In this episode, we talk about key highlights of the Union Budget 2021. It's a topic which has been covered quite a lot in the past week, and we just want to give it an analytical angle for the 'Aam Aadmi'.
The markets were on fire during the Budget week. Sensex was up by more than 4% in a single day and was up by 8% for the week - on the back of a positive budget with no new taxes being introduced. COVID Cess & Capital gains taxes were on the cards, but the Finance Minister didn’t announce any such measures pushing the markets into the stratosphere.
Highlight #1: Bad Banks & Development Financial Institution (DFIs)
The GoI proposes to set up a bad bank which would takeover the NPAs from struggling banks, bundle it up and sell it to AIFs/Funds that invest in stressed assets. Now, how exactly a bad bank would work, is again very ambiguous & would the banks be willing to take a steep haircut to make it work - is something we were scratching our heads over.
It was also proposed to set up a Development Financial Institution (‘DFI’) - earmarking INR 20,000 crore for the specific purpose of Infrastructure lending. Shankesh deep dived into the history of how DFIs came into existence and analyzed whether it makes any sense to set up a new DFI.
Highlight #2: Fiscal Deficit zooming to 9.5%
One of the major talks after the Budget closed, was the fiscal deficit number. Historically, the GoI has kept it in the range of 3-5% - but a 9.5% is GIGANTIC. We discussed the reasons for the increase in the deficit number and how Food Corporation of India plays a big role in moving the needle.
Highlight #3: Capex
This budget, has been all about the GoI spending money - and a lot of that on Infrastructural development. We need better roads & highways. Better railways. A lot of money was also being set aside for the Healthcare sector - given that we are still not entirely out of the pandemic.
On this front, we discussed about execution issues and how Infra spending looks good on paper - but could lead to money being ‘block’ed in bricks and cement if projects don't get completed on time. We do applaud the GoI regardless - because Infra spending is required to push India towards the 'Developed Nation' tag.
Shankesh also spoke about how Capex is the heart of any Budget and the Multiplier effects of the same.
Highlight #4: FDI and Privatization
The Insurance sector was opened to a 74% FDI from the current 49% - subject to safeguards. A few years back, FDI in insurance was raised from the mid 20s to 49% - subject to safeguards, and it didn't really attract a lot of FDI. So, it remains to be seen, whether a 74% FDI can flush this sector with foreign money.
The Government is planning to privatize two banks (the names of which are still unknown to us) and LIC might come out with an IPO in FY22 - which will be (without any competition) - India's biggest IPO in our opinion.
Highlight #5: Direct/Indirect Taxes
Not much activity on this front, however the definition of ULIPs was clarified and it will now be taxed as a Mutual Fund. Depreciation on Goodwill will not be allowed going forward. What stole the show was no new taxes being imposed like COVID cess, Wealth tax on the Ultra rich etc.
All in all, a very progressive budget. The execution, if done right - could really bring a meaningful change in the economy!
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