Budget 2021

Government Gives Itself A Fiscal Long Rope break of the government’s fiscal position has been confirmed. This is what the fiscal numbers look like:

• FY21 fiscal deficit at 9.5%. As part of this, the government will borrow another Rs 80,000 crore in the next two months of this year alone.
• For FY22, the fiscal deficit is pegged at 6.8% of GDP. The gross borrowing will be Rs 12 lakh crore.
• The total expenditure for FY21 has settled at Rs 34.50 lakh crore. For FY22, total expenditure is pegged at Rs 35 lakh crore.
• The new fiscal roadmap is also taking a slow route. The fiscal deficit will be reduced to 4.5% by FY26. 3% fiscal deficit target now a forgotten dream?

(Aside: As an attempt to bring transparency, the Food Corporation’s borrowings from the National Small Savings Funds will be stopped) 

Greater Reliance On Borrowings From Small Savings

The government has pegged the FY22 fiscal deficit at 6.5% of GDP or Rs 15.06 lakh crore. But market borrowings at about Rs 12 lakh crore.

How? For one, there is a big increase in the reliance on the National Small Savings Fund.

Equity Markets Surge On 'No Bad News Equity markets spiked as soon as the FM speech ended. Phew! No bad news, was probably the sentiment.

The reading also is that there are several measures to simplify business challenges, including changes to administration of direct taxes while increasing compliance. The biggest positive seems to be that there are no negatives like taxes on the ultra-rich, no Covid cess or any tinkering with long term capital gains tax.

So you got a budget with no bad news, ease of doing business and a focus on growth. With that, an index which has corrected 6.5% over the last ten days, is shooting up on a day when the rest of world is also rising.

Whoa Budget Speech Over!Just under 2 hours. So that was quicker than what most of us had expected.

No big tax changes announced in the speech.
Not clear on fiscal glide path yet (see post below).
Waiting for budget documents.
Taking a break for a bit.

Equity Market Still Not Enthused. Why?Why are markets not as enthused as they could be after a growth-focused budget?

The budget has all the right noises around spending on infrastructure, lots of capex plans and enough on divestment, even though the target is a bit lower than last year.

The Indices were up 1% when the speech started and are 1.5% higher now. Under normal circumstances, the market may have rewarded a budget like this with more gains. But the key to note is that the deficit numbers are higher than expected. The FM has said that there will be Rs 80,000 crore of borrowing in the remainder of FY21. Are markets worried about FY22?

What's The Fiscal Math Looking LikeThe numbers so far...

FY21: Gross expenditure now seen at Rs 34.5 lakh crore
FY21: Capital expenditure at Rs 4.39 lakh crore
FY21: Fiscal deficit seen at 9.5% of GDP
FY21: Additional Rs 80,000 borrowing

FY22: Gross expenditure seen at Rs 34.83 lakh crore
FY22: Capital expenditure seen at Rs 5.54 lakh crore
FY22: Fiscal deficit seen at 6.8% of GDP
FY22: Market borrowing seen at Rs 12 lakh crore

Ira, any word on how she’ll get from 9.5% to 6.8%?

Menaka, awaiting documents but there will be three components. First, the benefit of a stronger denominator because of better nominal growth. Second, total revenue will get some boost from automatic stablisers from better tax revenue (unless they cut excise duty on fuel products). Third, compared to last year, they will hope (yes, hope) for better divestment revenue.

Phew! Fewer Tax Papers To StoreChalo, can throw out atleast a few years of tax filing papers. The Finance Minister has cut time limit for reopening of tax assessments to 3 years from 6 years.

Btw I hope you are following our social posts for real time news.

Railway Capex Plans Will Boost These Stocks- If a large part of the Rs 1.15 lk crore for Railways is towards capex, it will have a positive impact on companies engaged in the space. Add to that, the Indian Railways national rail plan for India to prepare a future-ready railway system by 2030 seems to be a plan which will keep capex engaged in the years to come.

All this should be beneficial for all companies in this space, like KEC International, Kalpataru Power and Larsen & Toubro.

