Union Budget 2021-22: Main Highlights and Stocks To Benefit
Finance Minister Smt. Nirmala Sitharaman presented the Union Budget 2021-22 in the Parliament on February 1, 2021. It will facilitate a ‘reset of the Indian economy’. Amidst the pandemic, the total impact of Atmanirbhar Bharat and measures by RBI was at Rs 27.1 lakh crore (~30% of our GDP). The budget has now included a set of important schemes that target different sectors of our economy. Let us take a look at some of the key highlights from the Budget presentation.
Boost for the Healthcare Sector
The Finance Minister has announced a Rs 64,180 crore package for the healthcare sector, which will be spread over the next 6 years. This would come under the PM Atmanirbhar Swastha Bharat Yojana. Under this scheme, around 17,000 rural and 11,000 urban health and wellness centres will be set up. Launch of Integrated public health labs will happen in each district of the country.
The Finance Minister also said that more Covid-19 vaccines will be produced and linked to labs across India. An amount of Rs 35,000 crore will be allocated for the manufacturing and distribution of vaccines. The budget outlay for Health and Welfare is Rs 2.23 lakh crore, a 137% increase compared to the previous year. Pharma stocks can be watched.
The Scrappage Policy
The FM has announced a voluntary scrapping policy. Passenger vehicles (PVs) older than 20 years and commercial vehicles (CVs) older than 15 years must undergo a fitness test. This will help reduce the pollution levels in our country. It will also provide a demand boost for the automobile sector.
The fitness test will be conducted at automated fitness centres, which will determine whether the vehicle in question is qualified to run on roads or headed for the scrap heap. Each fitness test would cost approximately Rs 40,000. This is in addition to the road tax, and possible “Green Tax” that you have to pay while mandatorily renewing your private vehicle’s registration after the 15-year period. This would ultimately ensure that individuals get rid of their old cars and purchase new ones. We are waiting for more details. Stocks like Ashok Leyland, Tata Motors and Eicher Motors will benefit the most.
Boost for Infrastructure Sector
The Finance Ministry will set aside a total amount of Rs 5.54 lakh crore for the infrastructure sector. The Government will set up a Development Finance Institution (DFI), which will receive an initial capital of Rs 27,000 crore. The DFI aims to have a lending portfolio of Rs 5 lakh crore in 3 years. This DFI will be used to finance both social and economic infrastructure projects identified under the National Infrastructure Pipeline (NIP). It will be beneficial for infra companies like GMR Infra, which may otherwise not be able to take more loans as they already have high debt.
A National Monetisation Pipeline for brownfield projects will be launched. This includes:
- 5 operational roads with an estimated enterprise value of Rs 5,000 crore will be transferred to the National Highway Authority of India (NHAI) Infrastructure Investment Trust (InvIT).
- Transmission assets worth Rs 7,000 crore will be transferred to Power Grid Corporation of India Ltd (PGCIL) InvIT.
The Ministry of Road Transport & Highways will be allocated a total amount of Rs 1.18 lakh crore. Highway infrastructure projects will be given a boost. This includes building 8,500-km of highways by March 2022. We could see many listed construction or infrastructure companies receiving orders from NHAI for taking over such projects. Highway builders including Dilip Buildcon and even L&T will benefit. The proposed highway works include:
- 3,500 km corridor in Tamil Nadu
- 1,100 km in Kerala at an investment of Rs 65,000 crore
- 675 km in West Bengal at a cost of Rs 95,000 crore
- 1,300 km in Assam in the next 3 years
- Out of the Rs 1.10 lakh crore allocated for Railways, Rs 1.07 lakh crore will be towards capital expenditure. JSPL will benefit for more track laying. Also, the Indian Railways will monetise dedicated freight corridor assets for operations and maintenance after commissioning. IRCTC will obviously benefit.
- The FM said that Indian Railways will prepare a future-ready railway system by 2030 referred to as the National Rail Plan.
