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Budget 2021 lays foundation for $5 trillion economy

Monetisation of infra assets, divestment plans of the non-core assets, and conducive tax compliance are likely to attract the much-needed foreign capital.

February 02, 2021 / 11:22 AM IST

In basic terms, Union Budget is a financial plan of the government for a year, but in a broader sense, it significantly decides the course of the economy in the long term, too.

In the run-up to the Budget, there were apprehensions that the tight fiscal condition may force the government to increase taxes and cut capital expenditure.

It did not happen.

The Union Budget 2021 showed that India is not ready to lose control of the course of development and showed the commitment of attaining the goal of becoming a $5 trillion economy in the coming years.

In her Union Budget 2021 speech, Finance Minister (FM) Nirmala Sitharaman said the Budget was based on six pillars- (1) health, (2) physical & financial capital, and infrastructure, (3) inclusive development for aspirational India, (4) reinvigorating human capital, (5) innovation and R&D, and (6) minimum government and maximum governance.

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The COVID-19 pandemic posed an unprecedented challenge before the policymakers. While the economy was already in the slow lane, the pandemic made it suffer a historic contraction.

But the government seems to have managed the country's fiscal health quite well and it shows the intent of keeping the economy up and running.

"...I want to confidently state that our government is fully prepared to support and facilitate the economy’s reset. This Budget provides every opportunity for our economy to rise and capture the pace that it needs

for sustainable growth," the FM said in her Budget speech.

Market experts, brokerages, and analysts hailed the Budget. Most of them believe it had all the essential ingredients of making India stronger in days to come.

"The Union Budget has set the foundation for the lifting of the Indian economy from under $3 trillion to $5 trillion. The Budget focusses on making India Atmanirbhar by investing big in infrastructure, manufacturing, and healthcare, to be aptly funded through higher fiscal deficit, in a benign interest rate scenario," said Vijay Chandok, MD & CEO, ICICI Securities.

Chandok pointed out that the enhanced CAPEX for infra and manufacturing sectors is likely to be the key for generating overall demand, and drive employment generation.

The monetisation of infra assets, divestment plans of the non-core assets, and conducive tax compliance are likely to attract the much-needed foreign capital.

The measures to strengthen the domestic financial sector through recapitalisation of PSU banks, proposal to set up a Development Financial Institution, and stabile direct and indirect taxes are likely to provide the much-desired impetus to growth and equity markets after the Covid-induced economic pain, Chandok added.

The government took a bold step on raising the Capex target for the coming financial year even as COVID-19 put tremendous strain on the fiscal maths of the country.

The government’s expenditure on capital formation will rise 34.5 percent to Rs 5.54 lakh crore in FY22.

"The allocation of Rs 5.5 lakh crores in FY22 is a whopping 35 percent growth over the allocation in FY21 which clearly indicates the focus and thrust of the government. Moreover, the monetisation plans by encouraging INVIT structures and financing initiatives through the setting of development financial institutions is another positive move. Overall, the strong emphasis on infrastructure which is a long-term economic growth multiplier is positive," said B Gopkumar, MD & CEO, Axis Securities.

Apart from an increase in CAPEX, minimum government and maximum governance was a key highlight of the Budget that is deemed very important for a growing economy.

Naveen Aggarwal, Partner, Tax, KPMG India pointed out that a single Securities Markets Code is a step in the right direction to reduce overregulation.

"The FM also announced a hike in the FDI limit for the insurance sector to 74 percent from 49 percent by allowing foreign ownership with safeguards. The tax proposals too were crafted keeping in mind ease of compliance, certainty, dispute resolution, and reduce litigation," said Aggarwal.

The government has pegged the disinvestment target for FY22 at Rs 1.75 lakh crore. This will include the reduction of the Centre's stake in two state-owned banks and a general insurance company, and large-scale asset sales.

Gopkumar of Axis Securities said that the proposals for the financial sector which include privatisation of public banks and asset reconstruction company are significant positives for the financial sector. Overall, the budget has checked most of the boxes and will help the economy, he said.

Now, the implementation of the announcements is the key that will decide how the Indian economy will fare in the days to come.

"The government has also not been constrained by the fiscal numbers and has focussed on spending to get the economy back to its feet post the devastation of the pandemic. The key will be the execution of the plan. The divestment number will need a lot of work. The additional borrowing needs to be managed by RBI proactively to ensure that it does not impact the long-term rates significantly," said Amar Ambani, Senior President and Head of Research – Institutional Equities, YES SECURITIES.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Nishant Kumar
first published: Feb 2, 2021 08:03 am

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