The Union Budget 2021-22 was presented on 1st February 2021 amid a challenging macro environment. With the first decline in nominal/real GDP in four decades, the Government had to walk the tightrope, which they seem to have done. Though there is no large fiscal stimulus, the absence of any tax hikes and better fiscal math provides extreme comfort.
The budget had a clear and decisive agenda, reviving and driving economic growth. It belied all fears with no additional significant direct or indirect tax measures, which came as a positive surprise and a much-needed relief, which would improve sentiment and boost growth. Unlike typical budgets, there were no hidden additional taxes, which usually tempers down the initial euphoria. Tax collections and divestment targets also seem to be more realistic and achievable. While the government has refrained from any kind of direct fiscal stimulus, there was nothing surprising in the Budget data. While the higher fiscal deficit number looks astonishing, it is due to better accounting procedure, which is a much-needed welcome move.
The FM has pegged fiscal deficit at 9.5% of GDP in FY21RE (Revised Estimate), much higher than consensus estimates of 7% of GDP. While the headline number looks scary, almost 200 bps of GDP of this surprise was due to food/fertilizer subsidy, which the government has decided to take up on its books rather than keeping it off-Budget (through the Food Corporation of India). This transparency in fiscal math is highly appreciated and commendable. The 10-year bond yields spiked ~15 bps to 6.06%. R.E. for FY21 fiscal deficit (at 9.5%) overshot B.E by ~570bps, FY22 fiscal deficit has been pegged at 6.8%, higher than estimates. Capital expenditure budget is up ~34% YoY with higher outlays for healthcare and infrastructure sector while revenue expenditure has been kept under check with lower planned subsidy.
Budget 2021-22 built further on government’s directive of infrastructure/manufacturing-led economic revival envisaged under the ‘Atma Nirbhar Bharat’ development model. A bill was introduced to set up a financial institution providing Rs 20,000 cr to launch the National Asset Monetization Pipeline for funding new infra projects. The PLI scheme across 13 sectors (announced earlier) with planned expenditure of Rs. 1.97 lakh cr, over 5 years starting FY22 was reiterated. There was a proposal of a mega-investment textile park to be launched along with 7 more textile parks over the next 3 years. The glide path also clearly highlights growth priority; implying expansionary policy would persist in the medium term as fiscal deficit is expected to fall below 4.5% only by FY26.
The Government has targeted to raise Rs.1.75 lakh cr through disinvestment of Central Public Sector Enterprises in FY22. The FM announced plans to privatize two PSU banks and one general insurance company in FY22. The Government also plans to complete the disinvestment of BPCL, CONCOR and SCI in FY22. This can, if implemented successfully, will provide a boost to the equity markets. The Government plans to launch the much awaited LIC IPO next year. The said IPO was planned earlier, but had to be delayed due to unfavorable market conditions. The LIC IPO will be one of the biggest events for the stock market in the coming fiscal year.
The FY22 Union Budget, the first since the COVID-19 pandemic outbreak, has been announced amid a challenging backdrop. While the economy and markets have rebounded sharply from the lows triggered by COVID, the economy still has massive ground to catch up. Ahead of the budget, fears/concerns of a potential increase in taxation / the imposition of a COVID ‘cess’ and hikes in capital gains taxes had kept the market nervous for the past couple of weeks. None of them happened, which boosted sentiments.
We believe once the fine-print is absorbed, the market focus would return to the fundamentals, viz. corporate earnings growth, which is showing tangible momentum.
Overall, from an equity market perspective, we believe the budget, on balance, has turned out well, with no negatives on the taxation front and several long-term structural initiatives that augur well for medium-term growth. The push for capex and investments could trigger the revival of an investment cycle, in our view, which could then spread to multiple sectors – Cement, Auto, BFSI, Metals, and Capital Goods. This is further corroborated by the commentary on capacity utilization from corporates that have reported 3QFY21 earnings thus far.
