By Ashu Suyash
The Union Budget for FY21 leans towards the long term than the immediate. It creates some spending headroom by stretching the fiscal deficit target, and through an ambitious divestment programme. It does a good job of covering the broad horizontal imperatives, especially social infrastructure, but is short of making an impact towards spurring consumption in the current and next fiscals where the pain is most.
Clearly, there are four takeaways:
There’s not much of a consumption boost: Overall, the pronouncements are only mildly positive for consumption. Higher rural spending will help on this score as it sets off the virtuous cycle of rural employment, higher incomes and consumption. As for the new tax regime, our analysis shows that tax payers already availing of deductions, wouldn’t find shifting beneficial, but those not availing any deductions could gain. Consequently, spending on high-ticket items such as real estate can be muted in the short-term. There is some offset to be had from rural India, though, given the increase in allocations.
Steps have been taken to build confidence on Finance Street: For the finance sector, the budget seems to emphasise confidence-building, improving efficiencies in public sector banking, and enabling infrastructure investments. Sure, there was an opportunity to set up a big alternative financing vehicle that would have helped clean up the Augean stables of NPAs and provide liquidity, but that can also happen outside the Budget. The higher deposit insurance cover of Rs 5 lakh will boost depositor confidence and increase coverage to over 75% of all term depositors compared with 61% earlier.
For non-banks, the continuation of the PCG scheme, and expanded coverage of the Sarfaesi Act, will provide support in these challenging times. As for public sector banks, with no capital largesse, they would do well to build up on operational efficiencies and governance, and access markets on their own merit.
A good attempt is being made to draw foreign capital into infra: The budget makes a much-needed move to attract sovereign wealth funds into infrastructure by offering full tax exemption on interest, dividend and capital gains income for investments with a lock-in of three years. This would benefit the roads and highways sector, especially toll-operate-transfer, or asset monetisation, projects. This comes not a day late, as the government recently unveil its Rs 100 lakh crore National Infrastructure Pipeline vision.
Also, the government has raised the foreign portfolio investor limit in corporate bonds from the current 9% to 15%. Given the current corporate bond market outstanding at Rs 35 lakh crore, this opens up an incremental Rs 2.1 lakh crore limit to foreign investors. However, it is pertinent to note that only about 58% of the current limit has been utilised. Finally, the abolition of dividend distribution tax would avoid double taxation for foreign investors and make investment in domestic companies more attractive for them.
There are some big steps for MSMEs: The government is trying to address the chronic dearth of competitiveness of this sector by enabling easier access to debt or quasiequity. Using the CRISIL Quantix database, we studied 13,000 MSMEs and found that over half of their debt needs are for working capital. That being the case, there have been a raft of good steps taken — such as extension of loan recast by another year, 100% tax exemption for three out of 10 years for companies with a turnover up to Rs 100 crore (up from Rs 25 crore) along with reduced compliance and simplification in the GST filing process, and lastly, no audit for MSMEs with turnover up to Rs 5 crore.
How swiftly and relentlessly implementation happens, especially on the rural side, will decide how much of a bounce-back in consumption can we get.
(The writer is MD, CRISIL. Views expressed are personal.)
Source: Economic Times
