The Union Budget 2021-22 was clearly growth focused with sharp increase in capex allocation (up ~26% YoY), and outlining manufacturing as the key pillar for the economy, while rightly allowing for higher fiscal deficit, given the low interest scenario.

Union Budget has pegged the current years (FY20-21) fiscal deficit at 9.5% of the Gross Domestic Product (GDP) and 6.8% FY21-22. The fiscal deficit target has been above market expectation for both the years. The expectation for FY20-21 was around 7.5% while for FY21-22 was around 5.0%-5.5%.

Infrastructure: Key focus area for Union Budget 2021-22

1. As expected, the government has stepped up its capital expenditure gross budgetary support (GBS) allocation at by 26% YoY to | 5.54 lakh crore in the Budget to ramp-up infrastructure spending with focus on economic revival. Further, | 2 lakh crore towards additional capex to nudge states, allocation of | 20000 crore toward setting up DFI to have lending portfolio of | 5 lakh crore over the next three year with an aim to mobilise funding required to fulfil NIP and create opportunities in key segments like railways, roads, infrastructure power, defence, etc.

2. Roads & Highways were clearly the most resilient segment of infrastructure. On the overall capex front, for Roads and Highways, the revised estimates (RE) FY21E spends is! pegged ~12% higher at | 92053 crore vs. budgeted estimates (BE) of | 81975. Even for FY22E, the government has pegged the road capex at | 108230 crore, growth of 17% YoY on a decent RE base. The government is also looking to provide alternative financing source by monetising five operating projects worth ₹ 5000 crore through NHAI INVIT

3. Most importantly, the budget also provided for alternative source of financing such as setting up of DFI, monetization of assets across segments such as Highways, Grid Assets, Airports etc.

Disinvestment agenda receives solid push in Budget 21-22

In the Union Budget 21-22, the Finance Minister announced a target of ₹ 1.75 lakh crore for disinvestment. Barring four strategic areas, PSUs in other segments would be divested. Importantly, all strategic stake sales announced already would be completed in FY22E while Niti Ayog has been tasked with working on the next list of PSUs for disinvestment. Among the new companies in which government stake would be monetised next year, major names included 2 banks and a general insurer. Importantly, LIC of India would also form part of FY22 disinvestment agenda. Separately, the government also announced an asset monetization plan for encashing several operational assets such as NHAI toll roads, power transmission projects, oil & gas pi! pelines, tier 2/3 airport assets, warehousing assets and sports stadia, etc.

PSU banks in focus

Setting up of Asset Reconstruction and Management Company (ARC) or bad bank to take up existing stressed asset with singular focus on resolution of stressed assets recovery remains positive for banking sector, especially PSU banks. Further, ₹ 20,000 crore, capital infusion to strengthen balance sheet of PSU banks and focus on growth. The infrastructure and growth push from budget to fuel banking credit growth.

After the government last announced merger of 13 public sector banks into five, government has taken the first step towards privatising state-run banks starting with divestment of two PSU banks, in a bid to expedite long-awaited reforms in the banking sector. We believe merged PSU banks like BoB, PNB or non merged banks like Bank of India, Bank of Maharashtra, may be on radar

Governments focus on augmenting Farm income

Government remains committed to augment farm income with record procurement of farm produce (Wheat, Rice, Pulses) from domestic farmers for the fiscal year FY21E. Rice procurement is seen at ₹ 1.72 lakh crore for FY21E, wheat procurement is seen at ₹ 75,000 crore and pulses at ₹ 10,000 crore. It also laid emphasis on doubling the fund’s under NABARD for micro-irrigation for the fiscal year FY22 at ₹ 10,000 crore vs. ₹ 5,000 crore in FY21E. Budget 2021-22 also set target for agriculture credit at ₹ 16.5 lakh crore for FY22E. It also talked about introduction of agricultural infrastructure and development cess on certain products.

Commercial Vehicles space receives an impetus in Union Budget 21-22

For the auto space, the major Budget announcement was introduction of a voluntary vehicular scrappage policy for commercial vehicles older than 15 years and personal vehicles older than 20 years. We believe that the CV space would benefit the most from the proposed scrappage initiative and companies across the value chain (OEMs, forging players, tyre players and tyre chemical suppliers) stand to gain as a result. An additional tailwind to the CV space was provided in the form of ₹ 18,000 crore allocation for procurement of ~20,000 public buses on PPP model – which stands to support the presently struggling domestic bus segment. Other initiatives in infra space (aggressive road building) and agri economy (focus on farm incomes) i! s positive for several leading auto OEMs.

Budget developments on Direct Taxes for individuals

1. No major changes in income tax rates or slabs for individuals or corporates.

2. Unit Linked Insurance Products (ULIPs) with higher premium above ₹ 2.5 lakh per annum will be subject to taxed on maturity. It will bring the taxation on higher value ULIPs at par with mutual funds.

3. Tax exemption on interest earned on employee’s contribution towards various provident funds has been restriction to the annual contribution of ₹ 2.5 lakh.

4. Additional deduction of ₹ 1.5 lakh on interest on housing loan for affordable housing has been extended on home loans till 31st March 2022. The scheme was first introduced in 2019 budget and has seen extension since then.

Higher than expected fiscal deficit and Government borrowing

Due to higher deficit, the borrowing from bond market is also higher. The finance minister has announced additional ₹ 80000 crore of market borrowing in current financial year while for FY21-22, the gross market borrowing is pegged at ₹ 12 lakh crore. Bond market was expecting the gross borrowing for around ₹ 10 lakh crore for FY21-22.

The bond market reaction accordingly has been negative with benchmark 10 year G-Sec yield trading around 15bps higher at 6.05% levels. The bond market also got disappointed with no announcement with respect to road map for inclusion of Indian Sovereign bonds in global bond indices which would have led to significant inflows.

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February 2021