What Should Investors Do After such a Bumper Budget Presentation?
Key Takeaways
Investors definitely have a lot of key takeaways after yesterday’s budget and therefore, decide about buying, selling, and holding of their asset class. The recovery reflected in past 8–10 months after March in the Pandemic-hit year alone was far from expected. Thereby, further accelerating the growth, the government has made correct proposals for the same.
Before jotting down about how the sectors have been the clear winners of budget 2021–22 with right and timely allocations and amendments, we have a list about the losers as well. There are sectors that are eliminated from government’s attention in this budget against the sectors that aced the budget.
Winning Sectors of Budget 2021–22
Health and well being
Infrastructure and Construction
Metal Makers
PSU Banks
Textiles
Auto Mobile
Losing Sector(s) of Budget 2021–22
Bonds
It, undoubtedly, was a thumping budget but we have bonds signaling in red that acted marginally negative while the budget proposition.
Finance the spending to spur the growth
The government has proposed to revive the economy at the cost of high fiscal deficit. Spending is an ultimatum to spike the growth. Therefore, having realized government has now made proportions to finance the spend.
The sharp spike in capital expenditure of Rs. 5.54 lakh crore which accommodates 34.5% of the budget estimate 2020–21 shows government’s will to spur the economy.
Fiscal deficit pegged at 9.5% of GDP during current fiscal ending in March 2021 and for FY 22, the fiscal deficit is pegged at 6.8%. A fiscal consolidation is planned to lower the fiscal deficit below 4.5 per cent of GDP by in next 4–5 years from now.
Government plans to have a gross borrowing of Rs.12.05 lakh crore from the market in 2021–22. Moreover, the government has planned to approach the public for a total of approximately Rs. 80,000 crores in the last 2 months remaining, of the current fiscal year.
The raising of money by government is to fulfill the fiscal deficit which eventually will lead to lesser borrowing in the next fiscal. The RBI is more likely to step in to finance the borrowing along with public’s participation. Here, the RBI will definitely regularize and finalize the rate at which the government will borrow the money.
But, this year, the government has taken a serious and an appreciable step to increase the spending in the hurting economy rather than rolling out free money by way of MGNREGA (Mahatma Gandhi National Rural Employment Guarantee ACT) Schemes.
Infrastructure received a major push
Health and infrastructure is the major focus of the government and in this regard, the latter as attracted a definite body to receive funding for its long-term projects. Infrastructure is attracting a limitation of major funding which otherwise will lead to a long gestation period for banks. In this regard, the banks are not supporting to lend money for infrastructure projects which now will be done by the following ways:
-By having institutional structures i.e. by having designated bodies to roll out capital for infrastructure instead of borrowing it from banks.
-By a big push on monetizing assets by way of “National Monetization Pipeline” of probable brownfield infrastructure asset. The monetization of lands under government’s name will be set to be monetized by way of special purpose vehicles like REITs or InvITs.
-By increasing the share of capital expenditure in Central and State budgets
A bill to set up a Development Financial Institution to finance infrastructure with an embarked capital of Rs. 20,000 crore, which will lead to a lending of Rs. 5 lakh crore in 3 years. Infrastructure debt funds proposed in the budget will raise money through zero-coupon bonds.
Increased FDI in Insurance Sector
FM proposed to amend the Insurance Act, 1938 to ramp up the FDI limit from the low of 49% to 74% in insurance.
Bad Banks in Focus
The stressed assets of the bank will be looked over by an asset reconstruction company and an AMC will be set up to take over the current stressed debt. The concept here is simple and grabs the focus to have a centralized decision making. The loans will be cleaned up by managing and disposing off the same to ARCs, who in turn will be responsible to reverse the current bad loans into good. This will reverse the current situation of banks and lead to clean books of the banks.
The investment vehicle Alternative Investment Fund (AIF) is likely to be privately funded and should definitely not be a burden for the tax payers. The bad loans, here, are deemed to be purchased by private entity and not through government funds.
Moreover, furthering about what banks had for their trunk in the budget was impeccable. FM has laid down a proposal to inject Rs. 20,000 crore to PSU banks.
