A Clear Focus On Economic Growth Revival

The Union Budget 2021-22 was clearly an expansionary one with focus on growth and furthering the importance of AatmaNirbhar Bharat in order to boost manufacturing in India that, in turn, would provide the necessary boost for job creation. 

The government has reiterated the PLI (production-linked incentive) scheme allocation of Rs 190,000 crore over the next five years for 13 sectors. The Budget focuses on capital spend on one hand and asset monetisation on the other to channel the same towards the investment expenditure necessary to boost growth on a more structural basis over the next few years.

The growth focus of the proposals presented in the Budget was clear. It targets capital expenditure at Rs 5.54 lakh crore, a growth of 26% over financial year 2020-21 (revised estimate). India’s economic revival is also reflected in the expectations with nominal GDP growth at 14.4% in 2021-22E. In the absence of any major increase in tax rates (which helped remove an overhang from a market perspective), the net tax revenue is expected to increase by 14.9% in 2021-22BE, largely in line with the growth of nominal GDP. 

Fiscal deficit target is set at 6.8% of GDP for the next fiscal year as compared to 9.5% for fiscal 2020-21RE, reflecting the path towards higher spending. In this respect, the gross borrowing target for fiscal year 2021-22E was set at ~Rs12 lakh crore. The government is clearly looking at higher growth on a more structural basis in order to achieve debt sustainability and reduce the debt-to-GDP ratio over a period of time. 

While the disinvestment programme was impacted in FY21 largely due to the COVID-19 pandemic, it is heartening to note that the government is serious in the strategic disinvestment plan and has outlined the path for the same. In that respect, the much-awaited policy of strategic disinvestment of public sector enterprises was unveiled. The policy provides a clear roadmap for disinvestment in all non-strategic and strategic sectors. 

The government has identified four areas that are strategic where bare minimum CPSEs will be maintained and the rest privatised. The disinvestment target revenue is set at Rs 1.75 lakh crore for FY2021-22BE. The finance minister also stated the intention of the government to complete the privatisation of two state-run banks (apart from IDBI Bank) and a PSU general insurance company, which are bold steps in the right direction. The government also hopes to complete sale of its stake in BPCL, Air India, Shipping Corp, IDBI, BEML and Container Corp and launch the IPO of LIC in 2021-22. 

The emphasis on infrastructure development in the Budget is impressive with focus on allocation to roads and railways. As highlighted by the finance minister, Bills will be introduced to create a Development Financial Institution (DFI), which will provide long-term capital for the National Infrastructure Pipeline (NIP) projects. National monetisation pipeline will also be announced to monetise completed infra projects that will provide capital for new projects. 

The National Highway Authority of India (NHAI) and Power Grid Corporation of India Ltd (PGCIL) have launched InVITs which are likely to attract international and domestic investors to monetise projects. Further, Rs 2 lakh crore will be provided to state urban bodies for capex. 

To solve the bad loan problems of public sector banks and strengthen their balance sheets, the government further proposes to set up an ARC (Asset Reconstruction Company) for aggregating / pooling bad loans of state banks. This would be set up to consolidate and take over the existing stressed debt of the PSU banks and then manage and dispose of the assets to Alternate Investment Funds and other potential investors for eventual value realisation. 

Further, the NCLT framework will be strengthened and a special framework for MSMEs will be introduced. These measures bode well for management of corporate stress and improving the balance sheets especially for state-owned banks. 

Finally, the Budget continues its focus on agriculture, rural development and strengthening the health infrastructure. The agriculture credit target has been enhanced to Rs 16.5 lakh crore. Allocations under the national health mission for development of healthcare infrastructure over next six years have also been increased. 

Overall, it’s a growth-oriented budget which focuses on the revival of economy, on privatisation and there has been no introduction of new taxes. All of this does provide a catalyst for the economic recovery to gather further momentum. Equity markets have given a thumbs up to the budget with Nifty up by 4.74% today. 

Disclaimer: Views are personal and do not reflect the views of Kotak Mahindra Asset Management Company Limited.

The author is Group President & MD, Kotak Mahindra Asset Management Company