The additional borrowing amount for FY21, along with a higher-than-expected borrowing program for FY22, might impart an additional pressure on bond yields. The GoI announced additional borrowings of Rs.80,000 cr in Feb-Mar 2021. The much awaited rural spending allocation, which slows a considerable contraction in FY22, is largely on account of a very high base in FY21.
Direct Tax Measures:
- Senior citizens above the age of 75 with no income other than pension and interest income will not be required to file Income Tax Returns.
- Interest earned on Provident Fund contributions above Rs 2.5 lakhs per year will be added to income and taxed as per the income tax rate of the investor. Interest on employee contributions above Rs 2.5 lakhs per year will be taxed; employer contributions will not be taxed. The effect of this tax will be primarily on investors who make high Voluntary Provident Fund (VPF) contributions.
- FM has announced that there will be no tax exemption for maturity proceeds of unit-linked insurance policies (ULIPs) with an annual premium above Rs.2.5 lakhs. The rules will apply for ULIPs issued on or after 1st February 2021. However, the amounts received under such ULIP policies on death of the policyholder will remain exempt from tax.
- Reopening of assessments period reduced from 6 years to 3 years except in cases of serious tax evasion.
BUDGET at a glance
|Particulars||2019-2020 Actuals||2020-2021 BE||2020-2021 RE||2021-2022 BE|
|2||Tax Revenue(Net to Centre)||1356902||1635909||1344501||1545396|
|3||Non Tax Revenue||327157||385017||210652||243028|
|5||Recovery of Loans||18316||14967||14497||13000|
|7||Borrowings and Other Liabilities1||933651||796337||1848655||1506812|
|8||Total Receipts (1+4)||2686330||3042230||3450305||3483236|
|9||Total Expenditure (10+13)||2686330||3042230||3450305||3483236|
|10||On Revenue Account, of which||2350604||2630145||3011142||2929000|
|12||Grants in Aid for creation of capital assets||185641||206500||230376||219112|
|13||On Capital Account||335726||412085||439163||554236|
|14||Revenue Deficit (10-1)||666545||609219||1455989||1140576|
|15||Effective Revenue Deficit (14-12)||480904||402719||1225613||921464|
|16||Fiscal Deficit [9-(1+5+6)]||933651||796337||1848655||1506812|
|17||Primary Deficit (16-11)||321581||88134||1155755||697111|
|Sector||Key Announcements||Impact & key stocks|
|Automobiles||· 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.|
· Rs.1800 crs to support augmentation of public bus transport services. The scheme will facilitate deployment of innovative PPP models to enable private sector players to finance, acquire, operate and maintain over 20,000 buses.
· Allocation of Rs 1.18 lakh cr for rural roads in FY22 compared to Rs1.01 lakh cr in FY21.
· Enhanced agriculture credit and doubled the Micro Irrigation Fund corpus to Rs10,000 crs would boost the agriculture activities.
|· Would encourage buyers to opt for new vehicles. ~1.7mn M&HCV’s are older than 15 years without fitness certificates. Positive for CVs|
· Would increase demand for new buses/CVs- Tata Motors, Ashok Leyland and VECV
· Would increase infrastructure activities which help all the CV manufacturer
· Demand for tractors to increase. Positive for M&M, Escorts etc
|BFSI||· FDI limit increased from 49% to 74% in Insurance companies allow foreign ownership and control with safeguards.|
· An ARC and AMC step to consolidate and take over the existing stressed debt.
· Recapitalization of Rs.20,000 cr for PSBs
· Eligibility limit for NBFCs for debt recovery under SARFAESI Act proposed to be reduced from loan size of Rs.50 Lakh to 20 Lakh.
