Thrust is on sustaining economic growth through infra spending

Finance Minister Nirmala Sitharaman presented the third Budget of NDA 2.0 against the backdrop of pandemic-hit economy. There were hopes of Budget bringing in measures that would drive the economy – which the government clearly succeeded in doing.

Key positives

The government seemed fully prepared to back and facilitate a reset of the economy. Budget proposals seems positive as the thrust is clearly on sustaining the economic growth through spending across the infra ecosystem. This is a big takeaway for the economy and equity markets as it can broad-base the growth momentum in the economy and revive the capex cycle.

The increased outlay to infrastructure, capex, healthcare and the boost to overall credit flow in the business while clearing all the toxic assets in the banking system are key positives that should spur GDP growth. Further, increased FDI limit in insurance (74 per cent from 49 per cent), reforms in power distribution, asset monetisation and focus on divestment are some of the key takeaways.

With ₹5.54-lakh crore earmarked for capex (₹4.12 lakh crore in FY21) for FY22, there is huge focus on strengthening infrastructure through industrial corridors, highways, railways, ports, power, affordable housing and city gas distribution, especially with the highest-ever allocation to MORTH (Ministry of Road Transport and Highways). It laid more emphasis on PPP, special schemes for faster resolution of disputes, augmentation of infra-financing sources such as debt-financing institution, al (DFI), asset monetisation and strategic disinvestment plan. Government is focused on Atmanirbharta through performance-linked incentives and mega textile parks which is expected to fuel the industrial thrust. The Finance Minister announced a total spend of ₹64,180 crore on Atmanirbhar Health Yojna.

The Minister announced that deduction on payment of interest for affordable housing has been extended by 1 one year and there has been a tax exemption for notified affordable housing for migrant workers. which would boost affordable housing. The insurance sector is in for a great boost, with the government increasing FDI limit in the sector increase to 74 per cent % from the existing 49 per cent.

Absence of the much-feared Covid tax and surcharges on income tax is a great relief. The Minister also announced the scrapping of income tax return for senior citizens under certain conditions, new rules for removal of double- taxation for NRIs, and a cut in the time period of tax assessments which are all welcome.

The rationalisation of tax structures for FPIs, NRIs, InvITS and REITs will help attract more funds . A consolidated Securities Market Act, gold exchange regulator, LIC IPO and disinvestment in some PSUs will strengthen the capital market. Tax-efficient zero-coupon bonds for infra-financing will bring in significant flowsand enhance the participation of the capital markets.

Key negatives

Given the positive and expansionary outlook towards economy, the fiscal deficit is expected to be high. A slump in government revenues amid the pandemic has led to a sharp rise in deficit and market borrowing. Thus, the fiscal deficit is set to jump to 9.5 per cent of GDP in 2020-21., sharply higher than 3.5 per cent in the Budget Estimates.

It has been set at 6.8 per cent of GDP for FY22, with higher gross borrowing of ₹12 lakh crore which that is likely to exert pressure on interest rates. It will take another four years for bringing the deficit down to less than 4.5 per cent. An Agriculture Infrastructure and Development Cess of ₹2.5 per litre has also been imposed on petrol and ₹4 per litre on diesel. However, the basic custom duty has been cut so that consumer does not bear extra burden on most of the items.

The author is MD & CEO, Motilal Oswal Financial Services Ltd

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