All eyes are focussed on the Union Budget 2021-22 that will be presented by Finance Minister Nirmala Sitharaman on February 1. As we know, the Covid-19 pandemic had led to disruptions in all major economic activities. The upcoming Budget has greater significance, as it would give us a clear picture of how the Central Government plans to allocate essential funds to revive our economy. The Finance Minister had stated that this budget would be unlike anything we have seen over the past 100 years of India’s history.
Over the past few months, there have been multiple reports or rumours that indicate the different sectors of India’s economy that are likely to benefit from the Budget. Let us take a look at some of these sectors.
The agriculture sector had single-handedly supported the Indian economy while other major sectors were at a near standstill amidst the Covid-19-related lockdown. With the ongoing farmers’ agitation in Delhi, the government is expected to send across a positive message to the farmers in the country. It has been reported that the Union Budget would continue to focus on agriculture and allied sectors. In fact, ‘farmer welfare’ could be the central theme of this Budget.
A sharper focus is needed on the development of farm gate infrastructure, formulation, and strengthening of farmer collectives. Experts have suggested that the government could spend more to improve warehousing and cold storage facilities for farmers. There should be a further limit on the price of fertilizers and other chemicals. There are also expectations of providing nominal logistics support to poor farmers.
However, farmers have made their demands clear: a guarantee on the Minimum Support Price (MSP) and permanent withdrawal of the three farm laws. As farmers continue to protest, it will be interesting to see if the government has any plans to put an end to the agitation through its Budget.
The ongoing Covid-19 pandemic has taught the entire world the importance of having a strong healthcare sector. Increased public spending on healthcare will be one of the primary expectations of the upcoming Budget. We have realised the importance of improving healthcare infrastructure in public hospitals throughout India. More funds will have to be pumped into Ayushman Bharat, which is a scheme that aims to help economically vulnerable Indians who require healthcare facilities. People could expect the government to increase the deduction threshold for medical insurance.
On the GST front, the government can consider making healthcare more affordable by introducing a ‘zero-rating’ of GST for healthcare services. [Zero rating means that the entire value chain of the supply is exempt from tax]. This will help in keeping the credit chain intact and ensuring that tax is not added to the cost of healthcare services.
One of the critical requirements in the healthcare ecosystem is a skilled workforce. The arrival of new products and technologies makes it imperative that there are continuous learning and skill enhancement for healthcare professionals. It is also important to provide greater investment for preparedness against other health emergencies that may arise in the future. Thus, there should be more investments in diagnostic testing capabilities and contact tracing mechanisms.`
The financial system has been under severe stress following the Covid-19 outbreak, and the banking system is still facing asset quality issues. In Union Budget 2021, industry experts are hoping that the government will focus on better governance in the banking sector and simplification of compliance and regulation. There is an expectation that the number of public sector banks will be reduced from 12 to 4. This may include merging and also privatisation of banks.
According to RBI, the gross non-performing assets (NPAs) of banks could increase to 14.8% by September 2021, under the worst-case scenario. Through recent interactions with the media, the Finance Ministry indicated the idea of setting up a ‘bad bank’ to handle the expected influx of bad loans after the Covid-19 pandemic. A bad bank will have the power to purchase bad loans from banks at the market price. It acts as an aggregator of all the stressed assets in the banking system. This will allow the banks to clear their balance sheets and improve their fundraising capabilities.
The automobile sector had been witnessing a slowdown even before the pandemic. This was primarily due to regulatory changes, millennial buying preferences, and an increase in the cost of ownership. According to Moody’s, the Indian auto sector is expected to decline by 30% in the calendar year 2020, amid a contraction in GDP and the Covid-19 pandemic. Even though the festive season had provided a boost to vehicle sales, the automakers are worried that the demand would not sustain. Large automobile firms are also increasing the prices of their two-wheelers, passenger vehicles, or commercial vehicles due to an increase in input costs.
