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    Budget 2021/22: India spends big to boost growth

    Published On: 5 February 2021

    Asia House Advisory takes a look at India’s new budget, which aims to overturn the country’s worst economic performance since 1991.

    With India’s economy struggling amid the COVID-19 pandemic, Finance Minister Nirmala Sitharaman this week unveiled a 2021-22 budget that spends big in a bid to spark growth.

    Sitharaman presented a heavily digital-focused budget, with special attention paid to digitisation, infrastructure, and privatisation of state-owned companies. There was a major increase in healthcare spending too, up by 137 per cent.

    Last year saw India’s worst economic performance since 1991, with the economy contracting sharply (23 per cent) in the three months to the end of June 2020. However, while COVID-19 was the prominent factor behind the slump, India’s economy was already showing signs of slowing down following four years of policies such as demonetisation and the introduction of a goods and services tax (GST). The current budget, with a softer but more directional approach, may reset the path to economic growth for the country.

    Key takeaways

    – Budget sees a 26 per cent year-on-year increase in central spending.

    – Big focus on digitisation and emerging technologies as government backs startup ecosystem.

    – Capex increase of 35 per cent for infrastructure development.

    – Key thing to watch will be government cooperation with industry to support economic growth and increase the competitiveness of domestic business.

    Digital India

    The budget – the first to be presented on a ‘Made in India’ tablet instead of the traditional ‘bahi khata’ ledger – aims to show a renewed focus on digitisation. It includes slew of measures to boost the digital sector, such as a US$2.15 billion funding package for micro and small enterprises, tax holidays, capital gains exemptions, and exemptions on tax audits for companies transacting through digital modes. India has also allocated US$6.85 billion to the National Research Foundation for research and development in India’s startup ecosystem – currently the third largest in the world.

    Another key measure announced in the budget is the incentivisation for one-person-companies (OPCs). The government has now removed restrictions on paid-up capital and permitted easy conversion into other ownership structures for OPCs. This could push the frontiers of India’s tech startup sector away from ‘IT capital’ Bengaluru and finance centre Mumbai, and into tier-2 and tier-3 cities.

    With India’s IT sector employing about 4.8 million tech workers, generating US$180 billion in revenue in 2019, the budget clearly aims to back digital industries and capitalise on the trends emerging in the lockdown, which has seen many companies move to 100 per cent digital ecosystems for payments to clients and vendors. The combination of funding and deregulation for ease of doing business has had a cascading effect on entrepreneurship, employment and innovation, and could be a successful approach to help spark the economy.

    Financial sector reforms

    The budget has focused on economic recovery through expansionary policies such as recapitalisation of state-owned banks, the setting up of an asset reconstruction company, increasing foreign direct investment in insurance, and privatising some government banks. The announcement of a ‘bad bank’ to take on bad loans is a structural reform that could unclog the current financial system and promote risk appetite. And the move to privatise two state-owned banks and one general insurance company could add to the government’s coffers.

    Foreign investment in insurance has been hiked to 74 per cent from the previous 49 per cent – welcome news to global insurers like Allianz, Axa, Generali, Cigna, and Lombard, who can now own a majority stake in their Indian joint ventures.

    It is possible that a benign, lower interest rate environment could lead to a revival of loan growth aided by the infrastructure and industrial spend.

    Tax rationalisation

    In a move that would benefit most businesses in India, the budget has rationalised various indirect taxes – providing much needed stability in taxation. Carrying on with its theme of “Make in India,” the budget increases customs duty and steps up funding for a production-linked incentive scheme. Customs duty on imports of certain auto parts have been increased to 15 per cent – but to offset commodity inflation the government has reduced duties on imports of raw materials such as steel, precious metals, and copper scraps.

    Infrastructure and energy boost

    Another key feature of the budget is the specific thrust on infrastructure, with a five per cent increase in capital allocation for key infrastructure ministries. Large-scale infrastructure projects such as the Delhi Mumbai Industrial Corridor and Dedicated Freight Corridor are expected to create a framework for growth and attract foreign investment. The government hopes to attract global funds for the Infrastructure Investment Trusts (InvIT) set up by the National Highways Authority of India (NHAI) and PowerGrid Corp, offering opportunities for external investors.

    In the first phase, about five operational roads worth US$690 million will be open to investors through NHAI’s InvIT, as will seven port projects worth more than US$270 million. India’s shipping and logistics sector, in tandem with the global market, has seen headwinds and the government’s current invitation to private players, including foreign entities, to manage ports might prove beneficial for the industry. Also significant is that India’s National Infrastructure Pipeline has been expanded to 7,400 projects and the budget has made provisions for US$2.74 billion in funding for new infra projects.

    Further, the government also plans on monetising operations and maintenance of its Dedicated Freight Corridors which, with the strategic stake sale of CONCOR (Container Corporation of India), has major ramifications for the rail logistics space in the long term.

    The oil and gas industry also benefits a great deal from this budget, as it lays out a roadmap for pipeline monetisation and the sale of the asset-heavy state-owned Bharat Petroleum Corporation Ltd (BPCL) for upwards of US$12.5 billion. Another positive for oil manufacturing companies is that they have steadily passed on the recent increase in oil price (due to higher taxes) to consumers and a sufficient excise duty buffer exists to counter further increases in oil price. The downside to higher fuel prices for the average consumer, however, is that it makes goods more expensive and could lead to some contraction in purchasing capacity.

    However, the budget also contains some ‘green’ components around the transition from fossil fuels, with additional funding earmarked for the National Hydrogen Mission and US$270 million allocated to combat air pollution. Other measures to battle climate change include the US$550 million allocated towards studying the oceans and climate change, and a voluntary vehicle scrapping policy. As per the new law, unfit vehicles older than 15-20 years will be phased out, with mandatory vehicle fitness tests introduced.

    Shot in the arm for healthcare spending, up 137 per cent

    There has been a marked increase in India’s healthcare spend, to a total of US$30.2 billion – a year-on-year increase of 137 per cent. This includes a one-time allocation of US$4.8 billion for COVID-19 vaccines. With US$1.81 billion from the Finance Commission Grant for health, state government spends and US$8.8 billion allocated to the National Health Mission over six years, India hopes to improve its primary, secondary and tertiary care health systems – providing lots of opportunities for domestic and international pharma professionals, healthcare product companies and healthcare providers. Mass vaccination efforts could have a positive impact if it leads to the lifting of the lockdown and revival of businesses.


    Overall, the 2021/22 budget could open a number of opportunities for both domestic and foreign investors, and increase the country’s growth and competitiveness. But there is still a long way to go, and a key thing to watch will be government cooperation with industry to support economic growth and to increase the competitiveness of domestic business.


    Ed Ratcliffe
    Head of Advisory,
    Asia House Advisory

    Rachel Chitra
    Advisor, India
    Asia House Advisory

    This analysis was produced by Asia House Advisory. For more information about the consultancy and research services provided by Asia House Advisory, please contact ed.ratcliffe@asiahouse.co.uk

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