EF Digest - February 2022

Dear Investors,

The Finance Minister presented the Union Budget 2022 in the Parliament on 1^st February 2022. In our opinion this is a growth oriented Budget as the Government has shown strong commitment towards economic growth recovery as opposed to fiscal considerations. Salaried investors who were expecting tax sops in this Budget may be disappointed. For equity markets, the upcoming IPO of Life Insurance Corporation will bring cheer. The Budget also has implications for the bond market as the Government borrowing will increase. Overall the Budget was positive for the market. The Sensex surged by nearly 850 points to close the day at 58,863 while Nifty gained 237 points to close at 17,576. In this newsletter we will provide some highlights of the budget.

Increase in Government Capex

Government spending on Capital Expenditure, primarily infrastructure, will increase by 35% to Rs 7.5 lakh Crores in FY 2022-23. The Government has announced 25,000 km of national highway, 400 new generation Vande Bharat trains and 100 new cargo terminals in the next 3 years. The Government has also proposed projects linking rivers, subject to agreement between the State Governments. The fiscal deficit target for FY 2022-23 is 6.4% of the GDP and the Government plans to bring it 4.5% by FY 2025-26. The Government’s capex spending is the most highlight of this Budget. Government spending will hopefully also attract private investments in public private partnership (PPP). The equity market has welcomed the Government’s commitment to growth recovery.

Focus on environment

The Prime Minister on behalf of the nation had pledged to achieve net-zero carbon emission by 2070 in the COP26 climate change meeting held in November. The Budget provided additional allocation of Rs 19,500 Crores for Production Linked Incentives for manufacturing of high-efficiency solar photovoltaic cell modules with priority to fully integrate manufacturing units to solar power. The Government has also introduced battery swapping policy to encourage quicker adoption of electric vehicles.

5G Auction

5G spectrum auction will be conducted in 2022 and 5G telecom services maybe rolled out by telecom operators in FY 2022-23. Last year the Government provided a 4 year moratorium on due spectrum payments and allowed operators to convert interest they owe to the Government into equity. So we may see aggressive bidding in the 5G spectrum auction.

LIC IPO

The Finance Minister said that the public issue of Life Insurance Corporation is expected shortly. The market is eagerly awaiting this mega IPO. We think that the LIC IPO will provide a major boost to Indian equity market.

Lower Disinvestment Target

The Government has set a lower disinvestment target of Rs 65,000 for FY 2022-23. This is lower than the amount mobilized through disinvestment this year, Rs 78,000. The Government has been missing its disinvestment target for the last few years. It is prudent to set more realistic disinvestment target, which is what the Government has done this year.

Crypto Currency

Income from virtual digital assets will be taxed at 30%. This is first step towards legalizing crypto. The Finance Minister announced that the Reserve Bank of India (RBI) will issue Digital rupee using Blockchain and other technologies starting FY 2022-23. A crypto bill is also expected to be tabled in the near future. Till the bill is table, trading in crypto currencies is banned.

No tax relief

The Finance Minister did not announce any change in tax slabs, tax rates or increase in 80C limit in this Budget. This may be a bit disappointing for tax payers who were expecting some tax relief from the Government.

2 year window for updating ITR

In case, tax payers have failed to disclose their full income in the submitted ITR, the Government is providing a 2 year window from the relevant assessment year to file updated return. Please note that the Government is not allowing this two year window to file an updated return to claim tax refund or larger refund. This window for updating returns is applicable only for tax payers who have paid less tax. There will also be 25 to 50% penalty on the additional tax plus interest on the taxes due.

Impact on equities

The big push on capex and efforts to revive private sector investments will be comforting for equity market. The focus on climate change will also be a positive from FII investments perspective, since many FIIs may have ESG goals. We saw big FII sell-off in January; we hope that this Budget will revive FII confidence in Indian equities in medium to long term. Finally, the LIC IPO will be a big boost for the market. Overall, we expect equities, including equity mutual funds, to perform well (subject to global factors) in the medium to long term.

Impact on debt

The Government will have to borrow an estimated Rs 15 trillion from the market to meet the fiscal deficit target in FY 2022-23. Higher Government borrowing will push up bond yields; we saw 10 year bond yields surging after the Finance Minister’s speech. This will have an impact on longer duration debt funds. In such yield environment, we recommend shorter duration accrual based debt funds of high credit quality.

Conclusion

This budget shows renewal of Government’s commitment towards higher growth. Though there was no tax relief for individual taxpayers, we think that this budget is investor friendly. The Budget is also a suitable time to remind our investors that the deadline of 31^st March for your tax planning for this assessment year (AY 2022-23) is drawing close. Please contact your Eastern Financier’s financial advisors if you wish to make your tax planning investments.

Best Wishes,

Ajoy Agarwal,

(Managing Director)