Boost for Power Sector
The Indian power sector will receive additional funding of Rs 3.06 lakh crore. Pipelines of GAIL (India) Ltd, Indian Oil Corp (IOC), and HPCL will be monetised. The Ujjwala scheme will be extended to cover 1 crore more beneficiaries. [The Pradhan Mantri Ujjwala Yojana is a scheme of the Ministry of Petroleum & Natural Gas for providing LPG connections to women from Below Poverty Line (BPL) households]
- 100 more districts will be added to the Ujjwala scheme in the next 3 years for city gas distribution.
- An independent gas transport system operator will be set up to ensure equal access to all citizens.
- The government has announced a new gas pipeline project for Jammu and Kashmir.
The Finance Minister has also proposed to allocate Rs 1,000 crore to the Solar Energy Corporation and Rs 1,500 crore to the Renewable Energy Development Agency.
The government aims to spend Rs 1.97 lakh crore on various Production Linked Incentive (PLI) schemes over the next 5 years. This is in addition to the Rs 40,951 crore announced for the PLI for electronic manufacturing schemes. To achieve double-digit economic growth, PLI schemes to create manufacturing global champions for an 'Atmanirbhar Bharat' have been announced for 13 sectors.
In November 2020, the government announced a mega PLI scheme for 10 sectors. This included advanced chemistry cell batteries, electronic products, automobiles & auto components, pharma, telecom & networking products, textile, food products, white goods, and speciality steel. This will encourage global players to kickstart their manufacturing activities in India. It would also provide employment opportunities to lakhs of people.
Divestment target has been set at Rs 1.75 lakh crore for the upcoming financial year.
- For the current financial year (FY21), the government had budgeted to raise Rs 2.1 lakh crore through divestments. However, they have fallen short of the target.
- The stake sale of Life Insurance Corporation (LIC) will be completed this year. The initial public offering (IPO) of LIC will be conducted in FY22.
- The strategic disinvestment of companies including BPCL, Air India, Pawan Hans, IDBI Bank, Container Corporation of India (CONCOR) will be completed in 2021-22.
- Seven major ports worth Rs 2,000 crore will see their operations privatised in the year 2021-2022.
- The next lot of airports will be privatized in Tier 2 and 3 towns and cities. As we know, the Adani Group has taken over the operations of multiple airports from the Airports Authority of India (AAI). Adani Enterprises and GMR Infra can be noted.
- The government has approved a new Public Sector Enterprise Policy, which aims to accelerate privatisation activities.
Boost for Banking and Insurance Sector
The Finance Minister has announced a further infusion of Rs 20,000 crore for public sector banks. Another major update is the proposed launch of an Asset Reconstruction and Asset Management Company. This particular institution will take over the existing stressed/bad debts of commercial banks. It will acquire bad loans from banks at a negotiated price (at a discount from book value) and pay by way of cash and security receipts. The funds for buying the bad loans will come from the sponsors (government and other banks) and alternative investment funds. The institution will then restructure and turnaround the bad loans for a fee. PSU Banks will benefit the most.
A hike in Foreign direct investment (FDI) in the insurance sector to 74% from the existing 49%. Under the new structure, the majority of directors and key management persons have to be Indian residents. However, this move will help increase capital inflow in insurance companies and enhance their expansion and growth. This increase in FDI limits will help insurance companies to raise funds to ensure that financial stability is maintained- in line with growing business needs. Insurance stocks will benefit, both life and general.
Boost for the Agricultural Sector
The Finance Minister has proposed to increase the agricultural credit target to Rs 16.5 lakh crore. The Finance Minister stated that the government is committed to the welfare of farmers. State-run Agricultural Produce Marketing Committees (APMCs) will now be able to access the Rs 1 lakh crore Agriculture Infrastructure Fund (AIF). However, the budget allocation for the Department of Agriculture, Cooperation and Farmers Welfare has been slashed 8.5% for 2021-22. The flagship PM-KISAN scheme, meant to provide income support to farmers, saw a 13% drop in its budget. Certain provisions in the budget for the agricultural sector include:
- The provisions for the rural infrastructure development fund will be increased to Rs 40,000 crore from the existing Rs 30,000 crore. Infra companies including road builders and cement manufacturers will benefit.
- The amount allocated for micro-irrigation activities will be doubled to Rs 10,000 crore.
