Union Budget 2021: Credible, transparent and growth-supportive Budget

Nilesh Shah, MD, Kotak Mahindra AMC

The Budget was presented against the backdrop of a very challenging economic environment due to Covid-19. It is very welcome that the finance minister presented a Budget with growth focus at its heart and relaxed fiscal path compared to what general expectations were, both for FY21 and FY22. More importantly, there seems to be a change in the fiscal approach. The FM said the government will now try to achieve a fiscal deficit of 4.5% of the GDP by FY26 with consolidation being done through tax revenues buoyancy and asset sales. Finally, there hasn’t been any increase in taxes on the rich or capital gains; so to that extent, it is a growth-supportive Budget.

What is encouraging is the levels of transparency. The fiscal deficit is pegged at 9.5% for FY21 and 6.8% for FY22, with the government acknowledging it includes subsidy spending in FY21 to fiscal deficit and a clear growth focus.

The assumptions and targets on revenue are quite credible, and to some extent, conservative as well. Nominal GDP growth estimates at 14% in FY22 look realistic. Tax estimates on a CAGR basis between FY20 and FY22 look quite conservative and is factoring in nominal growth over most heads. The earnings momentum for corporates is looking up and this should aid corporate tax collections after muted growth in the last two years. GST collections will benefit from rise in WPI and also normalisation in services. In that sense, the gross tax collections growth of 17% in FY22 from a low base looks achievable. But the real boost to overall revenues would still be dependent on the government meeting its large disinvestment target (`1.75 lakh crore), which looks quite possible given the buoyant capital markets.

The overall spending growth in FY21 is now budgeted to be `34.5 lakh crore (+28% YoY) with Q4FY21 likely to see near doubling of spending. This should help support growth and thus broaden the economic recovery. The Budget continues to provide strong thrust to capex. Overall capital expenditure for FY21 would be `4.39 lakh crore (earlier `4.21 lakh crore). For FY22, the capex budget is set at `5.4 lakh crore (up 34% YoY).

The spending thrust is clearly on infrastructure and health, given that these segments have seen sharp slowdown in last few years. For affordable housing, the tax incentive for both developers and borrowers has been extended for one more year. Import duties have been relaxed in specific segments such as gold, steel etc to reduce input costs.

The government’s intent and reaffirmation towards privatisation and disinvestment are worth mentioning. FM reaffirmed that privatisation/disinvestment of Air India, CONCOR, IDBI, BEML, BPCL, etc would be completed by FY22. Privatisation of two more PSBs and one general insurance company has been proposed. FDI in insurance has been increased from 49% to 74%, which is a positive move to attract capital in the insurance sector.

(Views are personal)