· Fiscal deficit target for FY20 increased to 9.5% for FY21. Also, borrowings from market by government increased
· Tax holiday for Affordable housing increase for one more year
· NCLT framework will be strengthened e-Courts system shall be implemented and alternate methods of debt resolution
· Removal of tax implications on ULIP beyond annual premium of Rs.2,50,000
|· Enhanced capital flow to Insurance sector and will improve the penetration levels. Positive for all the Insurance companies.|
· Helps to make banks clear their balance sheets and resolve bad debts. Improve the capital adequacy ratios for the PSU banks. Positive for all banks specially PSU banks
· Smaller NBFCs can improve the recovery through SARFAESI. Boost for smaller NBFCs
· Bond yields could rise. Negative for Banks
· Additional tax soaps to boost smaller to medium ticket home loans. Positive for HFCs
· Faster resolution of cases and recoveries should improve. Positive for all Banks and NBFCs.
· Overall ULIP intensity could get limited. Negative for high ticket size insurance players in the industry
|Building Material/Cement||· Under Jal Jeevan Mission (Urban) universal water supply in 4378 Urban Local Bodies with 2.86 cr household tap connections, as well as liquid waste management in 500 AMRUT cities will be implemented over 5 years with an estimated outlay of Rs2.8 lakh cr.|
· The Micro Irrigation Fund corpus has been doubled to Rs.10,000 cr
· Under affordable housing, an additional deduction of interest amounting to Rs1.5 lakh, for loan taken to purchase an affordable house will get an extension of one more year to 31st March 2022. Further, affordable housing projects can avail a tax holiday for one more year – till 31st March, 2022.
· Total Capital expenditure is increased by 26% (vs FY21RE) to Rs5.54 lakh cr.
· PMAY (Pradhan Mantri Awas Yojna): allocation decreased by 32% to Rs27500 cr vs FY21E RE
· Affordable housing: Extension of additional deduction of Rs1.5lakh interest on loans for affordable housing loan to 31st March 2022. Extension by a year to 31st March 2022 on the profits earned by developers of affordable housing project.
|· It will lead to higher demand and consumption of pipes used in irrigation as well as carrying potable water for households. Positive for Pipe manufacturers such as Astral Poly, Finolex, Supreme Industries, Prince pipes, Shakti pipes etc.|
· Promotion of affordable housing and tax holiday to such projects will drive incremental demand for tiles, sanitary ware and faucets. Positive for companies like Kajaria, Cera Sanitary ware, Somany ceramic, Asian Granito etc.
· Increase in the capital expenditure is positive for the sector. But lower allocation in PMAY is cause of concern for retail demand. As this has been one of the main drivers of cement demand in Rural India in FY21E.
· To increase cement demand under non trade segment.
|Construction/Infrastructure||· Allocations to Ministry of Roads Transport and Highway at Rs1.18lakh cr is up by 16% vs FY21E RE|
· Target to award 8500km of roads and construct 11,000km of national highways in FY22. In FY21E target of award is 12650km and construction is 10250km.
· Steps on Infra financing: a) Set up DFI with capital outlay of Rs20,000 cr, this will be leveraged to create funding of Rs.5 lakh cr. b) National Monetization Pipeline of potential brownfield infrastructure assets will be launched.
· Relax conditions relating to prohibition on private funding, restriction on commercial activities, and direct investment in infrastructure by foreign Sovereign Wealth Funds and Pension Funds
|· Focus is shifting to construction vs award. This is positive as most of the companies are sitting on high order book.|
· Steps on financing to allay funding concerns on NIP (National Infra Pipeline). And Asset monetization by NHAI and other agencies to improve the balance sheet
· An Asset Monetization dashboard will also be created for tracking the progress and to provide visibility to investors.
· The move is positive for most road construction players. Ashok Buildcon, KNR Cons, NCC Ltd, HCC, Dilip Buildcon etc
|Railways & Defence||· Ministry of Railway Capital expenditure is increased by 33% to Rs2.15 lakh cr over FY21E RE.|
· Target to take Broad Gauge Route Kilometers (RKM) electrification to 46,000 RKM i.e., 72% by end of 2021 from 41,548 RKM on 1st Oct 2020. And 100% electrification of Broad-Gauge routes by December, 2023
· For Defense, FY21 revised capital expenditure increased by 18% to Rs1.34 lakh cr and maintained at Rs1.35 lakh cr levels for FY22.