Lower Divestment Goal: Yet, Need To See It To Believe ItThe FY22 divestment target at Rs 1.75 lakh crore is lower than FY21 at Rs 2.1 lakh crore. But that means nothing as this year we have barely achieved some 20-30,000 crore in asset sales.

Anyways, here’s what’s on the list
2 PSU BANKS + ONE GENERAL INSURANCE COMPANY + LIC IPO + AIR INDIA + BPCL + SPV FOR PSU LAND SALE + ETC...

For flavour - adding a comment from an external editor - former colleague Govindraj Ethiraj.

Bank Privatisation Begins?Finance Minister Nirmala Sitharaman has said that the government will look to privatise two public sector banks, along with IDBI Bank. The latter is known. The former is interesting. Is this the beginning to bank privatisation to reverse the bank nationalisation announced 51 years ago?

No details on which banks will be privatised has been shared. An amendment of the Bank Nationalisation Act will needed.

Aside: The government has also said that an asset management company will be set up for stressed asset management. Again, no detail on whether this is a government backed AMC. Remember, you can only call it a ‘bad bank’ if it is government backed. Else its only another ARC.

Govt Opens Exit Route For Stressed Indian Insurance Co. PromotersAmendment To Insurance Act to allow FDI from 49% to 74%, allow foreign ownership with safeguards.

This is a game changer - it allows Indian promoters who are cash strapped to bring in new capital from foreign partners.

Market View: DFI Much Needed, Insurance FDI Won't Impact Listed StocksFDI in insurance increased from 49% to 74%, but unlikely that the large players will invite FDI to that extent, so no impact on large listed insurers.

- Setting up of the DFI is a good idea, as lenders would be wary and infrastructure is a best way to get investments to yield results; should benefit select companies.

- Mega Investment parks in textiles are a good idea, but over three years are more motherhood statements. Doubt textile stocks will have sustainable gains due to this.

Bonds Sell-Off On Fiscal HowlerThe 10-year bond yield has surged to 5.97% from 5.89% ahead of the budget announcement.

The Bloomberg News report of a 6.8% fiscal deficit for FY22 is a big negative surprise. RBI will need to ensure continued support to bonds at that level of government borrowing.

The silver lining -- the wider fiscal deficit is coming with a material jump in expenditure as a % of GDP. Total expenditure of about Rs 35 lakh crore should be about 15.8% of GDP, with an assumption of 15% nominal GDP growth in FY22. Awaiting budget document for exact nominal GDP growth projection.

Big Infra Spend & Monetisation PushCapital expenditure will exceed FY21 BE of Rs 4.21 lakh crore. Revised estimate stands at Rs 4.39 lakh crore

But the bigger news is the BE for FY22: Rs 5.54 lakh crore
That’s 34.5% up

On the monetisation front – the focus seems to be on InvITs
FM says a National Monetisation Pipeline of potential brownfield infra projects to be launched.
Details a few road and power assets to be transferred to NHAI, PGCIL InvITs.

Read this insightful column on why InvITs will help public asset recycling

Negative Surprise On Fiscal Deficit    News reports that the FY22 fiscal deficit has been pegged at 6.8% of GDP. That is much higher than the consensus estimate of 5.6% of GDP. Negative surprise for bonds as supply of government paper will rise.

The FY21 fiscal deficit has also ended much higher than expected at 9.5% of GDP.

Long Live The DFI!The least surprising of budget announcements is in.

The government will set up a Development Finance Institution or DFI. The initial capital allocation of Rs 20,000 crore is lower than the Rs. 1 lakh crore number doing the rounds in whisper circles.

Over a three year period, this DFI will aim to lend Rs 5 lakh crore to the infrastructure sector, the Finance Minister said.

The DFI is part of a three pronged plan to increase investment in the economy -- a DFI, asset monetisation and higher capital expenditure will be used to achieve this.

137% Increase In Health Budget Well begun. FM focused the first, most important minutes of her speech on the most important issue of the day - health.

Atmanirbhar Swastha Bharat Yojana to Urban Swachch Bharat 2.0 - promises fairly comprehensive coverage of health infrastructure, sanitation and waste measures and reducing pollution via a voluntary vehicle scrapping plan.

