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Ahead of the Union Budget 2021, domestic equity market tanked more than 5% during the past five trading sessions till January 28. Finance Minister Nirmala Sitharaman will present her third Budget on February 1 after the outbreak of Covid in 2020.

Earlier, the 30-share index had declined 1% on the budget day in 2019 and 2% in 2020. Brokerages highlighted key expectations which will give further direction to the market.

Normalisation of spending

Phillip Capital Sectors like housing, power, education, commerce, industry, water resources, MSME, and other social sectors received lower funds in FY21 due to fiscal stress. Phillip Capital believes that this is likely to normalise in FY22 – thus broad-based spending.

Incentivising consumption & credit boost

Recapitalisation of PSBs, liquidity support for NBFCs, new scrappage policy, ‘Industry status’ to real estate (thereby reducing the cost of funding) – likely announcements that will be aimed at improving demand and credit growth. However, Phillip Capital does not anticipate major tinkering of income tax rates in FY22 owing to tight fiscal condition, increasing deductible tax limits under certain sections are likely.

“Government is expected to recapitalise PSBs to stimulate credit growth and offer fiscal support to Covid-hit sectors like hospitality. Allocations will be diverted towards Covid vaccination from Covid treatment in FY21. Subsidy payments (fertilizers, fuel) to corporates are relatively faring better,” Phillip Capital added.

Self-sustaining India
The government has already announced Rs 2 lakh crore PLI (production-linked incentive) benefits under Aatmanirbhar Bharat. Detailed policies for the second tranche of PLI benefits will be laid out in FY22. Phillip Capital does not expect funding requirement towards PLI benefits in FY22. Customs duty on manufactured products (medical devices, consumer durables, electricals) is expected to be raised along with the lowering of import duty on raw material – to encourage local manufacturing.

Centrum Broking added that the government may maintain its focus on the development of infrastructure (roads, water and affordable housing) that would give the economy much-needed earnings or employment stimulus. Further extension of PLI schemes to spur manufacturing might also be announced in the Budget.

“Infrastructure, real estate, construction and railways are some sectors, which may be in focus in the upcoming Budget 2021,” Centrum added.

Set up of a bad bank
Centrum Broking said that the idea of setting up a bad bank to resolve the growing problem of NPAs is likely to be addressed in the budget. Various news reports suggest that GOI is most likely to propose an establishment of a bad bank with its own set of regulations so that bankers can devote more time to the flow of credit instead of only trying to recover legacy bad loans

Demand-side measures
According to reports, Budget 2021 might take forward the relief announced with the Atma Nirbhar package with the basic tax exemption limit for an individual being raised to Rs 5 lakh from the current Rs 2.5 lakh. Centrum Broking believes that the move will provide more disposable income to people, and increase their spending capacity, which would augur well for the economy.

Redefining LTCG

Industry players are hopeful that the government will exempt tax on long-term capital gains
(LTCG) arising on sale of listed equity shares. Centrum Broking believes that the government could also streamline the holding period for granting such exemption to 24 months, bringing the same at par with unlisted shares.
“Abolishing the much-criticised LTCG tax would be a welcome move. A widely discussed point of note is redefining the concept of long term to two years and the change of taxation to zero. This can bring stability to the duration of investments across financial assets,” the brokerage said.