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Published: Dec 29, 2021
Updated: Dec 29, 2021
In her third budget presentation foray as Finance Minister, Nirmala Sitharaman has done a thoroughly professional job of chalking out major economic reforms through the instruments of disinvestments and attracting foreign funds while not exacerbating the woes of a corona-battered public with any fresh dose of taxation.
These mega changes have unsurprisingly boosted market sentiment, with the Sensex and Nifty zooming to new highs of 50255.75 and 14,789.95 respectively soon after the budget. Most notably, the FM has allocated a mammoth and unprecedented Rs 2,23,846 crore for public health infrastructure, nearly one and a half times more than the previous year’s outlay.
To fund budgetary expenditure, the FM has not shied from aggressive divestment of the family silver, including a historic IPO for Life Insurance Corporation.
After two pedestrian budgets lacking in direction, and where she had to flip-flop on certain proposals, Union Finance Minister Nirmala Sitharaman has the third time around come out with a highly growthoriented budget which will most likely put the pandemichit economy back on the growth path. Post the corona virus, economic growth plunged into the negative region and there was an urgent need to inject fresh blood into the economy, which Ms Sitharaman has done very ably. Unlike her first two exercises, her third budget is highly positive in stance, very bold in spirit and pro-reform in nature. She has not touched upon the taxation aspect and has refrained from imposing any fresh tax burden on the public. She has announced major economic reforms, chief among them raising the FPI limit in the insurance space from the current 49 per cent to 74 per cent. At the same time, the FM has announced that two PSU banks and one PSU insurance company will be privatised. Also, several PSUs, including BPCL, Air India, Shipping Corporation of India, IDBI Bank, BEML, Pawan Hans and Neelachal Nigam, will go for strategic disinvestment.
Not surprisingly, the stock market turned jubilant on the presentation of a totally unexpected growth-oriented and investor-friendly budget. The leading market indices zoomed to all-time high levels in the first 3 days following the budget, with the Sensex, the most popular index based on market prices of 30 pivotal stocks quoted on the Bombay Stock Exchange, shooting up by 1,155.35 points to 50255.75, and the Nifty, darling of analysts, based on 50 leading stocks quoted on the National Stock Exchange, spurting by 3,964.98 points to 14,789.95.
Gross tax revenues are budgeted to expand by 12.0% in FY2021 BE, which may appear reasonable in light of the 10.0% growth expected in nominal GDP. However, the revenue assumptions made for FY2020 seem aggressive. In particular, the GoI’s gross tax revenues are effectively forecast in the FY2020 RE to expand by 19% in Q4 FY2020 relative to the year-ago period, which seems ambitious given the modest recovery expected in GDP growth.
Moreover, the underlying assumptions behind the doubling in non-tax revenues expected from other communications services to Rs 1.33 trillion in the BE for FY2021, from Rs 0.6 trillion in FY2020 RE, are somewhat unclear, especially in light of the two-year moratorium on spectrum payments. With participation in the 5G spectrum auctions expected to be muted, the GoI may be expecting the bulk of the AGR-related dues to be settled in FY2021.
The receipts from disinvestment, divestment, etc. have been scaled up sharply to Rs 2.1 trillion in FY2021 BE from Rs 0.65 trillion in FY2020 RE. Although a pipeline of announcements provides some visibility for raising funds from this source, unless significant progress is made in H1FY2021 itself, doubts will start building up about the credibility of the fiscal correction being targeted by the government in FY2021. The budgetary allocation for capital expenditure has been increased by Rs 103 billion in FY2020 RE relative to the budgeted level, setting aside fears of a cut in capex. Moreover, the capital expenditure for FY2021 has been enhanced by a healthy 18% or Rs 632 billion, although this is partly offset by a disappointing reduction of Rs 379 billion in the internal extra-budgetary resources in FY2021 BE relative to FY2020 RE.
