Budget Will Continue To Be Reform-Oriented, Fiscally Prudent and Growth-Centric

In 2021, the capital market indices namely the NIFTY and SENSEX moved from strength to strength and registered a 24% growth in a year. There has been huge retail participation with an increase in convenience vis-a-vis fin-tech for common people to invest their savings in equity and mutual funds. The year witnessed 65 Initial Public Offers, of which 45 have given positive returns by the end of the year, while one-third of these IPOs have given more than 100% returns. Global liquidity because of liberal monetary policy by major central banks around the world caused due to the pandemic has been a factor for this Bull Run. One of the other important reasons is the very positive, definitive and growth-oriented budget presented by the Hon’ble Finance Minister Nirmala Sitharaman for the Financial Year 2021-22. As we look forward to the Budget for FY 2022-23 let’s see what can be on the investor’s mind.

The push for privatisation has been commendable in the previous Budget. The privatization of Air India is a bold, positive move that shows intent and ability to drive down the fiscal deficit. This should be followed by other promises of privatisation in the Budget of FY 2021-22, namely the privatisation of two public sector banks and a major public sector insurer. This will not just be fiscally prudent but also a huge signal that the government is serious and able to push difficult reforms.

The push for Government Asset Monetisation is an innovative step to generate revenue without loss of ownership of hitherto unutilized or underutilized public assets. Since there has not been a lot of action seen after talks of implementing these actions, I firmly believe that there should be a push for asset monetisation in this Budget. Such a move will increase private investment in the infrastructure sector and employment opportunities, thus integrating rural and semi-urban areas for overall public welfare.

One of the great successes in the last few years has been the flow of private capital, both Foreign Direct Investment and Domestic investment in unlisted companies. The year 2021 saw 41 new unicorns bursting onto the scene. However, in a country of entrepreneurs and innovators, I believe we have a long way to go. For this, private capital in start-ups is essential. One deterrent to the flow of private capital is the differential tax treatment of Long Term Capital Gains on listed and unlisted equity investments. Taxation of gains in unlisted companies deters investment in companies that are unlisted and hold huge promises. Reforms in this aspect will signal a bold government that is serious about business.

We expect domestic investment to continue flowing in Alternate Investment Funds I and II in the coming year. Category I funds invest in early-stage ventures, SMEs or any sector which the government deems to be socially or economically desirable. Given better tax treatment, it will mean better flow and better capital formation in new-age companies and start-ups. There has always been a debate around making AIF category III pass-through vehicles like I and II. With strong capital market flows, the stabilisation of the AIF regime makes a stronger case for the same.

A lot of hype and focus has hovered over the International Finance Services Centre in Gujarat (Gujarat International Fin-Tech City) in successive budgets and now can see a perceptible difference in Funds wanting to get set up in GIFT. However, current regulations require any FPI registration to be preceded by AIF registration according to the IFSC. This doubles up the tenor and paperwork, causing a major roadblock to setting up an alternate fund, since both the regulators (AIF, IFSC) work closely, a single registration should be worked out.

There has been considerable interest and rise in prices of commodities. SEBI has shown interest in allowing Foreign Portfolio Investors to participate in exchange-traded commodity derivatives. Allowing for this to happen, would be a push in the right direction for commodity trade.

In order to boost overseas fund flow, there have been talks to aggregate FPI and NRI routes for a considerable time. Currently, NRIs have to invest in the Indian capital market under RBI guidelines which is not convenient. Classifying NRIs as FPIs will improve the convenience of NRIs to invest back in India and increase the convenience of fund flow.

In broader terms, the market expects a continuation of a fiscally prudent, reform-oriented and growth-centric budget.

-Sachin Samant

President & Business Head

Banking & Financial Institutions Group (BFIG)

Kotak Mahindra Bank

Disclaimer:

This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.