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A global crisis notwithstanding, cometh the hour, cometh the woman. Union Finance Minister Nirmala Sitharaman has delivered a power-packed budget that makes all the ‘right’ moves. In doing so, the annual event, which over the years has lost much of its sheen, was celebrated by the markets with massive buying. Monday and Tuesday so far has seen equities climb to near all-time highs, a swift change in sentiment from a week back when there was trepidation all around on the fear of higher taxes and lack of fiscal space to go big on spending. 

Market focus

From an equity market perspective, 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. This could spread to multiple sectors such as Cement, Auto, BFSI, Metals, and Capital Goods. 

But do remember that with Sensex again close to 50K and Nifty near 14600, when the fine-print is absorbed, the market focus would return to the fundamentals, viz. corporate earnings growth. 

What stood out

The Union Budget 2021-22 was not afraid to go expansionary, and become aggressive on upfront infrastructure spends. Importantly, it boosted transparency & credibility in terms of accounting, spends, estimates. 

Comparable to P Chidambaram’s 1997-98 Dream Budget, Sitharaman’s budget that will be remembered for a long time given its distinct investment vis-a-vis consumption bias and no rejig or tweaking with taxes, both of which provide relief as well as continuity. The focus on urban over rural was also a differentiating factor. 

The absence of nasty surprises on the tax front was partially responsible for the relief rally in markets, which had almost baked in a Covid cess on all tax-payers and a levy on high-income earners. Those fears didn’t come true. 

As a result, the budget is feel-good for the economy, and is more than what the market hoped for. Of course, execution will decide the future. 

What has wowed experts, economists and commentators is perhaps the distinct shift from a cautious contractionary approach to a distinctly expansionary one by Sitharaman in the budget. Fiscal deficit at 9.5%/6.8% in FY21/22 is quite higher than estimates but it’s complemented by a focused push on infra-spending (up 25%) and fiscal accounting/estimating that have stepped up on credibility. The off-budget tricks used by previous FMs has been kept at a bare minimum this time. 

There’s an honest effort at fixing the financial system like asset resolutions, bank privatisation, a DFI and tax resolutions. Reforms like 74% FDI in insurance are being seen as a sign of things to come in more sectors. 

What was missed

But not everything is perfect. Budget 2021-22 also has chinks in its armoury. 

Firstly, net market borrowings continue to remain elevated at Rs 9.25 trillion, which maintains pressure on bond yields. The gross borrowing at Rs12.05 trillion is bigger than what most expected. This implies RBI support in the form of OMOs will be required to maintain demand-supply balance. 

The budget makes the job of RBI difficult as there will be a need for on-the-money coordination in the monetary stance. The risk of inflation flaring up in next 9-10 months remains quite high, which may kill the nascent growth recovery.

Secondly, the FY22 Union Budget extends the expenditure pattern adopted in the FY21 budget, by allocating higher/more resources to public health, Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), affordable housing segment, micro small and medium enterprises, rural development etc. However, the FY22 numbers are an increase over the FY21 budget estimate (BE) and not the RE (Revised estimate). For a number of heads/ ministries, the FY22 BE is significantly lower than the RE for FY21. The government finances face expenditure rigidity and this may have caused it. 

Also, more than 95% of the capex in FY21 (RE) and FY22 (BE) is concentrated in 12 ministries/departments. This is a top-heavy budget, which may not be as inclusive as previous budgets in terms of capex. 

Tax related announcements 

(Source: Philip Capital)

The following three acts are proposed to be consolidated into a rationalized single Securities Markets Code: 

ï‚· SEBI Act, 1992, Depositories Act, 1996 

ï‚· Securities Contracts (Regulation) Act, 1956 

ï‚· Government Securities Act, 2007. 

One of the proposals is also to decriminalize the Limited Liability Partnership (LLP) Act, 2008, in line with last year’s decriminalization of Companies Act, 2013. The rationalization of acts is aimed at reducing the compliance cost by simplifying the amendment process to one act instead of four separate acts. Along with decriminalization of the LLP Act, government has reiterated its commitment towards ease of doing business by providing a simpler legal framework.

Tax-related announcements: 

1. Relief to senior citizens: older pensioners (age 75 or more) with only interest and pension income are exempted from filing taxes. 

2. Reduction in time limits for re-opening of assessment: Being reduced to three years from the current six years. 

3. Relief for dividend: Dividend paid to Real Estate Infrastructure Trusts or Infrastructure Investment Trusts (REIT/InvIT) will be exempt from TDS. 

4. Setting up of a Dispute Resolution Committee (DRC): Dispute resolution for small taxpayers. 

5. Faceless Income Tax Appellate Tribunal (ITAT): To provide a transparent tax appellate mechanism, the government has proposed to the make the Income Tax Appellate Tribunal faceless and jurisdiction-less. 

6. Tax incentives for affordable housing and affordable rental housing projects: Extended the eligibility period (for claiming additional deduction for interest of Rs 150,000 paid for loan taken for purchasing an affordable house) to 31st March 2022. 

7. Zero Coupon Bonds by Infrastructure Debt Funds (IDFs): Proposed to make Zero Coupon Bonds issued by notified IDFs eligible for tax benefit. 

8. Tax incentives for IFSC: These include tax holidays for capital gains incomes of aircraft leasing companies. 

9. Relaxation in conditions for exemption to sovereign wealth funds and pension funds (SWF/PF): Proposed to relax some conditions for availing 100% tax exemption (introduced in the last budget) – such as prohibition on loans or borrowings, restrictions on commercial activities, direct investment in entities owning infrastructure, etc. 

10. Exemption for Leave Travel Concession (LTC) cash scheme: Will provide tax exemptions to the amount given to an employee in lieu of LTC, subject to incurring of specified expenditure. 

11. Rationalisation of taxation of Unit Linked Insurance Plans (ULIPs): Will allow tax exemption for maturity proceeds of ULIPs with annual premiums up to Rs 250,000. 

12. The government will smoothen GST and remove anomalies such as the inverted duty structure. 

13. Custom Duty Rationalization: Revised the customs duty structure to make it free of distortions. The government will review more than 400 old exemptions this year.