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Union Budget 2021-22: Growth gets priority over deficit

FY21 budget deficit at 9.5% of GDP and target for FY22 at 6.8% of GDP, much higher than the consensus expectations

Motilal Oswal Published 02.02.21, 01:47 AM
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The current year’s budget was announced on the back of very high expectations. It seems to have delivered on those promises and has opened up growth opportunities for the future. In my opinion, the key announcements which would have an impact on the future are as under:

Growth seems to be more important than fiscal deficit: This was one of the key positives of the budget and a departure from the government’s earlier focus on containing fiscal deficit even at the cost of growth.


The government announced FY21 budget deficit at 9.5 per cent of GDP and target for FY22 at 6.8 per cent of GDP, which is much higher than the consensus expectations. This should bode very well for the future growth given the realisation that growth is paramount.

Focus on capex: This was one area where the FM in her speech took a lot more time than most of her earlier budgets. There was clear realisation on her part that this is going to be the core for future growth and hence i) FM announced Rs 5.54 lakh crore of capex and also talked about nudging the state governments to invest more

b) start a DFI with initial capex of Rs 20,000 crore with an intention that it should have a loan book of Rs 5 lakh crore in the next five years c) foreign borrowing allowed for REITs and InVITs etc.

In my view, the past few budgets have ignored the capital formation a lot which has not only impacted the capex cycle but also employment generation. The government has renewed focus on capital formation and has taken a lead by increasing the allocation as well as asking the state governments to spend more.

This may lead to an environment being created where the corporates may move from asset light business models to taking some risk on their own balance sheets. Also, the government’s intentions to create different funding sources for this would bode well in the long term. Bank funded infrastructure assets face a lot of ALM (asset liability) problems and any delay in execution leads to stress to the banks and eventually to the asset owner.

The government’s announcement of monetisation of its infrastructure assets and better structures in REITs and InVITs would mean that foreign money can start flowing into this sector which is totally starved of funds.

Focus on privatisation with the announcement of privatisation of two PSU banks and one general insurance company. Moreover, the FM said LIC IPO would happen in FY22.

Privatisation of these PSU banks and insurance company would need legislative changes and the government’s intention to do that is more important than the privatisation itself. This provides some glide path to the PSU banks that the ultimate end game may be privatisation. This could lead to inflow of money in these banks. This may also have a consequential impact on the efficiency of these PSU banks.

Financial sector announcements: There were two key announcements: one around increasing the FDI limit on insurance to 74 per cent from 49 per cent with much lesser restriction on ownership and second around reduction of loan eligibility from Rs 50 lakh to Rs 20 lakh for Sarfaesi.

Although I would not expect too many foreign companies coming to India on the insurance side, however it can be very well expected that the foreign participation into existing companies may increase.

No increase in taxes: I would think that this is again a clear departure from earlier policies where rich were getting charged everytime. Also, a big positive for the markets as the expectations were very high of a COVID cess.

Hence, in my view more than the announcements in the budget, it is the indication towards the path which the government wants to follow is really encouraging. The government is not looking to fund its shortfalls by charging the rich, it is willing to spend even if it means by increasing borrowings. However, the expenditure would be much more on the capex side and job creation side rather than funding social schemes.

All this is indicating towards a much better future growth and we may see the much awaited animal spirits in the economy rising.

Motilal Oswal is MD & CEO, Motilal Oswal Financial Services Ltd

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