Overall, the incoming data on receipts from tax revenues, non-tax revenues from other communication services, and disinvestment proceeds in FY2021 would determine the credibility of the fiscal math for FY2021. This would also have an impact on the trend in yields of government securities, even though the net borrowing requirement announced for FY2021 is within the range expected by the market.
The budget proposals for 2021-22 rest on 6 pillars.
Healthcare and health infrastructure: Stunned by the scare spread by the pandemic, the FM has earmarked a gigantic investment of Rs 2,23,846 crore, unprecedented in the history of the country’s fiscal policy, in healthcare and health infrastructure, a spurt of 137 per cent from what was earmarked during the last budget for fiscal 2020-21. She also announced a new centrally sponsored scheme, PM AatmaNirbhar Swasth Bharat Yojana, which will be launched with an outlay of about Rs 64,180 crore over 6 years. This will develop the capacities of primary, secondary and tertiary care health systems, strengthen existing national institutions, and create new institutions to cater to detection and cure of new and emerging diseases. This will be in addition to the National Health Mission. The main interventions under the scheme are: (a) Support for 17,788 rural and 11,024 urban Health and Wellness Centres; (b) Setting up integrated public health labs in all districts and 3,382 block public health units in 11 states; (c) Establishing critical care hospital blocks in 602 districts and 12 central institutions; (d) Strengthening of the National Centre for Disease Control (NCDC), its 5 regional branches and 20 metropolitan health surveillance units; (e) Expansion of the Integrated Health Information Portal to all States/UTs to connect all public health labs; (f) Operationalisation of 17 new Public Health Units and strengthening of 33 existing Public Health Units at Points of Entry, that is at 32 Airports, 11 Seaports and 7 land crossings; (g) Setting up of 15 Health Emergency Operation Centres and 2 mobile hospitals; and (h) Setting up of a national institution for One Health, a Regional Research Platform for WHO South East Asia Region, 9 Bio-Safety Level III laboratories, and 4 regional National Institutes for Virology.
Vaccines: Provision of Rs 35,000 crore has been made for Covid-19 vaccines in BE 2021-22. The pneumococcal vaccine, a Made in India product, presently limited to only 5 states, will be rolled out across the country aimed at averting 50,000 child deaths annually.
Nutrition: To strengthen nutritional content, delivery, outreach and outcome, the government will merge the Supplementary Nutrition Programme and the Poshan Abhiyan and launch Mission Poshan 2.0. The government will adopt an intensified strategy to improve nutritional outcomes across 112 Aspirational Districts.
Infrastructure development: (a) National Highways Authority of India and PGCIL each have sponsored one InvIT that will attract international and domestic institutional investors. Five operational roads with an estimated enterprise value of Rs 5,000 crore are being transferred to the NHAI InvIT. Similarily, transmission assets of a value of Rs 7,000 crore will be transferred to the PGCIL InvIT; (b) Railways will monetise Dedicated Freight Corridor assets for operations and maintenance, after commissioning; (c) The next lot of airports will be monetised for operations and management concession; (d) Other core infrastructure assets that will be rolled out under the Asset Monetisation Programme are: (i) NHAI Operational Toll Roads; (ii) Transmission Assets of PGCIL; (iii) Oil and Gas pipelines of GAIL, IOCL and HPCL; (iv) AAI airports in Tier II and III cities; (v) Other Railway Infrastructure Assets; (vi) Warehousing Assets of CPSEs such as Central Warehousing Corporation and NAFED, among others, and (vii) Sports stadiums.
