Budget 2021 creates investment opportunities, from infra to healthcare

The Union Budget increased India’s healthcare spending by 137 per cent and lifted caps on foreigners investing in insurance to help revive an economy that suffered its deepest recorded slump as a result of the coronavirus pandemic. The Budget does not have new taxes and it proposes new initiatives like a vehicle scrapping policy and setting up textile mega-parks. Worryingly, the fiscal deficit is high. The huge government borrowing will swallow up bond market resources, likely affecting the private sector’s ability to raise cash. Devangshu Datta explains investments after the Budget.

Devangshu Datta | Business Standard
02nd February

Budget 2021-22, with its thrust on infrastructure development, makes a commendable attempt to revive the economy. This comes alongside an asset monetisation programme that should ease fund flows. There are no new taxes but new initiatives, such as the establishment of textile mega-parks and the vehicle scrapping policy, for long-term benefits.

An increase in the foreign direct investment (FDI) limit in insurance could result in fresh investments. Increased expenditure should lift the healthcare sector. The disinvestment programme and estimated revenues from auctions for telecom spectrum look more realistic than the estimates in the 2020-21 Budget.

On the negative side, there is a huge expansion in the fiscal deficit in 20-21 and the deficit will continue to remain high for years. Customs duties have been hiked on many items, adding to input costs for businesses and putting an extra burden on consumers.

The huge government borrowing will swallow up bond market resources, likely affecting the private sector’s ability to raise cash. The allocation of Rs 20,000 crore for bank recapitalisation will almost certainly be inadequate, given the likely rise in non-performing assets (NPA) this year.

The creation of three specialised financing institutions is interesting, but let’s wait for the impact on the ground. An asset reconstruction company could lead to faster resolution of bad loans, or it could get bogged down. A Development Finance Institution (DFI) for infrastructure may work, or become a non-starter, or even a disaster like IFCI. A specialised institution dealing in investment-grade bonds may energise the bond market and help stability.

The infrastructure thrust is easiest to assess as positive. Clearly this is good for developers, and for the cement and steel sectors in particular. It should generate employment, which is necessary if consumption demand is to rise.

The pace of road-building has accelerated; the pace of project awards has improved; so more work coming up is feasible. That means more construction, which means employment and offtake of basic commodities like cement and steel, as well as creating demand for specialised equipment. Asset monetisation should help financing. The urban waste and water supply mission will also generate activity, create capacity in stressed urban environments and improve quality of life for citizens.

Will the textile megaparks actually help India compete with Bangladesh and Vietnam in terms of cost? That’s a key question. The vehicle scrapping policy should boost the auto sector but in this fiscal, demand in the industry will depend on the ability to revive growth.

The sooner the disinvestment programme gets cracking, the better. The government should target the launch of IPOs while the sentiment is good and the market is at record highs. The monster LIC issue would be a significant achievement. Other public sector units that could be on the anvil for disinvestment include BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans, Neelachal Ispat Nigam limited. Two other banks and one general insurance company may also see stake sales.

Reducing expectations from spectrum auction is pragmatic. The sector is struggling and high bids would be unrealistic and, given the positive externalities of telecom, placing a lower burden on the telecom companies would help overall growth.

The Budget expands healthcare spending apart and allots Rs 35,000 cr for Covid-19 vaccination. This should help in capacity development and investors will certainly be targeting various segments of the sector.

The market sentiment is obviously positive, and the Budget makes it clear that good double-digit earnings growth is likely. The market is likely to have a broad rally, driven by rebounds in consumption after a core sector pickup once the infra spending leads to better employment prospects.

As of the last four months, FPIs were the only strongly positive investor segment with domestic institutions net sellers and net redepmtions in equity mutual. This Budget brings domestic investors onboard, but they should heed the fact that valuations are running very high. The high fiscal deficit is a negative. The trend towards high customs tariffs also means there will be inflation. If exports don’t pick up, there could also be some currency pressures.

Overall, the Budget delivers on expected lines.

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