Why is everyone going crazy about Budget 2021?

In case you’re thinking I will try to sound smart by throwing 45 different numbers here and there, don’t worry.

Is this the best Budget we have ever seen?

Let’s get back to reality.

Ever since I got into the world of Finance the ‘Budget’ is an annual event which is hard to miss.

While every budget has a finer print and certain nuances, keywords like ‘doubling farm income’, ‘infrastructure spending’, ‘ease of doing business’ are loosely used throughout the course of every presentation.

While I have always enjoyed watching the 1992 budget discussion, and this is again no comparison to that – I was thoroughly glued to the screen when the speech was being made today by the Finance Minister.

Let’s try and answer the question now.

While you may have heard different opinions from different folks up until now, here are a bunch of things that I found really interesting.

Credit Rating Bias

The Economic Survey has been candid enough to talk about the biases that are often present in the sovereign credit rating for India.

(Sovereign Credit Rating is the ‘Credit Rating’ that is given to a particular country based on their economic fundamentals – collections and receipts, borrowings etc. by rating agencies like Moody’s, S&P etc.)

To put things into perspective, India has never defaulted on any sovereign bond and yet the rating it gets every year often is at par with other countries that have defaulted or delayed on their sovereign debt obligations.

Collections over Rate hikes

Typically, in a year where economic activity had halted, the finances were stretched, there was a big expectation of a tax rate hike.

For the first time, it actually came as a surprise that there was NO tax hike! – neither on sin goods (which is typically used to stretch collections) nor on the personal or corporate side.

Clearly, the focus is on increasing collections through increased economic activity rather than going for a rate hike.

(In FMCG parlance, underlying volume growth over doing price hikes on the product to discourage purchases.)

This also brings in some stability in the tax regime which is often characterized by policy and regulatory flip-flops.

Not in the business of running businesses

There seems to be laser sharp focus in meeting divestment targets. The intent of the budget has often been towards divestment and privatization, but a lot of times the goals are not met.

Let’s go back here a little.

Typically, every budget of every country runs on a deficit.

The deficit is financed either by borrowings or by raising taxes. There are other elements too (for eg. divestment of assets etc.) but typically a mix of borrowings or tax hikes is used to finance the deficit.

Coming back, there is renewed focus in the right direction.

The concept of Multiplier Effect

Economics 101 – If you spend 100 rupees on a project today, it creates a ripple of transactions thereby actually creating economic activity that is more than 100 rupees. This is loosely called the multiplier effect.

In the past India never really had a robust Domestic Financial Institution (DFI) that could finance long term projects at a viable cost thereby causing additional stress on the banking system which was more equipped to service the retail and corporate side of the country.

With the renewed push on getting a well capitalized DFI in order, financing infrastructure projects would not be a challenge anymore.

Private Equity Mindset in Public Assets

In case you missed reading Weekly Round-Up #003, Blackstone and Brookfield own close to USD 40 bn of real estate. Brookfield is actually coming up with a REIT IPO on 3rd February, 2020.

Well, to get a primer on REIT and InvIt, you can read here.

Coming back to what was so special in the current budget. Both REIT and InvIt are alternative asset classes that are yet to find mainstream acceptance in the country.

Presently, on the REIT side, India has only two listed REITs.

The budget has made amendments to allow for Foreign Portfolio Investors to debt finance REIT and InvIt. What this entails is a good yielding asset class for the global investor community and maybe an inflection point where we see this asset class become popular.

What was your favorite part of the budget?


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About the author

Saket Mehrotra

Number cruncher, avid reader, coffee connoisseur, book store hopper & Metallica fan. An active follower of Sensex since 2009. CA, CS by profession.
Senior Associate - Equities at Tusk Investments. Ex - PMI, ITC.

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