- The agriculture infrastructure fund will be made available to Agricultural Produce Marketing Committees (APMCs).
- The government has proposed a farm cess of Rs 2.5 per litre on petrol, Rs 4 per litre on diesel. Prices of petroleum products will likely go up even more.
Boost for Real Estate Sector
This government continues to see ‘Housing for All’ and affordable housing as priority areas. The Ministry of Housing and Urban Affairs has been granted Rs 54,581 crore in the Budget 2021. To incentivise home buyers and real estate developers, it is proposed to increase the safe harbour limit from 10% to 20% for the specified primary sale of residential units. [Safe harbor is a legal provision to eliminate regulatory liability in certain situations, provided that certain conditions are met. It refers to an accounting method that avoids certain tax regulations]
In the July 2019 Budget, the government provided an additional deduction of interest, amounting to Rs 1.5 lakh, for loans taken to purchase affordable houses. The Finance Minister has proposed to extend the eligibility of this deduction by one more year, to March 31, 2022. Also, affordable housing projects can avail a tax holiday for one more year. All realty stocks will benefit but do note especially the ones who provide affordable housing.
Cement stocks will benefit, including ACC and UltraTech Cement among others.
No COVID-cess was announced, with no increase in corporate taxes. Senior citizens above the age of 75 years will now be exempt from filing income tax returns. However, such individuals will have to continue to pay income tax at their respective tax slabs. FM Sitharaman has proposed to give tax holiday for aircraft leasing businesses in Gujarat International Finance Tec-City (GIFT City). [A tax holiday is a temporary reduction or elimination of a tax] The minister has also proposed an extension of tax holiday for start-ups by one more year.
Other announcements on tax include:
- Dividend payment for Real Estate Investment Trusts (REIT) and Infrastructure Investment Trusts (InvITs) will be exempted from tax. Watch REITs stocks.
- The government has proposed to increase the threshold for tax audits from Rs 5 crore to Rs 10 crore (for those transacting 95% digitally).
- Advance tax liability on dividends will arise only after the declaration of the dividend.
- Foreign Portfolio Investors (FPIs) will get a deduction of tax on dividends at a lower treaty rate. We may see more inflow of FII funds.
- The government will also notify rules to eliminate the double tax for NRIs on foreign retirement funds.
Customs Duty Structure
- MSMEs and other user industries have been severely hit by a recent sharp rise in iron and steel prices. Thus, customs duty on semi, flat, and long products of non-alloy, alloy, and stainless steels will be cut to 7.5%.
- The duty on copper scrap will be reduced from 5% to 2.5%.
- Customs duty on Naptha (used in solvents, paints, etc) will be reduced to 2.5%.
- The customs duty on certain auto parts will be increased to 15%. This will bring them on par with the general rate on auto parts.
- To benefit farmers, the customs duty on cotton will be raised to 10%. The duty on raw silk and silk yarn will be increased from 10% to 15%.
- The customs duty on mobile components will be increased to 2.5%. Domestic electronics manufacturers like Amber and Dixon will benefit.
Other Major Announcements
- With the continuing focus on Atmanirbhar Bharat, Nirmala Sitharaman announced the establishment of 7 mega textile parks over the next 3 years. Also, 5 major fishing hubs will be developed across India.
- The Finance Ministry will notify the Securities and Exchange Board of India (SEBI) as the regulator for gold exchanges.
- A scheme to promote the flagging of merchant ships in India will be launched by providing subsidy support to Indian shipping companies in global tenders. An amount of Rs 1,624 crores will be provided over 5 years.
- The government has proposed a Rs 1,500 crore-scheme to promote digital transactions in the country. This will support the adoption of e-payments in smaller cities.
- The fiscal deficit has been estimated at 9.5% of GDP for 2020-21. Fiscal deficit for 2021-22 at 6.8% of GDP. [Fiscal deficit is the difference between total revenue and total expenditure of the government]. The estimated gross borrowing by the government for FY 2021-22 will be Rs 12 lakh crore.
Finance Minister Nirmala Sitharaman has tabled the 15th Finance Commission report in Lok Sabha.