Bad bank, no Covid cess: Why Sensex zoomed 2,100 pts post Budget proposals

The gained ground post the Budget speech by Finance Minister Nirmala Sitharaman with the S&P surging over 2,100 points in intra-day trade. The Nifty50, on the other hand vaulted over 4 per cent during the day to reclaim 14,200 levels.

The optimism despite higher borrowing and a wider fiscal deficit, analysts say, was on account of the positive measures to revive the Covid-19 hit economy. That said, while the number and the gross borrowing estimates are a tad higher-than-expected, the money, analysts say, is being put to good use.

“There was no major negative in the proposals announced by the FM. On the contrary, the proposal to set up a ‘bad bank’ to deal with stressed assets in the financial system that was not expected this time around, increasing foreign direct investment (FDI) limit in the insurance sector, recapitalisation plan of public sector banks (PSBs) coupled with privatisation of select public sector undertakings PSUs are proposals well received. Though there is additional borrowing and the is quite large, the money is being well spent,” said U R Bhat, managing director at Dalton Capital.

The idea of a had been in discussion for a while with a number of experts, including Viral Acharya, former deputy governor of Reserve Bank of India (RBI) advocating the same. The government plans to borrow around Rs 12 trillion in FY22 and has pegged at 6.8 per cent of the gross domestic product (GDP). Sitharaman said the government will be borrowing an additional Rs 80,000 in this fiscal to meet its deficit for 2020-21, pegged at 9.5 per cent of the GDP. Therefore, the total gross borrowing this fiscal would be Rs 14 trillion.

A higher fiscal deficit anchor for the state governments, experts say, should allow them to prioritise capex and National Infrastructure Pipeline (NIP) funding, but add to the overall general government borrowings in the coming fiscal.

“Budget FY22 swings the fiscal bat hard – and as a result, the fiscal deficit ball has lofted up sky high. At 9.5 per cent of GDP for FY21 and 6.8 per cent of GDP in FY22, fiscal deficit is much higher than what market was expecting. Overall, the reform announcements are positive, and the enhanced focus on capital expenditure is welcome. However the key question is that while the ball is aimed for the boundary line of growth, will it get caught by a negative rating action? It’s worth remembering than in FY23, we will no longer have the tailwind of superlative nominal GDP growth, so achieving fiscal consolidation will be much trickier,” said Dr. Aurodeep Nandi, India Economist at Nomura .

As per the budget proposals, the government plans to start the process of privatisation for two more public sector banks, other than IDBI Bank, and two insurance companies in fiscal 2021-22. That apart, Life Insurance Corporation of India (LIC) will go for an initial public offering (IPO) in FY22 as well. A major negative, according to experts, which was missing from the budget proposals was the imposition of Covid-19 cess and measures to hike or introduce new taxes for capital market-related activity.

“A budget with no changes in Direct taxes will certainly be remembered for years to come. Equity market will be enthused with no tinkering in capital gains taxes or securities transaction tax (STT) or any form of Covid-19 pandemic-related tax. The economic revival seen in the last four – five months will be further enhanced with the various budget proposals. Tax buoyancy, successful divestments and quick monetization of operating infrastructure assets remain a key to achieving the fiscal deficit target,” said Krishna Kumar Karwa, managing director at Emkay Global.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Source link