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After 6 days of losing streak, Indian Stock Market needed something to get the boost. Probably they've got something better than expected. Sensex & Nifty both experienced the best budget day gain since 1997. Equity markets rallied 3.5% on budget speech with no negatives. Big thumbs-up!
Let's quickly decode top 10 major highlights of budget in layman's terms!
India currently spends about 1% of GDP on health, among the lowest for any major economy. In the Union Budget 2021-22, FM proposed an outlay of Rs 2.23 lakh crore towards health and well-being. That’s a 137% increase over the Rs 94,452-crore budgeted expenditure on healthcare in the ongoing fiscal. The government plans to spend Rs 64,180 crore on the scheme spanning over six years. Besides, the plan includes the government tripling its spending on drinking water and sanitation to Rs 60,030 crore from Rs 21,5218 crore in last year’s budget.
FM also proposed spending Rs 35,000 crore for Covid-19 vaccines in the next fiscal, and announced the rollout of pneumococcal vaccines. Such vaccines can help India avoid more than 50,000 annual child deaths.
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2) Fiscal Deficit -
When government spends more than it earns then we call it as fiscal deficit.
When government earns more than it spends then we call it as fiscal surplus.
Well for a developing country like India, fiscal surplus is still a dream. Let's stick to fiscal deficit only. wait! How come a country can spend more than it earns? Well, by borrowing.
Centre's borrowings and liabilities has been the highest source from which money has come into the economy. The government had to borrow more in order to uplift a sluggish economy through spending boost. Besides, GST and income tax collections have also been a major source of revenue for the government in the past year.
The government estimates fiscal deficit of 6.8% of the GDP in the next financial year beginning April 1, but fiscal deficit in 2020-21 is estimated to soar up to 9.5% due to rise in expenditure on account of the outbreak of Covid-19 and moderation in revenue during this fiscal year.
3) Foreign Direct Investment
The government has planned to increase the FDI limit in the insurance sector. now, foreign investors can now hold a majority stake in an Indian insurance company — 74% from 49% previously. The move aimed at attracting greater overseas capital inflows to help enhance insurance penetration in the country. It was in 2015 when the government hiked the FDI cap in the insurance sector from 26% to 49%.
4) The big fat Divestment Target-
Disinvestment means sale or liquidation of assets by the government mainly to raise funds. The central government aims to garner Rs 1.75 lakh crore through divestments in 2021-22. Last year, the government had budgeted to raise Rs 2.1 lakh crore through divestments but has raised only Rs 19,499 crore so far in FY21 from asset sales in public sector firms.
Some of the big-ticket divestments planned last year, such an IPO of LIC will conclude this year. Other sales like Bharat Petroleum Corp., Shipping Corporation of India, Clearing Corporation of India Ltd., BEML Ltd. will also happen this year.
- Apart from IDBI Bank Ltd., the divestment of two other state-run lenders and one general insurer has been proposed in FY22. (Name not specified).
- FM also proposed setting up a special purpose vehicle to sell off land assets owned by various ministries and departments.
- Meaningful fiscal support to the economy in FY22 hinges on revenue generation from the government’s divestment program.
Roads operated by NHAI, power transmission assets operated by the Power Grid Corporation, oil and gas pipelines of GAIL, IOCL and HPCL, Airports in Tier 2 and Tier 3 cities, Rail infrastructure, Warehouses and Sports Stadiums. There will be a lot of monetisation.
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5) Capital expenditure in National Infrastructure Pipeline (NIP)
FM proposed to significantly enhance capital expenditure to Rs 5.54 lakh crore (34.5% more than the BE of 2020-21) in the next fiscal, besides creating institutional structures and giving a big thrust to monetizing assets to achieve the goals of the National Infrastructure Pipeline (NIP). NIP was launched in December 2019 with 6,835 projects, has now been expanded to 7,400 projects and around 217 projects worth Rs 1.10 lakh crore under some key infrastructure ministries have been completed.
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6) Agriculture Infrastructure Cess
The Budget has imposed an Agriculture Infrastructure and Development Cess (AIDC) of Rs 2.5 per litre on petrol and Rs 4 per litre on diesel. But thankfully, these will not result in any additional burden on consumers. Why? The reason for it is that unbranded petrol was earlier attracting a basic excise duty (BED) of Rs 2.98 and a special additional excise duty (SAED) of Rs 12 per litre. These have now been reduced to Rs 1.4 and Rs 11 per litre, respectively.