Disinvestment and Strategic Sale: In spite of Covid-19, the government has kept working towards strategic disinvestment. The Finance Minister said a number of transactions, namely BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans and NeelachalIspat Nigam Limited would be completed in 2021-22. Other than IDBI Bank, the government proposes to take up the privatization of two public sector banks and one general insurance company in
At the outset, the 2021-22 budget is a revenue deficit budget and a capital expenditure budget as can be seen from the table. When we make an absolute comparison between the revenue sources and expenditure budgeted, the total deficit to budgeted expenditure stands at 48.21%, revenue deficit is at 20.24% and capital expenditure deficit is at 27.96%. This gives us a clear picture that India is abandoning its fiscal restraint as it prepares to step up capital investment to support its battered economy after a pandemic-induced contraction. The capital expenditure expansionary policies are based on ways and means of financing through divestments of PSUs, asset monetisation through operating public infrastructure assets, and additional borrowings. If the government succeeds in borrowings for capital expenditure amid the huge revenue deficit, maybe its policy will stimulate the economy. Otherwise, it will remain a feel-good factor statement with a lot of side effects like stoking inflation amid speculative growth.
Hitherto, the fiscal push concerns restrained the government in its pandemic response because of the fear of a rating agency downgrade. Now, the government has realized that ‘spend more’ is the only way out for the economy to find an overall growth path. By the time the government realized the need for more spending, it ran into a huge revenue deficit and capital expenditure deficit. It means that the government has to borrow and raise funds to meet both the revenue deficit and the capital expenditure deficit. In clear terms, the capital expenditure projects will only go on track after the funds are put in place. Even to meet the 2020-21 capital expenditure needs, the government has to borrow an additional $11 bn from the financial markets over the next two months before the fiscal year ends on March 31.
For 2021-22, starting April 1, the government is targeting a fiscal deficit of 6.8 per cent of GDP, as it increases capital spending nearly a third over last year. However, in reality, the fiscal deficit will be much higher and may cross even 10 per cent of GDP. The year 2020-21 will end with a fiscal deficit of 9.5 per cent of GDP, far higher than previously expected and far above the 3.5 per cent that was targeted for the year in February last year, before the pandemic hit India.
National highway projects and infrastructure corridors have been cleared in poll-bound states such as Tamil Nadu, Kerala, Assam and West Bengal. If the taxpayers’ money is not spent prudently for the overall equitable development of the country, whenever and wherever elections take place the government will tailor the budget for electoral gains. A major portion of the capital expenditure is mainly allocated to 3 states which are due for elections.
First and foremost, the government does not have money for capital expenditure unless it borrows, divests or sells government assets. Even from such proceeds, a major chunk of spending is going towards the states which are going to face elections, which means this country is far away from financial prudence and corporate (government) governance, and is embracing a conflict of interests with a focus on election gains
The 2021-22 budget is not a budget for one year. Rather it is a feel-good creator of statements for the next 5 to 6 years. Most of the allocations may have given an impression that the allocated capital expenditure is of very high quantum, but the allocations are for the next 5 to 6 years, without any demarcation of yearly allocations over the next few years. The government apparently has laid out a ‘fiscal glide path’ that will see the deficit cut to about 4.5 per cent by the 2025-26 financial year, but its perception between 2021 and 2024 is absent.
We are still in the first phase of vaccination; limited capacities of vaccine companies cannot meet India’s massive need of vaccines for a 1.36 billion population. Irrespective of the facts, health spending is up by 137%. The first phase of the drive, which is restricted to frontline workers, is expected to cost some $2 bn. At just over $ 30 bn as against $ 21 bn the previous year, India’s overall health budget has more than doubled. This is a massive boost for India’s health sector, with more than $ 8.5 bn earmarked to upgrade healthcare infrastructure at the primary, secondary and tertiary levels over a period of six years. The government has already committed another $ 4.8 bn to India’s Covid vaccination programme, the world’s largest drive, which will extend to more than 1.3 billion people. Although it is still unclear if it plans to pay for vaccinating the entire population, the government would increase the funds if necessary.
A new Development Finance Institution (DFI), with a starting capital of $ 2.7 bn, will be set up to help fund large scale infrastructure projects. This is expected to kick-start spending and offer some relief to banks, which are reeling under a mountain of debt. Also, in the planned agenda, is an asset reconstruction and management company or a ‘bad bank’ that will take on unpaid debt from existing banks to free up their lending capacity.
