Greetings from team Carnelian.
The FM considered to be an underdog, delivered a splendid Budget 2021 yesterday, akin to what the Indian cricket team delivered in Australia, silencing critics, surprising many & unleashing the animal spirit! Since the time we have been following budgets, rarely have we witnessed one where the FM has addressed all that is required and more! No disappointments.
We have been extremely bullish on India even before the Budget 2021 was laid out (for reasons highlighted in our previous newsletters), but this one makes us even more positive as it clearly reinforces the government’s intent of doing “WHATEVER IT TAKES” to propel the Indian economy towards USD 5tn by FY25. We believe the FM has rightfully seized the mega opportunity when the economy is on a cusp of gaining momentum from China+1 and global digital revolution.
We consider the Union Budget 2021 as a “Carpe diem” event for the Indian economy; “Carpe diem” literally means - “seize the day”. Let’s run through the key catalysts announced in this budget.
Dissecting Carpe diem in context of the Union Budget 2021,
CA - Capex spend & fiscal deficit
R - Relief from tax hikes
P - Privatization
E - Ease of doing business
D - Developing State Capacity & Capability
I - Infrastructure boost
EM - Enabling manufacturing revolution
CA - Capex spend & fiscal deficit
For the first time, the NDA government has indicated that they are ready to let go of fiscal consolidation over growth. Going for a 6.8% fiscal target after a 9.5% deficit requires a lot of conviction and courage. Even wiser, the FM has drawn a huge focus on CAPEX oriented spending - a massive jump of 35% to INR 5.8tn. Several measures have been undertaken to enable capex even in the state budgets, which is a very deep one. The impact of CAPEX lasts over a long time as it builds capacity while impact of OPEX is short lived to a year. Higher capex spend will result into higher second and third order impact such as improving cost effectiveness, higher job creation, growth of various ancillary industry, increasing spending power in the economy (pls refer our previous newsletter for more details on second and third order impact)
Higher capex will also result in re-leveraging of the system and aid financial systems credit growth.
R- relief from tax hike
High fiscal spending without any kind of a tax hike is also BIG indication of the government’ mindset of moving to a lower tax regime. The Government could have easily taken COVIDSHIELD to do a tax hike, but resisted. A wise thing to do was igniting the animal spirit which is far more important than getting a small amount through tax hikes. THIS IS A BIG STATEMENT INDICATING CONTINUITY OF POLICY. India continues to be the lowest tax destination in the world, enticing global investments in a big way. This is a big enabler and the impact of this is very hard to quantify but easy to feel.
P – Privatization
A very big Shift! The FM has used the word “privatization” and not only divestment. Outlining a policy framework of having only 4 strategic sectors and privatizing the rest is a BIG departure from the past. This NDA government was seen weak on their intent of divestment given their track record over the last 5-6 years. This move of focused strategic sale of BPCL, Concor, Air India and divesting two PSB’s and one general insurance is a clear indication of the government’ desire to get out of business. The government also expects the LIC IPO to go through this year. While the obvious immediate goal is raising resources, there is a deep routed intent of removing inefficiencies from the system and re-orient India as a market-oriented economy.
E - Ease of doing business
Several steps simplifying the compliance requirements of business/individuals such as reducing the time limit for re-opening assessments, faceless tribunals, raising the tax audit threshold limit, relaxing norms for startups, investment by NRIs, raising FDI limit in the insurance and many more. This government has continued to relentlessly work towards using technology and reforms to improve the ease of doing business, which is well reflected this time too!
D – Developing State Capacity & Capability
For long-term sustainable development of a country, building state capacity is very essential. This budget has made several announcements on that count.
Health Sector– A multi fold increase in the health outlay is a clear commitment towards building the health infra-India has long been waiting for.
Outlining the Rail vision 2030, implementation of the National Education Policy, allocation towards power reforms, launch of the Development Financial Institution (DFI) to create a lending portfolio of INR 5tn, focus on Developing IFC in the GIFT city, Asset Reconstruction Company to handle bad assets of the banking system are few examples of building state capacity.
I – Infrastructure super boost
The Government’ intent to spend big and spend on infrastructure appeared throughout the budget. Direct measures are being initiated to boost road (8500 km), railways (100% electrification by 2023), new DFCC corridors, urban infra focusing on the Swatch Bharat Mission and metro rails, shipping incentives, power sector reforms are among the few notable ones.
More importantly, the FM has announced a big asset monetization plan to generate resources, which includes NHAI toll roads, Power grid assets, GAIL pipelines, Tier 2 and 3 airports, DFCC, warehousing assets and sports stadiums.
Infrastructure spend always has a multiplier impact on the economy, as it generates demand and builds efficiency.
EM - Enabling manufacturing
Atma Nirbhar Bharat is clearly a big focus area for the government which has been consistently highlighted by the FM during the budget and over the last one year several measures have been taken to grow India’s manufacturing GDP from USD 450bn to USD1.25tn by 2025. This budget has outlined several measures to create and nurture manufacturing capacities and capabilities - PLI outlay of over INR 1.97tn over the next 5 years, 7 textile parks are proposed to be set up over the next 3 years.
We have spoken about this mega trend several times over the last 6 months. The multiplier impact of this is significant as outlined in our previous newsletter.
We believe this budget is strategic, wise and visionary to propel India into a USD 5tn economy and more importantly a statement to the World that India no longer plays by the hand book handed over. It has her own aspiration, vision and approach of building a nation that is aspiring to get her ancient leadership status back at a global level.
Ignore India and her markets at your own PERIL!
At Carnelian, both our strategy viz Carnelian Capital Compounder Strategy and The Shift Strategy are well positioned to capture this huge opportunity!
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