In today’s Finshots we discuss the budget in 5 minutes.

Maybe 6 minutes if we are going to be precise.

Maximum 7.

…

No more than 8 minutes. Promise!!!

The Story

Healthcare was going to be the centre of attention. Everybody knew that. So when the government introduced a new centrally sponsored scheme, with plans to develop capacities of primary, secondary, and tertiary health care in India, it was reason to celebrate. In fact, the government promised to spend ~₹65,000 crores over the next six years in a bid to kickstart this program. And, they topped it by suggesting that they plan to spend 137% more in the next financial year on health care programs.

To put that into context. The government is expected to spend ~₹94,000 crores this financial year. The year after, they are planning to spend ~₹2,23,000 crores. And that is a lot of money. But as this report from ORF notes, it might not be all that spectacular. The basic contention is this. Yes, the government is allocating more money to the healthcare sector next year. But a good part of it is being apportioned to water and sanitation programs. Which by the way is an admirable goal in itself. However, considering there is a pandemic at large, perhaps we could have done more on the health care front. As it stands, the central government will reserve ~₹35,000 crores for vaccinations and the Finance Commission will grant another ~₹13,000 crores to states in a bid to help them invest in the health care sector. But outside of these special allocations, there isn’t a massive increase here.

Infrastructure

Infrastructure, on the other hand, is poised to receive a substantial boost. Perhaps the most notable announcement was regarding the creation of a DFI — Development Financing Institution. Think of it this way. The government wants to create jobs and it wants to do it in a way that’s sustainable. One possible solution is to incentivize the private sector. Because when they invest in creating large infrastructure projects, it has a ripple effect on the economy. It creates new jobs. It creates productive assets. It creates value in the long run. However, these private entities won’t invest if they are strapped for cash. So in a bid to free them from such banal constraints, the government will set up a new financing institution that will lend long term loans at quite reasonable interest rates (hopefully). Also, the government has promised to set aside ₹20,000 crores to fund the DFI and the hope is that this will create new loans worth ₹5 lakh crores over the next three years.

Fiscal Deficit

Needless to say, the government is spending a lot of money. In fact, they are spending substantially more than what they are earning. India’s fiscal deficit (read as total money spent by the government in excess of the total income earned) is expected to slip to 9.5% of the country’s GDP this financial year. For context, the government expected the deficit to stay at 3.5% when they presented the budget last year. However, these plans had to change after the pandemic.

Now bear in mind, not all of this money was spent in a bid to kickstart the economy. Some of it was spent to clear past dues and payments, most notably money owed to the Food Corporation of India. But even if you discount that, the spending is quite substantial. And the government will have to borrow some money in the short run. However, if they are serious about reducing the deficit over the long run (which they are), they need to make more money, plain and simple. So how will they go about this?

Three words

SELL!!! SELL!!! SELL!!!

Okay, we are getting carried away here. They are not really selling everything. Instead, the government has an ambitious program that involves....

Monetising government assets

Monetisation isn’t technically a fire sale. You don’t actually sell government assets to private contractors. Instead, it’s an avenue for the government to raise some money by working with private investors. For instance, consider the monetisation of roads. NHAI (National Highways Authority of India) has been trying to unlock value in this space for a while now. Meaning, if they have a national highway on their hands, they can technically transfer the asset to a private institution under certain conditions. The private entity won’t own the assets of course. But they will be able to make money off of it. In return, they will pay the government a large sum upfront and continue to operate the asset for the next 20 odd years for instance. In this case, they will manage the highways and the money from the toll collection will go to them. So to summarize here — The government gets a cash injection and the burden of maintaining roads is shifted to the private contractor. It’s a neat way of raising some money. And the government wants to up the stakes here. They’ll be monetising a lot of things.

Roads operated by NHAI, power transmission assets operated by the Power Grid Corporation, oil and gas pipelines of GAIL, IOCL and HPCL, Airports in Tier 2 and Tier 3 cities, Rail infrastructure, Warehouses and Sports Stadiums. There will be a lot of monetisation.