Math: The BED on unbranded diesel has been cut from Rs 4.83 to Rs 1.8 and the SAEC on it from Rs 9 to Rs 8 per litre. So, the overall excise incidence on petrol (BED+SAEC+AIDC) will now be Rs 14.9/litre, which was previously Rs 14.98, while that on diesel is Rs 13.8 (earlier Rs 13.83).
A similar readjustment has been made for alcoholic beverages that currently attract 150% basic customs duty. That basic import duty has now been slashed to 50%, even as the Budget has proposed an AIDC of 100%.
Net net the consumer does not have to pay anything extra :)
7) The Concept of 'Bad Banks'
Bad loan means, the loans which are unlikely to be repaid back by the borrower.
Increasing amount of bad loans of the banks has been the biggest challenge for RBI. In its Financial Stability Report they had warned that the gross NPA ratio may increase from 7.5% in September 2020 to 13.5% by September 2021. This will be the highest in more than 22 years and will put pressure not just on our banking system but also on the economy.
Solution? Bad Bank
So, What is a Bad Bank?
A ‘bad bank’ is a bank that buys the bad loans of other lenders and financial institutions to help clear their balance sheets. The bad bank then resolves these bad assets over a period of time. When the banks are freed of the NPA burden, they can take a more positive look at the new loans. Ideally, such a bank should be owned by the banks which have the most of NPAs.
Several leading economists feel “bad bank” could be a good idea to free the banks from the mounting burden of the NPAs.
"Bad banks have been under discussion for a long time, we are open to looking up any proposal on bad banks. It is for the government to come up with such a proposal, and if any, we will examine the proposal." - Shaktikanta Das, RBI Governor
Former RBI governor Raghuram Rajan has also suggested the government to privatise select public sector banks (PSBs) and set up a bad bank to deal with NPAs and dilute the role of department of financial services.
The Union budget for FY22 proposed to recapitalize public sector banks (PSBs) for ₹20,000 crore and set up a bad bank to remove toxic assets, two decisions that are expected to improve credit flow.
8) Taxation, Deposit Insurance
No big changes in Tax regime. Senior Citizens will now be exempt from filing returns after 75 years of age (if they only have pension & interest income) and the interest accruing out of your employee provident fund might be subject to taxes if you are contributing more than ₹2.5 lakhs per annum towards the EPF.
If you are worried your deposits may get stuck in your bank if it goes bust, you have a reason to cheer. FM Nirmala Sitharaman in her Budget speech announced that depositors will have an 'easy and time-bound' access to deposits if a bank gets liquidated. Deposit Insurance and Credit Guarantee Corporation Act (DICGC), (a wholly-owned subsidiary of RBI) provides deposit insurance to bank depositors if a bank fails to pay them their deposits. Last year, the amount of deposit insurance per individual was hiked to Rs 5 lakh from Rs 1 lakh. The Rs 5 lakh insurance includes both principal and interest amount held by each depositor.
9) Big Discoms Rescue
The power sector in India has three components — generation, transmission and distribution. Discoms are the companies that are responsible for the distribution the electricity to the consumers. These do not produce electricity, they buy the electricity from the producers and then sell it to consumers.
The Union Budget 2021-22 allocated Rs 3.05 lakh crore for the power distribution, to be released over five years. Why this much amount allocated?
At the end of December 2020, the outstanding amount payable by DISCOMS to generating companies stood at Rs 126,644 crores — an increase of about 20-25% from August 2019. The sector’s slow path to recovery has been despite the bail-out packages introduced by the Union government.
10) Big Infra Push
This is new one, the government will set up a new Development Finance Institution (DFI) called the National Bank for Financing Infrastructure and Development with a view to mobilise the requirement for funding of the ambitious national infrastructure pipeline. A professionally-managed DFI to be set up to provide, enable and catalyze infrastructure financing. The government proposes Rs 20,000 crore to capitalise this institution and aims to have a lending portfolio of at least Rs 5 lakh crore in three years.
Winners of this Budget: Hospital, Real Estate & Construction, Metal Makers, State-run Banks, Textiles.
Losers of this Budget: Bonds, Exporters, Farmers/Rural India, IT
Research Analyst (SEBI Regd.)
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