Demystifying Budget 2021

Krishma Sandesra

Entering into the Budget, the stock market was fueled with pessimism and witnessed  a ~2600 points fall in the Sensex leading to a correction of 5.3% in the last week of January 2021. FIIs also turned net sellers in the equity markets during the same time. There was also fear in the markets regarding an increase in the income tax rates and an introduction of covid related cess for HNIs in order to negate lower tax collections. The Hon. Finance Minister had the twin goal of providing an expansionary fiscal impulse to support growth revival along with providing a credible fiscal path.

Record high GST collection in the recent months and improving PMI numbers set the tone for the proceedings. The budget speech touched upon on many of the concerns of the investor community. The budget provided strong focus on health, infrastructure, privatization, availability of capital, ease of compliance etc. Path was laid to kickstart the capex cycle by increasing the allocation towards capital expenditure in spite of it leading to a higher fiscal deficit. Even for FY21, instead of curtailing expenditure and managing the deficit, the government actually let the deficit run to 9.5% of GDP compared to 3.5% budgeted estimates, leading to a 3x increase in deficit.

Please find the details of the Budget 2021 below:

Understanding the Budget Math (All numbers in INR Crores):

ParticularsFY20 (Actuals)FY21 (Revised Estimates)FY22 (Budgeted Estimates)Change of FY22 over FY21Comments
Gross Tax Revenue2,010,0591,900,2802,217,059
Net Tax Revenue1,356,9011,344,5011,545,39615%Rise in tax collection is in line with GDP growth and thus looks achievable. The recent trends in tax collection looks promising.
Total Non Tax Revenue327,157210,653243,02815%
Total Revenue1,684,0581,555,1541,788,42415%Total Revenue budget seems to be in line with reality mainly on account of an increased growth related expenditure and ease in compliance which should lead to a higher tax collection
Disinvestment Receipts50,30432,000175,000447%Disinvestment targets are in line with the expectation of divesting stakes in LIC, Air India, BPCL, Concor, Shipping Corp etc. On account of weak capital market sentiments last year, the disinvestments are planned to be completed in FY22.
Successful disinvestments would provide a great boost to investor sentiments as over last several years, execution on disinvestments have been poor.
Total Capital Receipts68,62046,497188,000304%
Total Receipts (excluding borrowings)1,752,6781,601,6511,976,42423%
Revenue Expenditure2,350,6043,011,1422,929,000-3%FY21 witnessed some expenditure on account of Covid which were not budgeted hence leading to a higher revenue expenditure
Capital Expenditure 
Roads and Highways68,37492,053108,23018%
Total Capital Expenditure335,726439,163554,23626%Significant rise in capital expenditure provides a key catalyst to kickstart the capex cycle for the economy
Total Expenditure2,686,3303,450,3053,483,2361%The quality of expenditure is much better as the increase in expenditure is mainly on account of capital expenditure which has a higher multiplier effect in terms of economic growth
Fiscal Deficit933,6521,848,6541,506,812
GDP20,33,984919,481,97522,287,37914%Higher GDP growth is mainly on account of lower base on account of Covid effect last year
Fiscal Deficit / GDP4.6%9.5%6.8%For FY21, the fiscal deficit has increased by ~3x compared to Budgeted estimates
For FY22, higher deficit is budgeted mainly on account of increase in capital expenditure
Market Borrowings6,24,08912,73,7889,67,708Higher market borrowings are budgeted for FY22 mainly to fund growth related capex

Key Announcements

  • In a landmark announcement, the government proposes to privatize 2 public sector banks and 1 public sector insurance company. This will definitely set the tone for more privatization of public sector undertakings leading to better efficiency, increased competitiveness and higher productivity in the medium to long term.
  • Proposal to setup a Stressed Asset fund, commonly referred to as a ‘Bad Bank’; will help in taking over the NPAs in the banking sector and seek speedy resolution. This will help in the necessary clean up of PSU banks and boost credit offtake which has hit a hurdle over the last several years
  • Proposal to setup a Development Financial Institution (DFI) to enable long term financing to infrastructure projects. The vision is to create a lending portfolio of at least INR 5 lac crores over 3 years
  • Proposal to setup National Monetization Pipeline to actively identify, monitor and execute monetization of assets. This may help to garner funds to provide further growth capital to the economy
  • FDI in Insurance has been increased to 74% from existing 49%


Tax related announcements

  • No major change in income tax rates, surcharges or slab structure
  • Proceeds of ULIP are now taxable on maturity, if the annual premium paid exceeds INR 2.5 lacs for policies taken on or after 1st Feb 2021. Thus the tax treatment will be very similar to mutual funds. And the tax arbitrage between ULIPs and MFs has now been removed for high value ULIPs.
  • Interest earned on Employee’s Provident Fund (EPF) / Voluntary Provident Fund (VPF) contribution above INR 2.5 lacs per annum will now be taxed at normal rates. Thus no more tax free interest on more than 2.5 lacs a year contribution towards EPF/VPF (applicable only on Employee contribution). This is applicable from 1st Apr 2021 onwards.
  • TDS not applicable on dividends paid by REITs and InVits
  • Relaxation on filing of income tax returns for tax payers aged 75 and above, with only Pension and Interest Income


Investment recommendation

  • Equity
  • The equity markets have cheered the budget mainly on account of higher capital expenditure, focus on monetization of unproductive government assets including an ambition to privatize PSUs, good quality growth led deficit, and thrust on ease of doing business
  • Instead of promoting social objectives, the government made a bold move towards kickstaring the capex cycle by higher allocation on capex for productive sectors. The Government has resorted to a higher deficit and market borrowing to provide the incremental push to capex cycle which will provide the necessary impetus to come out of pandemic related challenges
  • Formation of a Stressed Asset Fund and a Development Financial Institution, will boost the lending ecosystem and promote credit offtake
  • PSU Bank privatization may allow new players to enter the space with better practices and promote product innovation for better growth
  • Credible execution on disinvestments will fuel further confidence in market participants
  • Thus we recommend investors to have a higher allocation to equities to participate in the growth story. A Reform oriented budget, adequate liquidity and improving corporate earnings provide all the levers for better returns on the equity portfolio


  • Debt
  • Higher fiscal deficit leading to higher market borrowings will surely lead to some selloff in the bond markets
  • We expect the yields to rise more from the current levels in anticipation of a higher supply of securities
  • Also recent measures by RBI to suck out excess liquidity from the system have led to a rise in short term rates. Further once RBI starts unwinding the additional liquidity provided during the pandemic, there will be further up move in yields
  • We think that next MPC meet will touch down on some of the above points and may lead to a little hawkish (rates higher) stance
  • For debt investors, we recommend that the possibility to earn incremental gains on long duration funds looks low. Hence it is advisable to invest in the short end of the curve through liquid funds or via short term g-sec / income funds


Krishma Sandesra
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