- Wealth PMS (50L+)
The Budget for FY 2022 is here, and it’s incredible in one thing: Not too many higher taxes. We thought there would be a corona cess, and there wasn’t. An increase in personal tax rates, and there wasn’t. In that context, the budget’s more about what it did not do, rather than what it did. So, here’s the a summary of top 10 things in the budget (with annexures).
The Top 10 Things in Budget 2021 that matter
34 lakh crores to be spent in the next year, about the same as this year. They expect to collect much lower tax+non-tax revenue compared to the previous year (about 17.9 lakh crore) The deficit was a massive 9.5% this year, and will still be about 6.8% for next year. This is actually fairly decent – they expect lower tax revenues, will spend about the same, and the deficit at 15 lakh crore will be a reasonable percentage of GDP given it’s a post Covid year.
The gross borrowing for the next year is 12 lakh crores. This is a very large amount, but it’s overshadowed by one thing: this year. The current year’s borrowing is already substantially more.
There’s going to be a net additional borrowing (net of repayments) of over Rs. 9 lakh crores. This is a ludicrously large sum, and the government will find it difficult to finance it unless the RBI steps in. And we do expect the RBI to step in strongly in the next year.
Bond markets didn’t like it much. Yields rose from 5.9% to 6.05% which means bond funds would have lose money – anywhere from 1% on longer term bonds to 0.2% in shorter term funds.
However, this is not that bad. Because:
The end-result: They haven’t increased taxes. They will increase spending. This is good for the economy.
Positive for: Infrastructure players which is where the government spends.
Note that because of the fact that the income tax department usually doesn’t get anything right, this will only hurt your tax return process. But in the next decade when they start to get it right, this will be a big boon. Just stay alive till then and you’ll enjoy it, eventually.
The governmnt has said they will create an Asset Restructuring Company (ARC) and an Asset Management Company (AMC) to hold the bad loans of the banks so that the burden of bad loans is reduced. This will then sell these bad loans to an Alternative Investment Fund (AIF) that will buy those loans.
This has given huge enthu to the banking sector. But the details aren’t yet clear. Who creates the AIF? It’s quite likely the AIF will need private investment (from banks and foreign investors) who can then buy these loans and clear them over time. What are bad loans? Only those that were bad already? Can new loans becoming bad also qualify?
Will banks use this as an excuse to dump bad loans forever? And let taxpayers take the hit? The answer should be no, because this will be gamed and abused. We have to see how such a bad bank will work. Since this is not an actual bank, it may be structured as an AIF which can be privately funded. RBI will get involved in how the dispensation will work, but hopefully the loans are purchased by a private entity and not through a government funded effort.
Secondly, they will also create a fund that will buy bonds of “stressed investment grade” companies. This is actually not great. If it’s really stressed, it won’t be investment grade, but rating agencies can be arm-twisted into anything. However, this means that a fund set up by the government can buy these “stressed” bonds. It would make more sense to set this up as a pass-through mutual fund with minimum Rs. 50 lakh per investor as an investment, in order to allow HNIs to fund the purchase of highly stressed securities. Such a fund can also be bought by banks, private investors and foreign investors. We’ll have to wait and see how this comes about.
Positive for: Banks and NBFCs.
Gold imports have been rising despite high duties on the shiny metal. The duty has been 12.5%. This has now been reduced to 10%. (Actually to 7.5% and there’s now a 2.5% cess of sorts)
This is a good thing. Gold prices will come down and the duty does nothing to deter people from importing. All it does is increase the smuggling of it. I had proposed this anyhow, a slow reduction of duties in our post on this: Let Us Cut Gold Imports This Way
If your car or bike is more than 20 years old, or a commercial vehicle is more than 15 years old, it’s possible that the government may allow you to get a credit to scrap your vehicle.
Details will come soon, but the credit may allow you to buy a new vehicle in a cheaper way, if the current one is turning into scrap. This should help auto manufacturers, and also help create more steel scrap in India.
Positive for: Auto players.
Even though the market is at sky high levels, the government has not been able to sell its stake in its companies for much. This next year, there will be:
This is all good to hear, but let’s not get ahead of ourselves. Talk is cheap.
One good thing is that they expect only Rs. 175,000 cr. out of this exercise. That much should be there from just two or three of the above (LIC + BPCL for example). So the target in terms of amount may be easier to meet.
Positive for: Media companies, because so much noise and so little actual progress.
In what is a big pain for companies selling goods, a 0.1% TDS has been introduced for buying “goods” worth Rs. 50 lakh or more. This applies to companies (or LLPs or even proprietary businesses) who have a turnover of Rs. 10 cr. or more.
This is a tiny TDS, but it means that businesses buying goods online now have to deal with this TDS thing differently. This will however not apply to:
This is a boring little provision but can hurt a lot of businesses that do a lot of trading, including ecommerce buyers. All public trading companies that buy from “residents” will pay this tax at source. It’s a pain for cash flow, but won’t hurt profits that much. However, it should curb some situations where a very high payment is perhaps made, back and forth, to avail GST offsets and thus abuse the tax code.
There’s no benefit to this other than hurting the good companies. The bad ones will find another way out.
Overall, very reasonable budget. Markets are up big time, and perhaps quite linked with world markets as well. Good start to a February.
Click the tweet below to start:
— Deepak Shenoy (@deepakshenoy) February 1, 2021
Also, you can read the whole thing as an article .