This year’s Union Budget 2021, slated to be presented on 1st February 2021, is going to be completely paperless in the wake of the corona pandemic, as the Budget papers will not be printed and only the digital copies will be circulated. India’s Finance Minister Nirmala Sitharaman has described her upcoming budget as unlike anything seen in the last 100 years.
When she presents it on 1st February, the FM will not only aim to repair battered government finances and ensure demand recovers in an economy facing its worst contraction since 1952, she must also revive declining revenue and restore millions of jobs lost during the pandemic. That will be crucial to boosting consumer sentiment in a country where local demand contributes nearly 60% of GDP.
Experts believe that tax cuts, higher capital expenditure and greater spending on infrastructure projects — which tend to support low-income earners — hold the key to unlocking demand for goods and services.
Investors’ interest in banking sectors, especially public sector banks, remained muted in recent times due to concerns over increasing credit growth. In recent years, banks have had some success in bringing down the share of toxic assets on their books but the pandemic could undo those gains. Lending can pick up steam only if banks are able to find additional capital buffers to offset the impairment of their assets. Public banks still account for 2/3rd of the banking sector credit. ICRA expects that the budgeted capital of Rs.20,000 cr along with the external equity raise of around Rs.7,500 cr by a few public sector banks will be sufficient for public banks for the current financial year.
One of the long-standing demands of the real estate sector is to be provided with the industry status. It will help in fundraising for projects from various schemes. The sector also hopes that the budget will introduce GST reforms by bringing back the Input Tax Credit. This will help in bringing down the cost of construction thus reducing the property prices. Furthermore, the sector expects GST waiver for under-construction properties in the housing sector. These reforms will push the demand in the sector and ease the prevailing financial crunch. The sector is also expecting the government to expand its affordable housing scheme and give more tax benefits to potential homebuyers.
The government’s defence spending got a boost last year in the wake of the conflict with China at the Ladakh border. The government is likely to announce higher budget allocation for the defence sector, with focus on indigenous procurement and R&D.
The auto sector has strongly rebounded from the pandemic-induced economic shock. Automakers in the country now expect more demand-creating measures in the budget for quicker sales recovery. The two primary expectations are a cut in GST rates & introduction of a scrappage policy.
Privatization of trains and infrastructure development remain top priorities for the Indian Railways. While budget allocation may see only a marginal rise, measures may be announced for better public-private partnership (PPP) in passenger train operations.
India has close to 68 lakh Udyog Aadhar registered MSMEs and another 6.3 cr MSMEs. As per an estimate, currently, there are close to 30 unicorn Indian startups, and 18 out of the 30 unicorns have significant foreign direct investments. These bold statistics constituting almost 45% of the manufacturing output, 95% of the number of industrial units, 40% of exports, and employing nearly 11 cr people make MSMEs the largest source of employment after the agriculture sector. The MSMEs have borne the maximum brunt of this devastation. Some of them had to shut shop on account of lockdown measures, and the labor returning to their respective homes further compounded the problem.
The coronavirus pandemic exposed gaps in India’s healthcare system, which was overwhelmed as infections rose quickly in the country. Over 1.5 lakh people died in the country due to the Covid-19 pandemic and many of them died as they did not receive treatment on time. Therefore, this year’s budget is widely expected to focus on improving the country’s healthcare system, especially in rural belts.
The crisis of ideas in traditional media has been exposed due to the pandemic. Theatres were shut down and advertising was hugely disrupted. That’s when digital media and streaming services picked up the pace and took over the screens. Any stimulus package centric to the traditional media industry overall would help it bounce back.
The hospitality, travel & tourism industry has been hit hard by the Covid pandemic in 2020. They are hoping for some relief from the budget. However, with a focus on executing the Covid vaccination program in the country and increased burden on the exchequer, it seems less likely that Budget 2021 will relieve the tourism sector in the form of significant financial outlay.
An increase in the income tax bracket is overdue and it’s something that every salaried individual wants in every Union budget. As far as tax rebate is concerned, a higher deduction u/s 80C to avail tax deduction will be a welcome relief because this will encourage more salaried taxpayers to save and make long-term investment. Increasing NPS limit for additional deduction will help people to save tax and encourage long-term investing.
The increase in tax slab limit can improve consumption as there will be more disposable income at salaried individual’s end. Over last few years, even the standard of living is constantly improving and so has been the cost of living in most of the cities. In addition, standard deductions ensure that all taxpayers have at least some income that is not subject to income tax. These generally increase each year due to inflation. Sources said that while the level of deduction has not been worked out, if accepted, it may go up from Rs.50,000 to Rs.75,000 based on various pre-budget recommendations given to the Finance Ministry.
The FM may also consider investing more on public infrastructure and offer incentives for private infrastructure investments.
To sum up, the economic weakness makes it imperative that the Budget is pro-growth. This should mean that the focus of the Budget should not be on how to collect more taxes, as it has sometimes been in the past, but on how to revive growth in the economy. There are two ways to push demand. One is by an increase in expenditure, and the other is by a cut in taxes. This time, when most economists are arguing for a rise in fiscal deficit, the government, for the first time, will not be criticized for not being fiscally prudent, in fact, the larger the fiscal deficit, the less critical the critics will be. The revised fiscal deficit for the year 2020-21 may be as high as 6-7% of GDP. The Covid-19 pandemic has provided the government a unique opportunity to drive growth which they should not let go easily.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 12 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.