The announcements made in the Union Budget 2021-22 are in the right direction, for a country aspiring to get back into its long-term growth trajectory. Towards this, the Budget lays down the strategic intent for taking India into the next phase of development, by focusing on some key building blocks – healthcare/wellness, research/innovation, education, infrastructure and urban development, inclusive growth (agriculture and social-related) and governance-related reforms.
Given the backdrop of the pandemic year gone by, the announcement of the Atmanirbhar Swasth Bharat Yojana is aimed at establishing a centrally coordinated healthcare infrastructure.
The Budget has laid a lot of emphasis on infrastructure development, across roads/highways, railways and metro rail, ports/shipping/waterways and urban development. The government has proposed an “institutional” approach towards supporting the infrastructure development needs, through setting up of a development financial institution (DFI), monetization of infra assets (InvITs across a variety of assets) and enhancement in the capital expenditure. The National Infrastructure Pipeline has been further expanded to cover more projects.
Reforms announced in the financial sector are also developmental in nature – establishing a single Securities Markets Code, a world-class fintech hub in Gift City, an institutional framework for the Bond markets, regulation and development of commodity markets, increasing the FDI limit for the insurance sector and establishing an Asset Reconstruction Company and Asset Management Company for resolution of stressed assets.
The Budget has managed to “balance” the industrial development needs with those of the social and rural sectors, by announcing extension of coverage/benefits as well as developmental measures for agriculture, fisheries and workers, apart from infrastructure and schemes in education and skill development.
The Finance Minister has also conveyed the Government’s focus on disinvestment, by spelling out the commitment to complete the four pending items on the disinvestment agenda, as well as announcing additional disinvestment in two Public Sector Banks, one General Insurance Company as well as the IPO of Life Insurance Corporation of India. The FM also spelled out a roadmap for selling idle / non-core assets (especially land) of State-owned enterprises by setting up an SPV for the same.
The Finance Minister has pegged the fiscal deficit for FY21 at 9.5% of GDP (which entails an additional Central Government borrowing of Rs. 80,000 cr.) and for FY22 at 6.80 per cent, which implies a total estimated borrowing of Rs. 12 lakh crores. Clearly, the Budget suggests that the Government does not shy away from spending, as well as deviating from the fiscal prudence path prescribed under FRBM (which stands postponed to FY26). The reset of the fiscal path (though a need of the hour for the economy) is likely to weigh on the bond market, which has already reacted negatively on Monday, with yields climbing through the day.
Apart from the fiscal pressure, it is to be seen what cost-push pressures arise out of the hike in import duties (across a variety of items) as well as the imposition of the agriculture and development cess (on agro-commodities and agro-chemicals).
Apart from welcoming a “growth and development-oriented” Budget, the equity markets also heaved a huge sigh of relief from the fact that the Finance Minister decided not to tinker with the direct tax rates, which the markets were fearing, be it Covid cess, changes in long-term capital gains tax rate or changes in corporate income tax rate/surcharge.
The Union Budget 2021-22 has set the tone for growth/development and investment over the medium term; a lot now depends on the success and timeliness of execution.
(Unmesh Kulkarni is Managing Director Senior Advisor at Julius Baer India. Views are personal)