Barring four strategic areas, public sector undertakings in other sectors will be divested, with a $ 23 bn disinvestment target for the year. Plans include sell-off of a clutch of public sector companies including the debtladen national carrier, Air India, by the end of financial year 2021-22. Two public banks and an insurance company will also be privatised. Various public assets will be monetised. Further, plans for financial sector reforms include raising the cap on foreign direct investment in the insurance sector to 74 per cent, up from the previous 49 per cent.
Senior citizens above 75 years of age, having pension and interest income, are exempted from filing tax returns. A National Faceless Income Tax Appellate Tribunal Centre shall be established and all the communication between the tribunal and the appellants shall be made electronically. In order to provide a transparent tax appellate mechanism, it is proposed to make the Income Tax Appellate Tribunal faceless and jurisdiction-less. For reducing litigation and to give an impetus to the dispute resolution for small taxpayers, a Dispute Resolution Committee is proposed to be constituted.
To incentivise digital transactions and to reduce the compliance burden of the person who is carrying out almost all of his transactions digitally, it is proposed to increase the limit for tax audit for persons who are undertaking 95 per cent of transactions digitally from Rs 5 crore to Rs 10 crore.
An agriculture Infrastructure and Development Cess of Rs 2.5 per litre has been imposed on petrol and Rs 4 per litre on diesel. Unbranded petrol and diesel will attract basic excise duty of Rs 1.4 and Rs 1.8 per litre respectively. 100 per cent Agriculture Infrastructure and Development Cess on alcoholic beverages Further, an Agriculture Infrastructure and Development Cess (agri cess) is proposed on specified goods, on the customs side. Maybe the increase in tariffs on a clutch of items made by small and medium-sized domestic enterprises is to shield them from competition. Finally, they scrapped it! A voluntary vehicle scrapping policy is proposed to phase out old and unfit vehicles after 20 years in case of personal vehicles and 15 years in case of commercial vehicles.
Given that there is no increase in direct taxes, it exacerbates India’s delicate fiscal position. The fiscal expansionism also risks stoking inflation, as it comes with recovery already under way. Increased government spending for an extended period will create inflationary impulses over the medium term. The government’s tax proposals, particularly related to introduction of new cess and import duties on various products, could also cause inflation to rise. The RBI may find it difficult to support the government’s borrowing programme if inflation returns.
Markets discount the policy statements of the government in advance. The major indices rallied after the announcements of higher government spending, bank privatisation, liberalisation of the insurance sector and protective tariff increases over the next financial year. Markets may digest the deep analysis narration slowly on inflation friendly expansion, future debt-dependent programmes of the government, and increase in interest rates. Protectionism in terms of tariffs may help inefficient firms temporarily, but ultimately it is a drag on the pocket of the taxpayer. Global ratings agencies S&P, Moody’s and Fitch currently have the lowest investment grade rating on India, just a notch above junk. Given the debt dependence of India for capital expenditure projects, the future ratings may not be much better for India.
India’s GDP contracted 24 per cent yoy in the April-June quarter, when economic activities were restricted by a strict coronavirus lockdown. However, as restrictions have eased, the economy has been bouncing back, with manufacturing activity now back to pre-pandemic levels, according to IHS Markit, although services still lag behind. As herd immunity is increasing in India, India’s GDP may recover back to its prepandemic level after an 8 per cent contraction in 2020. The sharp rebound comes from a much lower base given that GDP entered the negative zone in 2020-21. There is no doubt that Covid-19 has ravaged the country, shrunk its GDP, sent unemployment soaring and added to the distress of a banking sector that was already in crisis. The budget’s idea to spend big to push growth is welcome but in the absence of a concrete plan for raising funds, it remains a mirage of hopes.
(Dr VVLN Sastry is a post-doctorate in Economics, a PhD in Law and Public Policy, a passionate economist and a financial and legal expert.)
