Budget 2021-22: Good news for financial services sector

Budget 2021-22: Good news for financial services sector

Disinvestment targets seem to be more realistic while a certain amount of scrutiny needs to be paid to inflation and the only way out is speedy growth for the country.

Indian Finance Minister Nirmala Sitharaman’s Union Budget 2021-22 also brought cheerful tidings for the financial services sector. Besides easing norms for the international financial centre in Gujarat, the Finance Minister announced several steps to deepen the bond market in India.

Foreign investors, in particular, will be happy that she has raised the foreign direct investment (FDI) cap in the insurance sector to 74 per cent from 49 per cent at present. This means, foreign insurance companies can now gain majority shareholding and control over their operating companies in India.

This could increase the flow of foreign investments as well as long term investment capital into the country.

The government is planning to disinvest its holdings in two public sector banks and one insurance company during the coming year. It did not, however, reveal the names of the companies. The Budget has accounted for $25 billion from disinvestment receipts during 2021-22.
The government is planning to disinvest its holdings in two public sector banks and one insurance company during the coming year. It did not, however, reveal the names of the companies. The Budget has accounted for $25 billion from disinvestment receipts during 2021-22.Courtesy: Getty Images

Disinvestment target more realistic this time

The government, which had earlier announced that it would exit all sectors barring a few strategic ones, announced that it was planning to disinvest its holdings in two public sector banks and one insurance company during the coming year. It did not, however, reveal the names of the companies.

“Congratulations to @narendramodi and FM @nsitharaman for a very reformist #Budget2021 with many big ideas including strategic disinvestment of two public sector banks & one insurance company. Thrust on infrastructure will boost growth,” tweeted Anil Agarwal, Executive Chairman of Vedanta Resources.

The Budget has accounted for $25 billion from disinvestment receipts during 2021-22. This is less than the target of more than $28 billion set for the current financial year, but many experts said it was better to set more realistic targets that could be achieved than over-ambitious ones that it fails to reach. Disinvestment receipts during the current year were a mere 6.6 per cent of the targeted amount this year.

The one issue that Sitharaman will have to be very cautious about is the management of the fiscal deficit. That said, the Finance Minister has done a fine balancing job under very difficult circumstances and given India a very good chance of bouncing back fast.
The one issue that Sitharaman will have to be very cautious about is the management of the fiscal deficit. That said, the Finance Minister has done a fine balancing job under very difficult circumstances and given India a very good chance of bouncing back fast.Courtesy: Getty Images

Inflation could play spoiler

Though most economists gave the budget a thumbs up, the one issue that Sitharaman will have to be very cautious about is the management of the fiscal deficit. Not only has the gap slipped to almost three times the budgeted figure of 3.5 per cent of GDP, but there is also no chance of it closing to anywhere near this figure over the next 3-4 years.

Such a big deficit can stoke inflation in a very big way and this can put the entire Budget math in jeopardy as the only way out of this situation is to spur fast growth. But the large deficit can also crowd out private investments. The remedy for this is to front load the huge expenditure in the early months of the coming fiscal and then track project implementation timelines and costs very closely to ensure that there are no overruns on either count.

That said, the Finance Minister has done a fine balancing job under very difficult circumstances and given India a very good chance of bouncing back fast from the setbacks it suffered this year and get back on the high growth trajectory.

No stories found.
No stories found.
No stories found.
No stories found.
No stories found.
No stories found.
India Global Business
www.indiaglobalbusiness.com