· For Air Force it has been increased by 27% to Rs.55,000 cr for FY21 (revised); For FY22 it is budgeted at Rs.53200 cr.
· •For Navy it has been increased by 41% to Rs.37500 cr for FY21 (revised); For FY22 it is budgeted at Rs33200 cr.
|· Railway expenditure increase is positive for Rail EPC and electrification target for broad gauge is maintained. Move is positive for Rail EPC companies like RVNL, IRCON, RITES|
· Higher capital expenditure augers well for Government’s approach for increasing the share of indigenization and would benefit domestic manufacturers. BEL, HAL, BDL, Mazagaon Dock, Cochin Ship; Bharat Forge
|Consumer||· Proposed custom cess of 17.5% on crude palm oil|
· Proposed custom cess of 20% on crude soya bean and sunflower oil
· Re-structured duty on alcoholic beverages from earlier 150% basic custom duty to 50% basic duty and 100% agri infra cess leading to no change in overall tax
· Proposed reduction in custom duties to 7.5% from 12.5% on gold and silver
|· This will make raw material sourcing cost for cosmetics, soap, detergent and packaged food manufacturing companies expensive. Mildly negative (as FMCG companies has power to pass on the cost to customers) for; HUL, Godrej, Marico, Britannia, ITC, Nestle|
· Neutral for United Spirits, United Breweries, Radico Khaitan
· It will reduce gold and silver price Positive for Titan
|Metals & Mining||· Increase in government capex by 34.5% YoY to Rs.5.5 lakh cr in FY22|
· Cutting customs duty uniformly on semis, flat and long products of non-alloy, alloy, and stainless steel to 7.5%
· Revoking ADD and CVD on certain steel products
|· It will lead to higher steel consumption, especially long products. Positive for steel players such as SAIL, Tata Steel, JSW Steel, Jindal Steel & Power|
· It will lead to slight fall in landed cost of imported steel. Slightly negative for steel players such as SAIL, Tata Steel, JSW Steel, Jindal Steel & Power.
|Oil & Gas||· InvIT for oil & gas pipeline for GAIL, IOCL and HPCL|
· Made the provision for petroleum subsidy at Rs14100 cr for FY22 vs Rs.39100 cr in FY21.
· Ujjwala scheme to be extended to cover additional 1cr beneficiaries.
· 100 more districts to be added under CGD in next 3 years.
· Gas pipeline project to be taken up in J&K
· To setup an Independent Gas Transport System Operator to facilitate natural gas movement on common carrier capacity on a non-discriminatory open access basis
· Expect Divestment of BPCL in FY22
|· Positive for oil & gas pipeline companies as few pipelines like Urja Ganga, Dabhol-Bangalore gas pipeline of GAIL can be monetized initially|
· With lower crude oil price, it should be sufficient to cover any subsidy burden. Any shortfall can be made provision in next year.
· Would be allocated through bidding mechanism.
· GAIL or GSPL are likely candidate if allocated through bidding mechanism.
· Should lead to better efficiency in gas transportation. Would await for more clarity.
· Largely expected by the market.
|Power||· To appoint multiple distribution companies (discom) for the supply of power to consumers.|
· To launch reform base power distribution sector scheme, with an outlay of Rs3 lakh cr over 5 years.
· Allocated Rs.8900 cr (increase of 48% vs FY21 RE) to power and renewable sector under various schemes (IPDS, DDUGJY etc).
|· Multiple discom will promote competition and bring efficiency in the operation of state owned discoms.|
· Power sector has seen increase in the receivables. And thus this will improve cash flows of power sector companies. But await clarity on the timeline of instituting it.
· The move is positive for the power sector players like NTPC, PGCIL, NHPC
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.