Union Budget 2021-22 was presented in a unique set of circumstances. The fiscal deficit had already threatened to go through the roof. GST collections for the full year had fallen drastically even as direct tax collections had also faltered. In the midst of all this revenue related chaos, the Indian economy was expected to contract at -7.7%. In short the conflict in the economic situation was obvious.
Theme of Budget 2021-22
On the one hand, the budget had to be reformist to drive growth higher. At the same time, the budget also had to be conservative in order to avoid revenue leakage and any negative marks from the credit rating agencies.
In the face of such conflicting priorities, it must be said that the budget has done a commendable job. It has been a bold budget that has not really minced words at any stage. At the same time, the budget has been pragmatic too.
The strategy of the budget was straight forward. A hike in customs duty was an obvious answer to generate revenues in the short term and also to benefit Make in India. An aggressive disinvestment plan has been worked out to disinvest two more PSBs, apart from IDBI Bank, as well as a general insurance company. This is in addition to LIC.
In addition, monetization of road, highway and gas pipeline assets are being planned on a large scale to raise resources for the government. One bold move was to announce an aggressive fiscal deficit at 9.5% of GDP for FY21 with an estimated fiscal deficit at 6.8% for FY22. That is nearly 200-250 bps more than original estimates. Fiscal deficit will stay high for some time because a gradual reduction is planned to 4.5% by FY26.
Key takeaways from the Union Budget 2021-22
Here are some of the key takeaways from the Union Budget statement.
- Health has been made a top priority with a healthcare outlay of Rs.223,000 crore. This is a growth of 135% over the previous year allocation and includes an Rs.35,000 crore allocation for the COVID vaccination program. The budget has also underlined the plan to gradually scale up this outlay from 1.3% of GDP to 3% of GDP. This program will also include the operationalization of 17 new public health units at points of entry.
- A brand new Vehicle Scrapping Policy will phase out old and unfit vehicles based on automated fitness centres. Commercial vehicles older than 15 years and private vehicles older than 20 years will have to be scrapped or attract a steep green tax.
- Aggressive divestment cum privatization program launched. The disinvestment target has been pegged at Rs.175,000 crore for FY22 and will include mega IPOs like LIC, CONCOR, BPCL and SCI, among others. In addition, 3 PSU banks including IDBI Bank as well as one large general insurance company will also be privatized. FDI in insurance has been hiked from 49% to 74% to simplify foreign ownership.
- A unique national Asset monetization pipeline will oversee the asset monetization program of roads, highways and gas pipelines in a time bound manner. The funds raised will be used to bridge the revenue shortfall in the budget.
- The budget has laid out the plan for a national infrastructure DFI with a base capital contribution by the government of Rs.20,000 crore. The DFI will build a loan book of Rs.5 trillion over the next 3 years funding infrastructure projects.
- The big news was the creation of an ARC-AMC, better known as a bad bank. This will be a nodal body that will be well capitalized and take over the stressed assets of the PSU banking system. Such assets will either be hived off directly or securitized and sold as pass through certificates. It could make a bid difference to banking reforms.
- Capital markets could be moving towards centralization of regulation. The budget has laid out plans to merge the SEBI Act, Depositories Act and the SCRA under a single nodal regulation covering all aspects of capital markets. Of course, breadth of jurisdiction and conflict of regulation needs to be ironed out still
- Tax rates were not changed but certainly simplified. Persons aged more than 75 years who get pension and interest from deposits need not file returns any longer, unless they need to claim refund from the IT department. In addition, the window to reopen IT assessment cases has been cut from 6 year to 3 years. For incomes up to Rs.50 lakhs and disputed income of Rs.10 lakhs, the special dispute redressal mechanism can be used. Affordable homes will also get tax holiday for one more year.
- Some duty rates have been tweaked. Duty on copper scrap was reduced to 2.5% and customs duty on gold and silver will be rationalised. To support the Atma Nirbhar program, duty on solar inverters were raised from 5% to 20% and on solar lanterns from 5% to 15% . A special customs duty on nylon will be charged at 5%. In addition, tunnel boring machines will attract customs of 7% while customs duty on cotton raised to 10%. Customs duty on cotton raised from 0 to 10%.
- A special agriculture infrastructure and development cess is proposed to be imposed on certain items including urea, apples, crude soybean and sunflower oil, crude palm oil, kabuli chana and peas. In addition, there will be an additional cess of Rs.2.50/litre on petrol and Rs.4/litre on diesel.
In short, the budget has done the best under the present trying circumstances to balance growth and circumspection.