Union Budget 2021 – Detailed Explanation:
In December the Finance Minister was quoted saying “Hundred years of India wouldn’t have seen a budget being made post a pandemic like this”. She presented the budget for a third time yesterday at the Parliament. Although the budget was well received we take a closer look at it in order to better understand and assess if it can rescue an economy in crisis.
The Finance Minister was faced with a very challenging task where she was expected to help the economy make up for the 8 quarters of slowdown and 4 quarters of Covid-19. In such a situation one would brace for the worst with increased taxes and government spending directed towards quick relief measures. The Finance Minister began her budget speech in Parliament at 11 am highlighting the difficulties of Covid-19 but moved on to provide an optimistic note by providing a quote from Rabindranath Tagore where she referred to the post-Covid world as the “dawn of a new era”.
She commenced her speech using a very first of its kind paperless approach with a Made in India tablet. Sitharaman stated that the budget proposals rest on 6 pillars: Health and well-being, physical and financial capital and infrastructure, inclusive development for aspirational India, reinvigorating human capital, innovation and R&D, and minimum government and maximum governance.
She first started off by addressing the situation the country was stuck in with a 9.5% (fiscal deficit). One of the highest figures ever. A transparent and courageous step surely to be worthy of praise. The FM went onto project 6.8% for FY22 with govt plans to bring it down to under 4.5%. But what followed took many by surprise. The Budget did not include the harsh measures that were expected. Instead, the FM adopted a policy where it focused on pushing for growth by strengthening infrastructure and focussing on the long term prospects. Below we will be understand Union Budget 2021 – Detailed Explanation
1.Push to develop Healthcare
As expected the FM targeted the problem at hand regarding vaccines. She announced a Rs 35,000 crore outlay for the COVID vaccine in the fiscal beginning April 1st. In addition, the FM also announced Pradhan Mantri Atma Nirbhar Swasth Bharat Yojna and marked Rs 64,180 crore for the new scheme for over six years to combat new and emerging diseases and developing capacities of primary, secondary and tertiary healthcare systems.
The spending on healthcare this year was hiked by 137% to over Rs 2.23 lakh crore. This was more than necessary as India being 2nd on the list for the highest coronavirus cases after the United States. Unfortunately, however, India only spends 1.8%(2020-21) of GDP on health, among the lowest for any major economy. This has resulted in India being one of the top 10 nations with the highest Out-of-Pocket-Expenditure (OOPE). The increase in spending this year makes up 3% of GDP and can bring down the OOPE according to the Economic Survey 2021.
The survey also ranked India 145th out of 180 countries based on the quality and access of healthcare. Countries ranked below were Nepal, Pakistan, sub-Saharan countries, and some pacific islands. It cannot be stressed enough how necessary this announcement was especially in recent times.
Normally when in times of crisis or when governments are desperate for growth they often willfully ignore the consequences their actions may have on the environment. But the FM has not overlooked this and addressed concerns of air pollution, sanitation, and clean water. A very important announcement made by the FM for a voluntary vehicle scrapping policy to phase out old vehicles. Here personal vehicles will undergo a fitness test in automated centers after 20 years while the commercial vehicles will undergo the test after 15 years. By doing so the FM has also set an example for leaders around the world.
The scalping of vehicles would prove to be beneficial for the environment as older vehicles licensed with worse off emission policies would be phased out. This would make way for newer vehicles which by using technological advancements reduce emissions. In addition, this also promotes a cyclical trend in the industry for phasing out and purchase of new vehicles. This announcement led to the increase in share prices of companies in the automobile industry.
The government has dedicated a significant portion of its spending towards developing infrastructure. The focus currently will be on roads, railways, and power. In addition, the budget also has given a push to various PLI (Production-linked incentive) schemes. The government aims to spend Rs 1.97 lakh crore for this purpose, starting this fiscal. This is in addition to the Rs 40,951 crore announced for the PLI for electronic manufacturing schemes. This will lead to the attraction of global players in the Indian manufacturing sector as the government is planning to offer plug-and-play infrastructure to the companies willing to come to India.