Completing Disinvestment that was fragmented in the previous year
LIC IPO is the massive and the biggest disinvestment this year.
Alongside, 2 PSU banks are also proposed to be disinvested and privatized in 2021–22, laying a major emphasis on ‘Minimum Government and Maximum Governance.’
Income Tax: Good News for Senior Citizens!
Just when, no changes have been made to the tax slab for individual filing of income tax, there is an additional point to ponder upon.
Budget 2021–22 incorporated elimination of filing the income tax for senior citizens above 75 years. An extended relief felt!
Moreover, the budget also eased the hassle of calculating and paying advanced tax on dividend income. This process will even eliminate many tax payers from paying interest on advance tax and dividend income which otherwise was comparatively difficult to calculate and process.
Along with the fact that ITR filing is eliminated for senior citizens, it is also made hassle free for the tax payers now. Details on “capital gains from listed securities, dividend income and interest income from banks and post offices “ will be pre-filled in the ITR form, which will be available soon.
Extension of Payment of Interest by One Year — ‘Housing for All’
Affordable housing is the point of focus too wherein, the timeline is extended for availing the benefit of interest payment on loans by another one year up to March 31, 2022. This will lead to claiming extra deduction of Rs. 1.5 lakh for considerably small tax payers on the payment of interest on these home loans.
Slashed Custom Duty on Gold and Silver
A rationalized cut in custom duty on gold and silver has effectively brought down the price of gold in the following days after the budget. And, the slash of import duty will definitely lead to even decreased price of these precious metals in the domestic market which will immediately emphasize on exports of jewelry.
India has been a major importer of Gold and Silver and to ease the rates, these precious metals that previously attracted 12.5% of import duty is now reduced to 7.5% which now will regain export momentum that otherwise declined in the previous year. However, an Agriculture Infrastructure and Development Cess (AIDC) has been laid on import of specific goods which includes Gold and Silver both. The two metals will attract 2.5% of AIDC that will lead to a total duty of 10% which is a net of AIDC and reduced import duty.
What should investors do and why?
After having focused on the key changes that the budget proposed, the budget 2021–22 is definitely a transformational one. Whereas, will the markets just keep rising, is the major question that investors have and what to do next in order to capitalize their earnings.
Equity and Debt
Debt: Given that infrastructure has lured major focus, the infra-zero-coupon bonds will open doors to newer debt options along with raising money for infrastructure from the public as well. However, the bonds market appeared less favorable towards the borrowing part proposed that lead to spike in yields from 5.9% and 6.05%. Not that these bonds are weighing heavily to spur the bond market.
We have already seen a reaction of the bond market when government proposed to borrow more this year and therefore, not that the debt market will ace against equity. But, a mix of rational asset class is likely to be the ultimatum this year.
Equity: Considering the current market situation since the past 3 months now, has led to a notional conclusion that the equity market is trading at higher valuations due to liquidity leading to substantial growth in the current P/E against long-term P/E.
Debt and hybrid instruments like InvITs will be preferred largely as the latter are not subject to TDS.
The equity market is definitely booming and sees budget as an excellent one due to higher capital spending and no change in personal tax or corporate tax or increment in tax on capital gains. This definitely boosted the sentiments of FIIs as well as the DIIs.
ULIPs and EPF: The high premium types i.e. proceeds from Unit Linked Insurance Plans with premium above 2.5 lakhs of will be taxed at the time of exit. Similarly, Employee Provident Fund will lure interest taxed with a limit held at 2.5 lakh per year.
To conclude, a civil and not so mundane market movement and growth is expected in the years to come which otherwise did not happen in the past 4–5 years, given the capital spending and a positive view for the nation. Haven’t given much in terms of taxes, the Union Budget hasn’t taken away anything either. Being stagnant with taxes is the main reason why investors applauded the budget and felt a sigh of relief. With the tax tangent being simplified, the public can focus on other important tangents of increasing their earnings and amplifying the purchasing power to let the money rotate with ease in the economy.