Total cost: Rs 2,23,846 crore

FM Invokes Cricket Win At Gabba Early in her speech the Finance Minister invoked the Indian cricket team’s spectacular win at Gabba.

Reminded me of a super line in one of the post-win articles: ‘India rode their luck, but it was luck of their own making.’

What The Stock Market Is Watching For

So what’s likely in Budget 2021 for equity markets?

• Tax cuts for low income groups to boost consumption - positive for FMCG and other forms of consumption.
• Incentives to spur real estate demand - positive for housing, building materials and housing finance companies.
• Strong messaging about divestment - positive for overall sentiment, select PSUs
• Policy announcements around infrastructure financing (creation of bank/financial institutions to finance infrastructure projects like ports/road/power projects) - positive for port/road infra companies.
• Any added incentives around local manufacturing

The choice of poetry this year is Rabindranath Tagore. “Faith is the bird that feels the light when the dawn is still dark.”

We're keeping the faith Madam Finance Minister...at least for the next two hours.What could spoil the party for equity markets?

• A budget which strives to protect fiscal deficit at the cost of growth
• Any tinkering with LTCG, though probability is very low
• Significantly higher incidence of tax on high income groups

  Tax Revenue Good News: Real & Optical

  
  

  As we go into the Budget speech, there’s good news on taxes. Real and optical.

  REAL
  GST for December 2020 (collected in January 2021) was Rs 1,19,847 crore, 8% higher Y-o-Y.

  • That’s a record number
  • It marks four months of above 1 lakh crore revenue per month
  • And, December revenue from import of goods was 16% higher. Ordinarily, that would suggest industrial and economic activity is recovering faster.
    

  
  

  A look at tax revenue for the April - December period may also offer some cheer, even if its more optical than real. Despite a 3-month lockdown we’ve narrowed the gap with FY20 on gross tax revenue and overtaken last year’s net tax revenue figure.

  In November GTR was about 1.5 lakh crore rupees behind FY20. In December the gap narrowed to approx. Rs 45,000 crore.

  

  Interestingly, net tax revenue collected between April - December 2020 is ahead by about Rs 60,000 crore over the same period last year. (Lower share of revenue to states)

  

  If the momentum sustains there’s a realistic chance that FY21 tax revenue will equal that of FY20.

  Before you reach for the bubbly though, you should know that FY20 tax collections vastly underperformed even the revised budget estimates. That’s the third year in a row.

  Gross Tax Revenue (Rs crore)
  FY20 BE: 24,61,194
  FY20 RE: 21,63,423
  FY20 Actual*: 20,09,882

  Net Tax Revenue (Rs crore)
  FY20 BE: 16,49,582
  FY20 RE: 15,04,587
  FY20 Actual*: 13,55,886

  Gross Tax Revenue (Rs crore)
  FY21 BE: 24,23,020
  Till December: 13,38,126 (55%)

  Net Tax Revenue (Rs crore)
  FY21 BE: 16,35,909
  Till December: 9,62,399 (59%)

  January 31, 9:22 PM IST

  Great Expectations

  
  

  Expectations ahead of the budget have reached a crescendo. Meeting those expectations will be a challenge even if the government does a reasonably good job with the budget.

  We're expecting the government to present a budget which shows consolidation in the headline fiscal deficit, while keeping government spending support going. Yes, they can do both. The 15.4% nominal GDP growth being projected in FY22 by the Economic Survey, will mean the government can budget for a similar 15-16% growth in gross tax revenue. That, plus an aspirational divestment target will mean they can show good growth in expenditure while bringing down the deficit. The government would do well to keep the divestment target within an achievable rangWill the government get some outside support from the Fifteenth Finance Commission in the form a fiscal deficit range? We'll watch for that.

  Aside from the headline numbers, a do-no-harm budget would actually be great news.

  Announce the intention to set up a development finance institution, a roadmap on privatisation (not just divestment), step-up health spending and ensure the rural jobs guarantee scheme is well funded. Finally, use the opportunity of a forced fiscal reset to make the Union budget cleaner and more transparent.

  That, to our mind, would make for a good-enough budget, even if not a historic one.