INSUBCONTINENT EXCLUSIVE:
Union Budget 2021 is behind us
While there are many things to say about the Budget, the core takeaway for us was the realistic growth estimate of 10 per cent (nominal) and
a fiscal deficit of 3.5 per cent for FY21.
The core thrust of this Budget was to improve the ease of doing business
To achieve that goal, the government is trying to improve contract enforcement
If the government is able to execute this on ground, it would vastly increase business optimism
Improved contract enforcement reduces credit risk premium at the last mile level
Overall, contract enforcement brings in a degree of business predictability and improve project deliveries all through the system
The government is also taking steps to remove the potential criminal liability upon businessmen for civil matters, which is likely to
improve business sentiment.
The government is also planning to bring in a tax charter
This charter will introduce clear rights and obligations for the taxpayer and protect the businessman from tax harassment
Thus, the businessman may have more time to concentrate on their business than lawyer.
There is a view that the current economic slowdown
needs to be stemmed by building consumption demand
That, in our view is not the core problem
The core problem is that of credit crunch.
Having said that, the government has, through multiple means, provided ample spending stimulus
For instance, the average GST rate has come down from 14.4 per cent to 11.8 per cent
It means the foregone tax revenue of around Rs 2 lakh crore was left in the hands of the consumer
Likewise, the telecom price competition has left a value of around Rs 1 lakh crore in hands of the consumer
direct income, at least debt and EMI burden was reduced
Concurrently, the outflow from Seventh Pay Commission saw an income growth of around Rs 1 lakh crore in hands of government employees and
This also is an indirect income in the hands of consumers
Finally, and more importantly, GST, which is a consumption tax, continues to remain buoyant despite occasional slide
This means consumption undercurrent remains strong
So there is ample demand stimulus within the economy.
The core issue, as mentioned earlier is that of credit growth
The trust deficit in the aftermath of IL-FS default has seen the credit to NBFC sectors dry up
This, along with the slow credit offtake in the NPA-riddled PSU banking sectors, caused the overall credit supply in the economy dry up
In 2019, the incremental credit supply to commercial sector dropped by around Rs 5.16 lakh crore
And it is the slow lending pace that needs to pick up.
Guest ContributorChange in receipts and spends of Budgets on a five-year block
(2014-19) over (2009-13)Source: Kotak institutional equities, Budget documentThe government has tried to address this issue over multiple
Over five years, it has pumped in around $45 billion to recapitalise and reviving the PSU banking sector
It has foot the bill of nearly $57 billion in farm loan waivers
This waiver has relieved the farmers as well as banks from being locked in a mutual tussle.
At that, the government has raised resources to
To achieve this, the government has tapped into small savings and divestments.
The FY21 divestment target of Rs 2.1 lakh crore is tall
It is more than double the target we have achieved in any year in the past
If, the strategic divestment of BPCL and the maiden IPO of LIC are done in FY21, then this divestment number looks achievable.
This Budget
also tried to address the high trade deficit by imposing duties on many import items
At the same time, it provided strong incentives for manufacturing investments in India.
On the taxation front, the key initiative, other
than the tax charter, was the cancellation of dividend distribution tax and making it taxable in the hands of the investors
By doing so, FPIs would be freed from double-taxation whammy since their tax liability would now only be with respect to their home country
laws.
The Finance Minister also proposed new lower tax slabs for individual taxpayers, who are willing to forgo the existing deductions and
This way, a choice of two tax regimes has been provided
One for those who prefer more cash-in-hand; and other for those who are seeking to invest for the long term.
From the capital markets
viewpoint, the FPI bond limit has been increased from 9 per cent to 15 per cent
While the limit is still under-utilized, but with the possible inclusion of India in the MSCI global bond indices, we may see these
appetites getting well tapped.
The government is in advanced stages of issuing specific securities that will not have limits to FPI
This way, sizeable passive funds may find their way into Indian debt market.
The Budget has removed the tax that the sovereign wealth funds
may have had to pay for their investment in infrastructure companies
This will invite long-term and strategic capital in our infrastructure sector
Likewise, there is a proposal to launch an ETF for government securities on the same lines as bond ETF
This will provide convenient access for retail investors, pension funds and long term investors.
RBI, in tandem with the Union government,
adapted an effective and innovative approach by way of introducing LTRO (long-term repo operations)
Here RBI will conduct auction of one-year and three-year tenures at repo rate
This will create a surge of liquidity in the market and provide lending momentum to the banks
With RBI keeping the possibility of rate cuts open in the future and with ample liquidity in the system, yields at the shorter end of the
yield curve are likely to fall further.
For long-term equity mutual fund investors, the smallcap and midcap segments still continue to
provide investment opportunities
It would be relevant to point out that, we have been highlighting since last six months that the mid- - smallcaps are attractively valued;
and that a bounceback seems imminent
We thank the distributors who aligned accordingly and were thus able to provide their investors the full benefit of the current rally in
smallcaps and midcaps.
Debt fund investors can consider prudently-managed credit risk funds to tap into the wide spreads that are available
currently in high quality bonds
Short-term investors can look at parking their funds in money market / corporate bond segment and utilise SWP route to meet their cash flow
