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Budget FY21: Focus on development expenditure driven by reliance on non-tax receipts
The FY21 Union Budget focussed on development expenditure in the agriculture and infrastructure space while containing the fiscal deficit at 3.5%. Emphasis on capital expenditure is evident as it is budgeted to grow at 18% vs revenue expenditure growth of 11.9% over FY20RE, with subsidies expected to remain flat.
Heavy reliance on non-tax receipts in FY21 is a key risk, while the budgeted tax growth is achievable: Gross tax receipts growth at 12% does not appear unrealistic (given estimated nominal GDP growth of 10%) although non-tax revenues and non-debt capital receipts budgeted at Rs6.1tn compared to Rs4.3tn in FY20RE appear high and could be challenging.
Market outlook: Overall Budget focus on fiscal prudence and development expenditure is positive for the capital markets; however, missing triggers like: a) big bang personal income tax cuts, and b) measures for boosting real estate and NBFC sector could keep equity markets range-bound especially in the light of the coronavirus related sell-off in global equities.
* Direct tax changes are beneficial for the middle-income group, but does not incentivise financial savings: Changes in direct tax rates for the for the <Rs1.25mn per annum income group is expected to result in aggregate savings of Rs400bn for the said income group. However, it does not incentivise savings into financial instruments such as insurance and MFs.
* Dividend Distribution Tax (DDT) has been scrapped, with dividend now being taxed in the hands of the receiver and could have implications for dividend and buyback policy.
* Disinvestments have been budgeted at Rs2.1tn in FY21E vs Rs1.05tn in FY20BE, which was revised downwards to Rs650bn. Large disinvestments from LIC, was mentioned in the budget speech.
* FY20 fiscal deficit at 3.8% using the FRBM escape clause: Fiscal slippage of 0.5% using the FRBM trigger has allowed lower than expected cuts on revenue expenditure, while capital expenditure exceeded BE by Rs103bn.
* Borrowing programme: Net market borrowing in FY20RE has increased from Rs4.5tn earlier to Rs5tn, and Rs5.4trn in FY21BE. Reliance on small savings is higher for FY20RE and FY21BE at the rate of 2.4tn vs Rs1.3tn in FY19A and FY20BE.
* Sector impact (refer detailed comments by respective analysts on pages 5-10)
* Positive: Paints, Cement, Building Materials (including Pipes), Oil and Gas, Agri, Print media, Telecom, Footwear, Banks, Capital Goods
* Negative: Insurance, Fertilisers, Soaps and detergents
* Neutral / mixed: Real estate, NBFCs, Auto, Consumer, Pharma and healthcare.
* Major focus areas and related announcements:
* Rs1.7tn towards transport infrastructure: Transport infrastructure along with the NIP worth Rs103tn continues to be in focus at Rs220bn. Monetisation of 12 lots of highways planned by 2024. 100 new airports are planned till 2024.
* Rs2.8tn allocated towards 16 action points towards farm income and rural infrastructure: Action points were announced towards water-stressed districts, Blue economy (fisheries exports, production), organic and integrated farming, efficient warehousing, and non-farm incomes (solar power, horticulture).
* Announcement towards better delivery of social outcomes: Health and education sector saw expenditure growth of 6% and 5% respectively, with announcements towards setting up hospitals in aspirational districts, etc.
* Deposit insurance cover increased to Rs0.5mn from Rs0.1mn.
* Decriminalising civil offences: Companies act and other such acts which criminalised certain civil offences to be reviewed and reversed
* Access to foreign capital: Budget announced tax concessions to Sovereign Wealth funds for investment in infrastructure and priority sectors with a minimum lock in period of 3 years. Limits on FPI holding in corporate bonds increased from 9% to 15%.
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