Budget 2021: Promising but ambitious one!

The Budget 2021, a highly unique one due to the pandemic, provided the confidence to the investors as witnessed by Nifty50, which closed the day 4.7% higher at 14,281. First do no harm or “primum non nocere”, is a doctrine as old as medicine itself. The Finance Minister adopted this approach to capital markets, taxation and the results are there for all to see. Investors were expecting harsh revenue raising measures as epidemic related expenses mounted while revenues shrank. Finance minister presented an expansionary budget without significant increase in taxation.

Following are the key highlights from the budget 2021;

• The nominal growth rate target has been set at 14.4% for FY22 as against 10% in FY21.
• The estimated fiscal deficit stands at 9.5% in FY21 vs 3.5% as per the previous estimate. The deficit is expected to be 6.8% for FY22.
• India FY21 Gross Tax revenue estimate said to be reduced by about Rs 5 lakh crore. The Government is estimating FY22 expenditure at about Rs 35 lakh crore.
• A sharp increase in capital expenditure on the infrastructure segment- Rs 5.54 lakh crore, 34% higher than the budget estimate of FY21.
• Announcing its version of a bad bank, the Government will set up an asset reconstruction and management company to take over the bad loans. A bad bank will act as an aggregator of all stressed assets in the system. It is set up to buy the bad loans and other illiquid holdings of another financial institution.
• Reducing customs duty uniformly to 7.5% on semi, flat and long products of non-alloy, alloy and stainless steel. Exempting duty on steel scrap till March 2022. To provide relief to copper recyclers, reducing duty on copper scrap from 5% to 2.5%.
• Raising customs duty on some auto parts to 15%, on cotton from 0% to 10%, on raw silk and silk yarn from 10% to 15%.
• Set aside Rs 15,700 crore for medium and small enterprises in FY22, double of what was budgeted in the FY21.
• The central government aims to garner Rs 1.75 lakh crore through divestments in FY22. In FY21, the government had budgeted to raise Rs 2.1 lakh crore through divestments but managed to achieve only Rs 50,304 crore. The central government will further incentivize states to divest assets.
• Provide Rs 20,000 crore in FY22 for re-capitalization of public sector banks.
• Proposed to increase the permissible limit for Foreign Direct Investment for insurance companies to 74% from 49% along with allowing foreign ownership and control with safeguards.
• The much-awaited voluntary vehicle scrappage policy is claimed to be bringing Rs 43,000 crore business opportunity by boosting consumption in the auto industry and helping the environment. Vehicles would undergo fitness tests in automated fitness centers after 20 years in case of personal vehicles, and after 15 years in case of commercial vehicles.
• To further augment road infrastructure, more economic corridors are being planned. 3,500 km of national highway works in Tamil Nadu, investment of Rs 1.03 lakh crore 1,100 km of national highway works in Kerala, investment of Rs 65,000 crore 675 km of highway works in West Bengal, cost of Rs 25,000 crore.
• The imposition of Agriculture, Infrastructure & Development Cess on the following items after reducing customs duty is expected to fund infrastructure for agriculture.

• Government sets agriculture credit target of Rs 16.5 lakh crore for FY22 to increase provision to a rural infra development fund to Rs 40,000 crore from Rs 30,000 crore. Five major fishing harbours to be developed as hubs for economic activity.
• Proposed an outlay of Rs 2.23 lakh crore towards the healthcare sector, 137% higher than Rs 94,452 crore projected in FY21. The spending will include a new centrally sponsored scheme, the PM Atmanirbhar Swasth Bharat Yojana, to strengthen the health infrastructure of the country. The government plans to spend Rs 64,180 crore on the scheme spanning over six years.
• The Government will rationalize customs duty on gold & silver. The gold currently attracts an import duty of 12.5% which has been reduced to 7.5% and Agriculture, Infrastructure & Development Cess of 2.5% is imposed.

Impact of the budget announcement on the sectors

• The formation of the bad bank will help the banks to liquidate its non-performing loans in a comparatively easier way. The banking industry is expected to benefit out of it.
• The Government is expected to provide higher recapitalisation to the Public Sector Undertaking (PSU) banks. This will aid in providing relief from capital erosion due to the COVID impact.
• The vehicle scrappage policy, although a voluntary one, is expected to provide tailwinds in the auto industry, especially the Commercial Vehicles segment. The tractor and two-wheeler makers expect increased allocation towards the rural economy.
• The increased spending on the healthcare sector is expected to provide opportunities for the growth of the industry. The healthcare infrastructure is expected to improve as a result of increasing spending towards the sector.

 Investment Strategy

• With the Government’s approach to have an expansionary budget, investors will be focusing more on winners like cyclical players instead of focusing on safety net stocks like those belonging to Pharma and Consumer sectors.
• We believe that the mid-cap stocks will be a late-cycle story with the focus on the expansionary budget. We have already recommended quality mid-caps in the past and we will continue to spot opportunities in the mid-caps space as and when they arise.

We will be watching the execution of the budget very closely as any deviation from the expected performance, especially the receipts side, which can affect the interest rates meaningfully.