Disinvestment

There will also be disinvestments — They will soon privatize two public sector banks, one general insurance company and Air India. They will also IPO LIC and raise some money here. However, letting go of public sector companies can be extremely challenging at times. For instance, the government has been quick to sell stake in companies that have been doing really well — like NTPC and Oil India. The problem with this strategy is that it leaves all the bad apples for later. And when you get to the bad apples, like Air India for instance, it can get a bit tricky. So we will have to wait and see how things progress here.

Agriculture Infrastructure Cess

Besides this, the government also laid out plans to raise money using a rather sneaky move. They’ve added an Agri infra cess i.e. an extra charge on petrol and diesel —  ₹2.5 and ₹4 respectively. The cess is also applicable on a bunch of other items including alcoholic beverages, but before you go out on the streets to protest with brickbats and broken roof tiles, one small addendum. This won’t affect the price of these items for the most part. And it certainly won’t affect the price of fuel. Because it just so happens that the government also decreased the excise duty by the same amount. So they added a cess, making fuel more expensive and then they cut down duties by a similar margin to negate the impact of the cess. And they did it with multiple items. So what gives?

Well, the thing is — Money raised from cess goes to the centre directly. The custom and excise duties go to the Consolidated Fund of India and the proceeds of the fund are often shared with the states. So in a bid to rope in more money, the government increased the cess, at the expense of the states but they made sure that the move did not affect consumers. Granted, the centre can only use this money towards Agri-Infra initiatives (because it’s an agri-infra cess) but it will definitely raise some eyebrows.

Bad Banks

And if you were following the markets closely during all this, you probably already know that banking stocks surged like crazy after the budget. Now, bear in mind, you can never say for sure why stocks move upwards, downwards, sidewards and go round and round. But rumour has it that this rally was a byproduct of the bad bank announcement.

For the uninitiated, Indian banks have had a problem with unpaid loans for a while now. It’s no secret anymore and considering the terrible year we just had, it’s quite possible that this problem might just metamorphosize into a catastrophe. So the plan right now, it seems, is to move all these toxic loans somewhere else. Maybe, move it to a “bad bank.”

This way — Struggling banks will only be left with the pristine stuff — the good loans (loans that are likely to be repaid in full). And they can focus on getting their act together instead of worrying about the problem loans. Also, when outside investors look at these banks the next time around, they will see that there’s a real money-making opportunity here. No Toxic Stuff!!!

So maybe they will pour some money and recapitalize our bleeding banks. But how do you move the problem loans to a bad bank?

Well, the usual process involves the bad bank buying the toxic loans and then trying to resolve them. Meaning —  recover the money. They will only focus on this bit and nothing else. So the argument goes that they should be better at this stuff because they are specialised agencies. And if they managed to recover some money, it’s a win-win for everyone involved. Who will own the bad bank you ask? It’s hard to say. However, it’s likely going to be a mix that includes the government, private investors, and the banks themselves. In the meantime, we will just have to wait for the fine print.

Deposit Insurance

Also, the government promised to amend the banking laws in a bid to protect depositors like you and me. When banks go under, most customers lose access to their deposits. It’s happened way too often in the recent past. And in a bid to alleviate some of these concerns, the government will soon introduce changes that will allow depositors to immediately access up to ₹5 lakhs in the event a bank fails.

Taxation

On the taxation front, there weren’t many developments. Senior Citizens will now be exempt from filing returns after 75* (if they only have pension & interest income) and the interest accruing out of your employee provident fund might be subject to taxes if you are contributing more than ₹2.5 lakhs per annum towards the EPF. But outside of that, no big announcement.

Foreign Direct Investment

And finally, the government said it planned to increase the FDI limit in the insurance sector. Meaning, foreign investors can now hold a majority stake in an Indian insurance company — 74% as opposed to 49%. The hope is that this will further incentivize outside investors and the added competition might benefit Indian consumers.

That’s it. That’s our coverage of the budget. And…

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Until then…

*Correction: Senior Citizens will be exempt from paying taxes if they only have pension and interest income. They will have to file returns if they are making gains elsewhere. This wasn't noted in the earlier version of the story and we regret the error.