Home / Budget / Opinion /  Govt is correct to shed conservative fiscal strategy

The paradox of 2020 lies in the fact that it brought us together while keeping us apart. As the adage says, “change is the only constant", changing scenario from a virtual world to the gradual opening, getting back to normalcy has been at the centre stage. With all this, the priorities of people and economy at large, have aligned and re-aligned again to adapt to the evolving scenario. The backdrop for setting the budget got tougher. The need to run a counter cyclical fiscal measure was stronger than before. On the other hand, rising deficit and debt made the decision even more challenging. The government has justifiably shed its conservative fiscal strategy and sided with counter-cyclical measures to support growth.

Fiscal deficit projections have been significantly higher than the market expectations (FY21: 9.5% of GDP vs market expectation of 7-8%, FY22: 6.8% of GDP vs market expectation of 5.6%). Higher deficit in both years is for good reasons. In FY21, it is to clear the mounting arrears on food subsidy. Higher deficit in FY22 will be largely directed towards higher capex outlay.

Infrastructure was one of the key areas with focus on roads, railways and ports. Setting up of Development Financial Institution (DFI), issuance of zero-coupon bonds, debt financing by foreign portfolio investors (FPIs) in infrastructure investment trusts (InvITs) and real estate investment trusts (REITs) will address the financing issues for the sector. Additionally, monetization of assets will further unlock value and bring in additional funds.

Within the realm of the financial sector, the proposal to liberalize foreign direct investment (FDI) in insurance from 49% to 74%, setting of securities market code to consolidate and rationalize a wide array of acts, aiming to privatize two public banks and infusing 200 billion to recapitalize public sector banks are steps in the right direction. The proposal to set up an asset reconstruction company is a good beginning and can lead to faster resolution of stressed assets rather than banking consortium taking the National Company Law Tribunal (NCLT) route.

From the taxation perspective, absence of covid-19 tax, wealth tax and an unchanged long-term capital gains (LTCG) tax is positive from equity markets. That said, imposition of agriculture infra cess on a wide array of products will lead to higher taxation on select goods. The government has stayed away from any withholding tax on REIT and InvIT, which is also market positive.

One thing that Covid-19 has put emphasis on is healthcare facilities and infrastructure. The government has announced various schemes to further develop the healthcare system and committed 2.23 trillion towards the sector.

Besides, the focus on multifarious areas, shows the balanced approach even amid the complex challenges thrown due to the pandemic. From focus on start-ups, decriminalization of the LLP Act and redefining small companies under the Companies Act, increased FDI in insurance, and relief to non-resident Indian (NRI) investors on dividend income; the budget has redefined the priorities by re-arranging the key building blocks of economy.

From the mutual fund industry perspective, we have seen some positive announcements. Bringing high ticket unit-linked insurance plans (ULIPs) at par with the MF taxation has brought the two products on the same level playing field. Also, restricting tax exemption on the interest income earned on the employees’ contribution to provident fund to 2.5 lakh, may lead to increased investor interest in MF products.

To sum, equity market should be taking the budget positively owing to no unfavourable development on taxation and focus on capital spending. Fixed income market may feel jitters given massive increase in supply of government papers. Owing to higher deficit projections, supply of government borrowings was significantly higher than market expectations. As such, markets would be keenly watching RBI’s approach towards absorbing the elevated supply. That said, some rise in yields cannot be ruled out.

Vinay Tonse is MD and CEO of SBI Mutual Fund

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