This Union Budget 2021-22 was presented against the backdrop of very challenging economic environment worldwide and restrained mindset of India Inc. due to COVID-19 pandemic. Considering this, FM has really done a commendable job by presenting a growth-focused budget and by taking higher fiscal deficit route as a policy decision, both for FY21 and FY22.
The FM mentioned that they will now try to achieve fiscal deficit of 4.5 percent of GDP by FY26 with consolidation being done through tax revenues buoyancy (as economy bounces) and through asset sales. FM aims to achieve this by not increasing any tax rate, which is a welcome move.
Transparency adds to credibility: What is also heartening is the levels of transparency, with fiscal deficit pegged for FY21 at 9.5 percent and at 6.8 percent for FY22, with government acknowledging it includes subsidy spending in FY21 to fiscal deficit and a clear growth focus. What is also worth mentioning is on total spending target which is revised up from Rs 30.4 lakh crore in FY21 to Rs 34.5 lakh crore (Govt is scheduled to borrow Rs 80,000 crore over the next 2 months), spending target set at Rs 34.83 lakh crore for FY22 is flat compared to FY21 revised estimates (RE). Again, this just implies that the government has included subsidy spending done in FY21 on account of COVID-19 in FY21RE estimates making it credible and much more transparent.
The assumptions and targets on revenue are quite credible and conservative as well. Nominal GDP growth estimates at 14 percent in FY22 looks realistic. Tax estimates on a CAGR basis between FY20-22 look quite conservative and is factoring in only 3-4 percent growth over most heads. The earnings momentum for corporates is encouraging after a long time and this is expected to help corporate tax collections after muted growth in last two years. GST collections will also benefit from rise in WPI and normalisation in services as the year progresses. In that sense, the gross tax collections growth of 17 percent in FY22 from a low base looks achievable. But the real boost to overall revenues for the Centre would still be dependent on government meeting its large disinvestment target (Rs 1.75 lakh crore) which looks quite possible thanks to the buoyant capital markets.
Overall spending growth in FY21 is now budgeted to be Rs 34.5 lakh crore (up 28 percent YoY) with Q4FY21 likely to see near doubling of spending. This should help support growth and thus broaden out the economic recovery. Budget continues to provide strong push to capex. Overall capital expenditure for FY21 would be Rs 4.39 lakh crore (earlier Rs 4.21 lakh crore). For FY22, capex budget is set at Rs 5.4 lakh crore (up 34 percent YoY). The spending thrust of the focus is clearly on infrastructure and health – a much needed boost given that these segments have seen sharp slowdown in last few years. In addition, for affordable housing as well, the tax incentive for both developers and borrowers has been extended for one more year. In addition, the import duties have been relaxed in specific segments such as gold, steel etc. to reduce the input costs for producers.
Another big positive of this budget has been government's intent and action towards privatisation and disinvestment. FM reaffirmed that privatisation/disinvestment of Air India, Container Corporation, IDBI Bank, BEML, BPCL etc would be completed by FY22. Add to that privatisation of two more PSU banks and one General Insurance company has been proposed. Also FDI in insurance has been increased from 49 percent to 74 percent which is a very positive move to attract capital in the insurance sector.
Comments on monetisation of existing infra assets as a source of funding through invites as well as ways to monetise non-core assets like land for PSUs should be seen positively. An Investor Protection Charter for all financial products, reduced time frame to re-open past filings, relief to senior citizens for filing tax returns, relief to file advance tax for dividends etc. are all important initiatives for genuine tax filers. There has also been a convergence of taxes between ULIPS and equity Mutual Funds for most investors, providing a level playing field for these investment vehicles.
Overall, it's a growth oriented budget which focuses on the revival of economy & privatization; and no surprises of new taxes does provide a catalyst for the economic recovery to gather further momentum.
Disclosure: Views are personal and do not reflect the views of Kotak Mahindra Asset Management Company Limited.
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