A big positive in the budget is no increase in direct taxes: Sameer Kaul

Budget 2021

The Union Budget for FY21-22 has been presented against the backdrop of severe economic contraction globally due to the Covid-19 pandemic.

Budget 2021As the economy is just beginning to recover from the shocks of the pandemic, there were high expectations from the government in terms of a fiscal stimulus. The Finance Minister’s words of “A budget like never before” had also increased expectations. At the same time, there were fears that the government may need to increase taxes to raise resources to kick start the economy.

Post the break out of the pandemic, the government and RBI had announced several support measures which amounted to INR 27.1 Lac crore (13% of the GDP). These announcements at different points in time were equivalent to 5 mini budgets. The Union Budget for FY21-22 is a continuation of the reformist policies that the government had announced as part of the support measures.

The Finance Minister has increased the Health and Wellbeing expenditure by 137% as compared to last year to INR 2.23 Lac crore with Rs 35,000 crore on Covid-19 vaccine development and inoculation. The Capital Expenditure has been increased by 34.5% as compared to last year, thus clearly spelling out the government’s intent to boost growth by focusing on infrastructure spending. The long-expected Vehicle Scrappage Policy has also been announced. With regard to Banking & Financial Services, the government has hiked FDI in the Insurance sector from 49% to 74% and has also announced the privatization of 2 Public Sector Banks and 1 General Insurance company. Also, allowing FPI investors to subscribe to debt issued by REITs/InvITs is a positive. The clear message on PSU banks going ahead is that there will be lesser capital to be deployed, underperforming banks shall be amalgamated and large-scale infrastructure financing from capital markets through products like InvITshall be encouraged rather than bank financing. An Asset Construction and Management Company is also proposed to be set up to help clean up the balance sheets of banks.

The fiscal deficit for FY21 is projected at 9.5% of GDP as against the estimate of 3.5% of GDP during the budget speech last year. The deficit for FY22 is projected at 6.8% and will gradually be reduced to 4.5% by FY26. The budget is based on conservative estimates of nominal GDP growth of 13% for FY21-22. This gradual path to fiscal consolidation clearly shows the intent of the government to prioritize economic growth over fiscal prudence at the current juncture.

A big positive in the budget is no increase in direct taxes. There is however an increase in gross market borrowings to INR 12 Lac crore for FY22. The government has thus decided to support economic growth through debt financing and monetization of assets through the disinvestment program.

The Finance Minister also announced the scrapping of income tax filing for senior citizens under certain conditions, new rules for removal of double taxation for NRIs and a reduction in timelines for reopening of tax assessments. The incentives announced for Start-ups and the Affordable Housing segment in last budget have also been extended till FY22.

All in all, the Finance Minister seems to have done a commendable job of going all out to support economic growth without worrying too much about the fiscal impact in the near term.

Sameer Kaul is the MD&CEO of TrustPlutus Wealth Managers (India).