limited access to capital. This segment was already impacted due to GST and its cascading effect. Although the government has eased credit to the segment, more such measures are expected to address MSMEs’ need to access capital. Most of India’s recent GDP growth has been on the back of the services sector. This sector has been impacted significantly due to Covid. Hotels, restaurants, airlines and segments such as these will require low cost of capital along with restructuring of overdue loans.

There is a need to increase the household domestic savings pool to fund future growth. Hence, an enhancement in the 80C limit is long overdue. The government may also look at providing further tax incentives to enable people to buy adequate health insurance which has gained importance following the pandemic. This will be positive for insurance companies.

Further, to help the urban poor displaced due to reverse migration, focus will continue on affordable housing schemes which will benefit housing finance companies. Higher rebate ceilings for long-term capital gains taxes and an exemption of individual dividend tax liability of up to Rs 10,000 for each listed company to encourage savers to invest long term in equity assets are on the wish-list of broking firms and investors.

As banks go digital, to promote digital payments and improve credit accessibility, it is expected that the government will continue its agenda in the budget to improve internet infrastructure and connectivity in Tier 2/3 cities to support digital payments across these geographies.
Macro-fundamentals are largely in place and this budget could give the leg-up for a $5 trillion GDP dream for the Indian economy. So will it be a “vibrant” budget and provide the necessary stimulus for India to become one of the fastest growing economies? Let’s wait and watch for D-Day.

(Siji Philip is the Senior Research Analyst at Axis Securities. Views expressed are the author’s own.)