Union Budget 2021 Review - Acuité Ratings & Research

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research

Fiscal Deficit

"Surely, the sharp rise in fiscal deficit estimates to 9.5% and 6.8% of GDP in FY21(E) and FY22(P) is a matter of concern to the bond markets since it is higher than consensus estimates. The Economic Survey had already highlighted the adoption of a fiscal expansionary policy over the medium term to reignite the growth engines and that has been reflected in the budget. In the context of higher government borrowings which is set to spike to Rs 15 Lakh Cr (gross) in FY21 from Rs 8 Lakh Cr in FY20, the market will keenly await the MPC's commentary on the direction of the interest rates but clearly, a hardening bias has crept up. However, the higher fiscal deficit estimates also highlights the possibility of greater spending push by the government in Q4FY21 which may boost GDP growth in the current quarter. The government capital expenditure as a proportion of GDP is set to pick up from 1.7% in FY20 to 2.3% in FY21(E) and further to 2.5% in FY22(P) which will be a 17 year high figure and will enhance medium term growth prospects."

Financial Sector:

"The budget has made a few important announcements in financial sector reforms. It has permitted 74% FDI in the insurance sector which is expected to lead to higher investments and consolidation in the sector. While another Rs 20,000 Cr has been allocated for capital in public sector banks, it has also announced its intent to divest its stake in 2 public sector banks and one general insurance company. This is surely a significant step ahead but government's ability to execute it in a timely manner needs to be seen. Lastly, an ARC and an AMC is proposed to be set up to buy out stressed assets of the banking sector. We, however, will need to wait for the details in this regard before we can comment on the efficacy of such a bad bank in providing capital relief to the banks with high GNPAs."

Infrastructure Sector:

"As expected by the market, the budget has given high priority to infrastructure investments in line with the National Infrastructure Plan (NIP). Significant step up in national highway projects is in the anvil; significantly higher allocation has been made for railways and urban infrastructure including public transport systems. The city gas distribution network will be expanded further to smaller cities. Importantly, the National Monetisation Pipeline for refinancing of operational projects has been contemplated which will start with the InviTs from PGCIL and NHAI. The decision to set up a separate DFI with an equity capital of Rs 20,000 Cr and with a loan target of Rs 3.0 Lakh Cr over the next 3 yrs is also another timely measure to facilitate adequate funding for the sector."

Healthcare Sector:

"We had expected higher allocation for the health sector given the vulnerabilities in the health infrastructure exposed by the pandemic. India's public spending on healthcare needs to be stepped up from the current 1% of GDP to around 3% of GDP. The plan to set up 17,000 rural and 11,000 urban health centres along with public health labs is a step in the right direction and will also generate significant employment in the health sector."