The automobile industry has high hopes from Union Budget 2021. Here are a few:
- Currently, a bike that costs Rs 50,000 is taxed at 28% GST- which is similar to a passenger car worth lakhs. It has been reported that a 10% GST reduction could boost demand for two-wheelers.
- Vehicle loans under Rs 5 lakh could be considered as priority sector lending (PSL) by banks. This will encourage banks to provide more loans to customers and lead to enhanced credit creation. Ultimately, it would also increase the demand for automobiles.
- A new policy to scrap cars, buses, and trucks that were more than 15-years-old, is expected to be announced in the Budget. It would also incentivise the purchase of new vehicles. You can read more about the vehicle scrappage policy here.
- Electric mobility is another key priority area for the government. There are many Indian promoters and international groups that are willing to invest in the electric vehicle (EV) segment. To boost demand, India needs to improve upon essential infrastructure such as electric charging stations.
The contribution of the real estate and construction sector to India’s overall economic activity is quite significant. The Covid-19-related lockdowns had caused severe disruption in sales and construction. With the easing of restrictions, there has been a strong recovery in sales and development activities. However, the housing sector will look forward to additional measures that can support recovery in demand and remove supply-side challenges faced by developers.
There have been several reports stating that the Union Budget would consider expanding the current income tax benefits available for homeowners. There is an expectation that buyers will get home loans at affordable rates and a moratorium on loan payments. This would encourage more people to buy properties. Realty firms have stated that the government should allow real estate developers to set off Goods & Service Tax (GST) paid on inputs like cement from tax liability on rental income. This would help avoid double taxation and give a boost to the office market to help India maintain its advantage in various sectors like IT and startups.
Amidst the Covid-19 pandemic, the Centre should focus on providing more access to basic necessities such as healthcare, drinking water, and housing. More money should be put into the hands of citizens so that consumption receives a push. This is possible through well-defined tax reliefs or exemptions. In order to ensure a V-shaped recovery of the economy, all financial resources must be utilised or allocated judiciously.
However, the government is likely to impose Covid Cess to fund additional spending due to the pandemic, including that on vaccines. If the government charges an additional 2% Covid cess on income tax, then the total cess amount would go up to 6%. The current 4% cess imposed on income tax was introduced in Union Budget 2018 by ex-finance minister Arun Jaitley. This means that our tax liability would go up (based on the current tax slabs).
Such a cess will only help the Centre obtain more revenue, while states will gain nothing. Several reports indicate that the Covid-19 cess will be primarily imposed on large corporates and high net-worth individuals (HNIs).
Markets do not like increased taxes. In fact, when Nirmala Sitharaman decreased corporate taxes on 19 September 2019, markets rallied like anything and the candlestick formed was called the Nirmala Sitharaman candle. Will we see a fall like this if an increase in tax is announced?
We have only mentioned a mere five sectors that could receive benefits from the Union Budget 2021-22. Fast-moving consumer goods (FMCG), retail, logistics, power generation, telecommunications, and other essential sectors are also expected to receive a much-needed boost. To attain self-reliance of essential resources, the government is likely to introduce more programmes under the Atmanirbhar Bharat Abhiyan. Production linked incentive (PLI) schemes could be launched for more sectors. These measures would encourage domestic and multinational companies to ramp up their production activities in India. Lakhs of people would be able to obtain employment opportunities. It is also vital that our country gives additional importance to renewable energy sources and the infrastructure surrounding them.
The Narendra Modi government may also introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 in the Budget session of the Parliament. This would lead to the ban of private cryptocurrencies in India (such as Bitcoin). Interestingly, the government has plans to launch a digital version of the Indian Rupee.
The Finance Ministry has sought valuable insights from industry experts from all major sectors. They have now prepared one of the most important budgets in India’s recent history, which would set the path for further economic growth. Will all the essential sectors receive the incentives or benefits that they require? We will have to wait and watch.