Bad bank, no Covid cess: Why Sensex zoomed 2,300 pts post Budget proposals

The markets gained ground post the Budget speech by Finance Minister Nirmala Sitharaman with the S&P BSE Sensex surging over 2,300 points to settle at 48,601 levels. 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 fiscal deficit number and the gross borrowing estimates are a tad higher-than-expected, the money is being put to good use. Besides, foreign portfolio investors (FPIs), too, had something to cheer about as the Budget proposed to rationalised the tax on dividends, bringing them at par with treaty rates.

“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 fiscal deficit is quite large, the money is being well spent,” said U R Bhat, managing director at Dalton Capital.

The idea of a bad bank 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 fiscal deficit at 6.8 per cent of the gross domestic product (GDP). Sitharaman said the government will be borrowing an additional Rs 80,000 crore 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.