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Budget 2021-22 Analysis!

Budget 2021-22 Analysis!

Last updated: 01 Feb, 2021 | 01:17 pm

Budget 2021-22 Analysis!
Macro Highlights

The government has continued to follow an expansionary fiscal policy to fund the economic recovery post Covid-19. The budget has estimated a higher fiscal deficit as well as lower disinvestment, but the new borrowings might help the government in managing its finances.

Fiscal deficit for FY21 pegged at 9.5% of GDP. Target set at 6.8% for FY22

Analysis: Amid Covid-19 pandemic & expansionary fiscal policies, the budgetary deficit is posited to rise steeply. Last year, the government had set a very difficult target of a fiscal deficit 3.5% of GDP. This year's number is more realistic given an expansionary Budget. At 9.5% in FY21, the deficit would be the highest in the last 30 years. The 6.8% estimate for FY22 is much higher than analyst expectations of 5.8%.

The government seems to have taken the suggestions of the Economic Survey calling for a continued expansionary fiscal policy to ensure that growth returns to pre-Covid levels. The government forecasts the deficit to narrow to 4.5% by FY26.

Government's divestment target for FY22: Rs 1.75 lakh crore

Analysis: To manage the mammoth fiscal deficit, the government has set an ambitious disinvestment target. While the targeted number is lower than the target of ₹2.1 lakh crore last year, it is still very steep. For perspective, the government has raised less than ₹30,000 crore in asset sales so far in this financial year. The government has met its divestment target only twice in the last 10 years.

To achieve the above target, the government has proposed stake sale in two banks, LIC, Air India, BPCL and a General Insurance Company. To fund the high fiscal deficit, the government has resorted to multilateral borrowings, Small Saving Funds and short term borrowings. It has called for an additional ₹80,000 crore for which it would be approaching the markets in next 2 months.

For middle class and taxpayers

Contrary to expectations, Budget 2021-22 has not provided any income tax relief to taxpayers. There have been no changes in income tax slabs or rates. Standard deduction for the salaried and pensioners also remains the same as before. Luckily, there have been no negative surprises either.

Burden reduced for Senior Citizens above 75 years

Analysis: For senior citizens who only have pension and interest income, the government has provided exemption from filing ITR. The paying bank will deduct the necessary tax on their income. It is to be noted that the relief is only on filing ITR and not tax payment. 

Reopening tax assessment time reduced

Analysis: The government has reduced the time limit for reopening of income tax assessment cases to three years from six years, while for serious tax fraud cases where concealment of income is Rs 50 lakh or more, it would be 10 years. This is to reduce the uncertainty for the taxpayers.

Additional tax deduction of ₹1.5 lakh for interest on home loan extended under Affordable Housing Scheme

Analysis: The government has extended the timeline for taking home loans and claiming additional tax deduction on interest payment till March 31st 2022. The deduction of Rs 1.5 lakh per financial year is available under section 80EEA. This deduction is available over and above the ₹2 lakh deduction available on the interest payment on housing loan subject to certain conditions. The total deduction available to an individual taxpayer on the interest payment of a housing loan for buying an affordable house is Rs 3.5 lakh in a financial year.

Important conditions include

  • The home loan must be taken between April 1, 2021 and March 31, 2022.
  • Stamp duty value of the house property should not exceed Rs 45 lakhs
  • The taxpayer should not own any residential house property as on the date of sanction of the loan
Pre-filled tax returns

In order to make compliance easier for the taxpayer, details of salary income, tax payments, TDS, etc. already come pre-filled in ITR. To further ease filing of returns, details of capital gains from listed securities, dividend income, and interest from banks, post offices will also be pre-filled in income tax returns going forward.

Faster access to funds in case of bank failure

Bank customers won't have to wait for a bank to be liquidated to get back their deposits covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC). If the banking regulator RBI puts a bank under watch, depositors can still get access to funds immediately. This comes as a major relief especially in the context of recent bank failures (PMC Bank). 

For Banks and Insurance

The announcements of cleaning up bank NPA, PSU recapitalisation and hiking FDI in insurance come as a major positive for the banking industry, which has been dealing with the economic impact of the pandemic. Bank Nifty has soared to record high following these announcements. This 'bad bank' will help to tackle the upcoming NPA wave.

Cleaning up of bank NPAs:

The government has proposed setting up an asset reconstruction company and an asset management company (AMC) to clean up non-performing assets in the banking sector. This is being done to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds and other potential investors for eventual value realization.

Analysis: The Economic Survey 2021 had suggested a fresh asset quality review of banks after the Covid-19-related regulatory forbearances are removed. This is important because the banks' gross NPA's are expected to rise to 13.5% by September 2021, from 7.5% in September 2020 under the baseline scenario, according to RBI estimates.

PSU Bank recapitalisation

To further consolidate the financial capacity of PSBs, further recapitalization of ₹20,000 crores is proposed in 2021-22. This is being done to help the banks meet the regulatory capital requirements. 

FDI in insurance hiked to 74% from 49% earlier:

The government has proposed to increase the permissible FDI limit from 49% to 74% in insurance companies and allow foreign ownership and control with safeguards. 

This is a welcome change. This paves the way for more M&A activity in the insurance sector. All the listed insurance players including HDFC Life, SBI Life and ICICI Pru Life ended the day's session higher.

Infrastructure spending
  • Development Finance Institution: The DFI will be set up on a capital base of ₹20,000 crore and will have a lending target of ₹5 lakh crore in three years. Debt financing through the infrastructure investment trust (InvIT) and real estate investment trust (REIT) routes will be enabled through necessary changes to the current rules.
  • Production linked incentives for Manufacturing:  The government has committed nearly ₹1.97 lakh crores, over 5 years starting FY 2021-22. 
  • The table below shows allocation for various projects.

The government has announced heavy outlays for Railways, Ports, Energy etc. All of this together is expected to boost infra development in the country.

Healthcare

The government has provided ₹35,000 crores for Covid-19 vaccine in BE 2021-22. A new scheme, PM AtmaNirbhar Swasth Bharat Yojana, will be launched with an investment of ₹64,180 crores over 6 years.

Analysis: This will develop 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.

Vehicle scrappage policy

Vehicles would undergo fitness tests in automated fitness centres after 20 years in case of personal vehicles, and after 15 years in case of commercial vehicles.

Analysis: This policy is expected to boost automobile demand, which has been impacted by weak consumer sentiment amid a slowdown in the broader economy. Major automobile stocks including Maruti Suzuki, M&M and Bajaj Auto have reacted positively to the announcements.

Final take

Overall, the Budget has given priority to more fiscal support and spending with the hope that the resultant economic growth will offset the negative impact stemming from a higher deficit. The slew of measures announced for infrastructure and rural development should help to bring the economy back on track.  No negative surprises in terms of taxation such as a higher LTCG or new surcharges comes as a further relief for the taxpayers in these difficult times. The market seems to have given a thumbs up to the Budget, posting its best Budget day gain in a long time as measures such as cleaning up of NPAs, vehicle scrappage policy, hiking FDI in insurance, tax incentives for FPIs came as major positives, among others.

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