The Union budget for fiscal 2021-22 presented by Union Finance Minister Nirmala Sitharaman may prove to be a game-changer for the Indian economy. This budget made me jubilant and I am now highly optimistic about the rapid growth of the economy. If the budget proposals are effectively implemented, the GDP can certainly grow at 9 to 10 per cent from fiscal 2022 onwards.
I am extremely happy that Ms Sitharaman has paid serious attention to the poor state of our healthcare and health infrastructure. The budget signals were the government's priorities lie. In its fight against Covid-19, this government has had to bear the brunt of 70 years of underspending on health care and health infrastructure. It has unsurprisingly focused on the sector through an expansion of expenditure on health and nutrition from Rs. 94,000 crore to over Rs. 2.2 lakh crore. As recommended by many economists, the budget provides a strong Keynesian stimulus. There is a significant enhancement of allocation to existing water supply and sanitation programmes.
Interestingly, as a pleasant surprise, this year, there are no complaints about Ms Sitharaman’s budget. All measures announced by her are positive and moves like privatisation, disinvestment, earmarking a huge amount for developing infrastructure, absence of fresh taxes and allocation of a bumper amount of Rs 2,23,345 crore for investment in health care and health infrastructure are all highly positive, revolutionary and progressive steps which can certainly change the face of the economy with a rapid pace of growth. I appreciate the fact that the government has learnt a valuable lesson from the Covid19 pandemic Covid-19 and Ms Sitharaman has gone for gigantic investment in the health space.
An initiative like National Rail Plan 2030 will go a long way in creating a future-ready railway system by the end of the current decade. The move for public-private partnership in the fields of port management and waterways is a step in the right direction. Accordingly, major ports will be moving from managing their operational services on their own to a model where private partners will manage it for them.
The Finance Minister should be congratulated for a major economic reform in increasing the FDI limit in the insurance sector with an amendment to the Insurance Act 1938 to increase the permissible FDI limit from 49 per cent to 74 per cent and allow foreign ownership and control, with safeguards. Viewed from several angles, the budget is an impressive fiscal exercise, but I fail to understand why the Finance Minister has reduced allocations for vital areas like education and environment. I am also worried over the limited job opportunities for the youth who are completing their studies. Hundreds of thousands of students who will seek employment in the coming days should not be disappointed. This is an area which needs serious attention. Needless to say, I like the budget very much. But there should be effective execution of the budget proposals. Otherwise, the benefits of the budget will remain only on paper.
(Mr Taparia is Managing Director of the Supreme group of industries)
What’s common between the recently played and won Test match at Gabba, Australia and the recent budget announcement? A one-line summary -- in both events they chose to play aggressively. Rishabh Pant played a natural game with an aggressively played innings and scored a win for India. On February 1, the FM presented a growth-stimulated budget which produced record gain in capital markets with the Sensex rising 2,500 points within hours and the Nifty rising 650 points. In both cases, they chose to play decisively and for a win! Budget 2021-22 has been well-received by the markets and economists because: (a) It spared individuals and corporates any new taxes. No new taxes in the budget is a rare situation and is a significant deviation from the past. A welcome change. Thank you, FM. (b) It has pushed the economy to produce growth of 14-15%, which came as a surprise because the planned growth is smartly funded from monetisation of assets, raising fresh funds and attracting global investors
There are investment opportunities of more than Rs 10 lakh crore, which I have summarised here after analysing Ms Sitharaman’s budgetary proposals. The banking sector is the biggest beneficiary.
The banking sector alone may end up attracting between Rs 5-7 Lakh crore from the above initiatives.
The auto sector is another major beneficiary as the FM has proposed a vehicle scrappage policy
(1) Passenger vehicles (PVs) above 20 years and commercial vehicles (CVs) above 15 years will
qualify
for scrapping.
(2) It is estimated that more than 34 Lakhs PVs are
more than 15 years old, and more than 20 lakh
vehicles are 20 years old. Also, more than 17 lakh
CVs are more than 15 years old.