Infrastructure projects have also been focused on Tamil Nadu, Kerala, Assam, and West Bengal considering the upcoming Assembly elections in the states.
A very important announcement as this would be the main source of funds for financing the infrastructure projects. Although there have been talks for disinvestment of various government entities the FM has now set a deadline. The companies include BPCL, Air India, Pawan Hans, IDBI Bank, Concor to be completed in 2021-22. Two PSU banks are to be privatized among others. In addition to this LIC IPO will be held this year.
For successful disinvestment, it is important that the markets hold their current good form.
The FM also announced a bad bank proposal, where the government will set up an Asset Reconstruction and Management Company for Stressed Assets to take over bad loans.
One of the best moves by the government has been avoiding any major changes on the direct tax front. The search for revenues could further delay the recovery process. On the direct tax front, the government provided relief for senior citizens over 75 years. They no longer have to file income tax returns.
Instead, the government has added cess but the FM announced that they will be imposed post adjustments done to customs duty. This will be adjusted to ensure that no effects are felt by consumers. The cess has been set as an ‘agriculture infrastructure and development’ cess. These will be charged at
- Rs 2.5 per litre Agri infra cess on petrol, Rs 4 on diesel.
- 2.5% on gold, silver, and dore bars;
- 35 pc on apples.
- 30% on Kabuli chana, 10% on peas, 50 pc on Bengal gram/chickpeas, 20 pc on lentil ;
- 5 pc on cotton
The government also has halved the time frame for reopening of income-tax assessment cases from 6 years to 3 years. For reopening of serious tax evasion cases up to 10 years, the government has put in a monetary limit of cases involving over Rs 50 lakh in a year. This is meant to reduce tax harassment of income taxpayers.
The FM also announced changes to customs. Between increasing consumption and protecting local producers the FM has opted for the latter. The FM announced hikes on customs for refrigerators and AC, auto-components, mobile parts, etc. The long-term goal here seems to be encouraging companies to produce in India instead of importing which would only make their products dearer to customers.
5. Social security for gig workers
Another significant announcement by the FM is the extension of social security benefits will be extended to gig and platform workers, This includes 15 million gig workers in the country who work for companies like Uber, Ola, food delivery in Swiggy and Zomato, and contract workers in IT and software firms.
6. FDI in insurance companies
The Finance Minister announced a hike in the FDI limit in Insurance companies from 49% to 74%. This will lead to an increase in capital inflow into insurance companies aiding the growth of the sector.
Some sections that were not covered in Union Budget 2021 – Detailed Explanation
One sector which had high prediction as the focus of the budget was that of Defence. Especially after considering the turmoil on the Indo-Chinese borders. But the government has allocated Rs 3,47,088 crore to the sector. Almost the same as the Rs 3,43,822 crore last year with only a 2% increase.
The Airline and the Tourism sector were the worst affected during the pandemic. But surprisingly apart from a Tax exemption for aircraft leasing companies nothing in the budget was directed towards these two sectors.
Although the budget does give high hopes over the next 5 years there is little or no attention directed towards the poor and lower sections including daily-wage workers who were the worst affected during the pandemic. The budget also does not direct much attention towards MSME’s which form a majority of businesses in the country and is the biggest employer in the country which too was severely affected by the pandemic.
To conclude the Union Budget 2021 – Detailed Explanation
On the whole, the budget has held itself to higher standards than those released in the previous years by the government. It is evident that FM has decided the avoid focussing on particular sectors to provide quick relief measures but instead aimed at picking the economy up by focussing on growth for the long term. The growth-oriented budget was very well received especially by the equity markets. Indian equities gained the most on a budget day since 1997. Thanks to FM for leaving out any tax hikes. The S&P BSE Sensex ended 5% higher and the Nifty 50 gained 4.7% on budget day. It is evident that the FM has adopted a conservative approach. Although it has already laid good groundwork for the next 5 years. Its final assessment depends on its execution!
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.