FPIs are now also allowed to invest in debt securities of NBFCs and InViTs/REITs to provide the much-needed liquidity in this space
The Budget was widely expected to provide a 5-year strategic roadmap to make India a $5 trillion economy and a short-term tactical plan to revive the economy.
The Budget did indeed focus on fiscal management, reviving growth drivers with a thrust on rural demand and infrastructure, providing a boost to liquidity in the credit market, and enabling an easier tax and regulatory environment for foreign investors and startup ecosystem.
Digitization and Electric Vehicle were given specific impetus with an objective to influence consumer behaviour to adapt to these emerging trends and technologies.
Focusing on Infrastructure & Development:
Infrastructure investment is key to kick-start the virtuous cycle for economic growth. The government proposed an ambitious plan of investment of Rs 100 lakh crore over the next five years.
Special emphasis has been laid on roads and railway sector. Plans of upgrading 1.25 lakh km of village roads with an investment of Rs 80,250 crore over the next five years is the largest budgetary announcement in this sector.
In order to balance the fiscal deficit target, the government has decided to heavily rely on off-budget sources and PPP route for funding and development of infrastructure.
While this is a step in the right direction, further significant policy and structural changes will have to be brought about to assuage the current issues plaguing PPP projects viz. availability of long term equity and debt financing, attracting foreign investments in this sector and reducing bottleneck and payment delays in infrastructure projects.
Specific announcements like allowing FPIs to subscribe to debt securities issued by InviTs and REITs and introduction of credit default swaps for infrastructure sectors are positive growth-oriented steps.
Boosting Electric Vehicle Adoption:
Modi 2.0 government has placed a strong emphasis on the adoption of EV with a vision to achieve 30 percent penetration of EV by 2030.
While the budget provides tax and GST incentive to bring about a behavioural shift in consumers to shun polluting vehicles and reduce the gap between total ownership cost of EV and traditional vehicle, more government support will be required over the coming years to enhance the charging infrastructure network- a key bottleneck in adoption of EV.
Supporting and incentivising local manufacturing capabilities for batteries and EV will be critical to achieving our strategic objective of energy security and reducing import bills, else we run the risk of replacing oil imports with battery imports even with increased adoption of EV.
Budgetary announcement of plans to set up mega manufacturing capacity for semi-conductions and lithium-ion battery, exemption of the custom duty on lithium-ion cells and tax exemptions for EV components are significant measures to boost investment and growth.
Supporting Farm and Rural Demand:
The Budget had a strong flavour of “rural first” with a long term vision of doubling farmer income and enhancing rural demand.
Agriculture comprised 5.4 percent of budgeted expenditure up from 3.5 percent in FY19, primarily due to the allocation of Rs 75,000 crore towards Pradhan Mantri Kisan Samman Nidhi (PM-Kisan) to provide Rs 6,000 in income support to 12.6 crore small and marginal farmers.
Specific plans for promoting “agri-preneurs”, water security, rural electrification, capex to improve rural roads & connectivity and “zero budget” farming connectivity are positive steps to increase rural income and demand.
However, more such bolder steps need to be taken in the coming year to enhance private investments in rural India, which will be critical to achieving government’s vision of doubling farmer income and spurring rural demand.
Attracting overseas capital:
The budget was a mixed bag for foreign investors. The government increased FDI limit in key sectors. Similarly, for FPIs, the government increased investment limits from 24 percent to sectoral FDI limits, and also streamlined existing KYC norms to make FPIs more investor-friendly.
FPIs are now also allowed to invest in debt securities of NBFCs and InViTs/REITs to provide the much-needed liquidity in this space.
At the same time, the fine print of the budget suggests an increase in the effective tax rate for non-corporate FPIs by up to 19 percent with effective peak LTCG and STCG at 14.25 percent and 21.37 percent, respectively.
Since 70 percent of FPIs are registered as non-corporate, this may have an impact on the inflows via FPI route.
In summary, the budget sets a broad roadmap and takes positive incremental steps to achieve government vision of $5 trillion economy.
Bolder structural reforms and policy frameworks will have to be implemented in the coming years to further unleash the growth potential of the country. Structural reforms to improve the viability of infrastructure projects by improving the financial strength of off-takers will be critical to enhance the flow of foreign and debt and equity capital in this sector.
Further, favourable and consistent taxation regime, especially for long term foreign capital, will be important for sustained capital flows.
Lastly, entrepreneurship will remain a key driver for job enhancement in the country, and the government needs to build on the positive steps taken in this Budget to enhance rural entrepreneurship and ease business environment for startups.
The author is Joint MD & CEO, YES Securities.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.