3) The automobile industry is a Rs 4,50,000-crore industry and it is estimated that 30%
additional demand will be generated under the scrappage policy.
This is indeed a game-changer. Revival in the auto
sector could propel growth for the auto ancillary
industry and also for all the wheels of the economy.
(4) Rs 18,000 crore is being allocated for spending on
new buses for building urban infrastructure.
The infrastructure sector is another major beneficiary.
(1) Roads and highway infrastructure under the
Bharatmala project is already under implementation amounting to Rs 5.54 lakh crore.
(2) 5 road corridors are being announced covering
southern and eastern India, amounting to more than
Rs 3.50 lakh crore.
(3) A Rs 1.10 lakh crore capex programme has been
announced for the Railways and new railway corridors are proposed to be developed in eastern,
western and northern states.
(4) 7 ports will come under public-private partnership
(PPP).
(5) 7 new textile parks are being announced.
(6) Urban Infrastructure covering metro and bus services for ‘B’ cities has been announced,
which is
likely to attract funds from global investors.
(7) A new fintech hub is being proposed at Gift City,
IFSC.
(8) An asset monetisation programme covering
monetisation of roads, power infrastructure, gas
pipelines, railways, warehousing and sports stadium
infrastructure has been announced. The move
promises to unlock value from government-owned
assets.
(9) The increase in the FDI limit for the insurance sector from 49% to 74% has the potential to
attract an
additional Rs 1.25 lakh crore.
It was music to the ears when the FM spoke about the IPO of Life Insurance Corporation. LIC could be easily listed with a market cap in excess of Rs 5 cakh crore. At a 10% divestment, it could be an IPO well above Rs 50,000 crore. Surely, it will attract many global players to invest in LIC. Divestments of BPCL, Concor andPawan Hans, among many others, is likely to happen along with ailing PSUs with Rs 1.75 lakh crore receipts likely. One may ask, will it happen this time? Yes, it could! I have been long asking for creating a separate SPV (special purpose vehicle) for effecting the divestment of PSUs. It is good to hear the FM providing for an SPV for divesting ailing PSUs and monetising them. Indeed, the move is promising and should succeed this time. Rationalization of customs duty on some items and charging agri cess on petrol (Rs 2.50/litre) and diesel (Rs 4/litre) are some of the measures on the indirect tax front. The agri cess on petrol and diesel is impact- neutral on the consumer as it is done by reducing excise and replacing it with the agri cess.
After the disruptions of the pandemic, the least one could have expected was to maintain economic growth and prevent the financials of the country from being over-stretched. In Budget 2021-22, it is very heartening to find that the additional growth is provided for but without raising taxes. Growth has been funded smartly out of non-tax resources. This is a brilliant move. Without raising taxes, higher GDP growth of more than 14% is provided for, and the resources will be funds from global investors.
As I visualise it, raising money from global investors, and that too without stretching the finances of the country, will lead to re-rating of India by global rating agencies. With the expected improvement in ratings, additional inflow of low-cost funds will be the resulting outcome. In turn, re-rated India will have a favourable currency valuation, preventing depreciation of the currency. Comparatively, with less stress on borrowings by the government, it will also have a favourable impact on interest cost. The lower the cost of funds, the better it will be for the financial viability of infrastructure projects and for the financial health of the banking sector. The investment market has been cheered up by the
budget as growth in the economy is provided for without stretching the financials of India. Higher spending on infrastructure is expected to result in better consumption in the economy. Greater consumption would result in higher tax collections and better financial health of the economy. The writing on the wall is clear: India is heading for a $ 5 trillion economy in the next 5 years. Welcome to the world of long-term investing — you are likely to grow your wealth handsomely! Or shall I say, the beginning of better times has started for Indian investors! Enjoy the journey, the direction is already set.
(Mr Taparia is Managing Director of the Supreme group of industries)
February 15, 2025 - First Issue
Industry Review
VOL XVI - 10
February 01-15, 2025
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