IMPACT OF BUDGET 2021 ON MAJOR INDUSTRIES of INDIA
Updated: Apr 28
India got its first ever digital budget on a February 1, 2021 for the financial year 2021-22. The finance minister Nirmala Sitaraman presented the union budget while describing the six main pillars of this budget: help and wellbeing, physical and financial capital and infrastructure, inclusive development for aspirational India, reinvigorating human capital, innovation and R&D, minimum government, maximum governance, and fiscal position. Today we are going to talk about in impact of the budget on business and major industries of India. Electronic industry Indian electronic market is one of the fastest growing industry and is expected to grow annually at a compound annual growth rate of 30%. To promote the value addition, custom duty has been raised by 2.5% or more on various inputs, parts or subparts required for manufacturing of parts of mobile phones, Chargers, lithium-ion battery, etc. And there is a significant increase in customs duty on import or export of solar inverters and solar lanterns or lamps by 15% and 10% respectively. So basically, there are two implications of these changes in India's electronic market. First to avoid increase in overall cost of raw materials due to increased custom duty, the buyers may shift to Indian raw materials which will give a huge push to domestic manufacturing, the ultimate aim of the government. Secondly the price of domestic products will eventually rise, the reason being rising demand of new buyers who have recently shifted to Indian products.
Apart from production linked incentive schemes, mega investment textile parks (MITRA) will be set up in upcoming three years. These parks will have all the required facilities which will help the textile industry in increasing production which in turn will lead to increase in exports. To further support this industry, the custom duty on various raw materials like Caprolactam, nylon chips and nylon fibre and yarn have been reduced. These all steps will boost the textile industry, provide jobs to youth of India and may increase the foreign direct investment in this industry.
The government will launch a scheme costing Rs.18,000 crores to support expansion of public bus transport services in urban areas. This will increase the demand of buses which in turn will lead to upscaling of production by bus manufacturing companies. This process will provide a boost too automobile industry.
To support ministry of defence in manufacturing of aircrafts by public sector units, the custom duty on components or parts required for manufacturing have been reduced to nil. This will help in making India self-dependent for defence aircrafts and perhaps will we will start exporting aircrafts as well.
Capital adequacy ratio (CAR) for public sector banks should be 12% as directed by RBI. CAR is a ratio of bank’s capital to risks. Higher the CAR, higher the ability of banks to absorb the bad debts and vice versa. Now when banks declare assets as nonperforming/stressed, their capital also erodes while writing off that stressed assets. The bank due to lack of capital funds find it difficult to give subsequent loans. Here comes the role of government, it provides the required capital to the banks to maintain the CAR. This is known as recapitalization. The government will provide Rs. 20,000 crores for recapitalization. Now the banks have got enough capital to provide further loans, this will lead to increase in supply of money to the borrowers and will contribute to the economic recovery.
The next big announcement is introduction of bad banks. Since the public sector banks are ailing with increasing Nonperforming assets (NPA) and is expected to increase even more due to the pandemic, the government has come up with a proposal of setting up Asset reconstruction Company limited (ARC) and asset management company (AMC) which will be a private entity. The ARC, also called the bad bank will buy the stressed assets from the banks. Then comes the role of AMC. The AMC will be run by highly professional people who will restructure and operate the asset, make sure that the value of asset does not erode, and hence will find a potential investor or buyer of the asset. Now the banks have got rid of the stressed assets and got recapitalized by government. It can now focus on its main functions that is getting deposits from public and lending money to borrowers. And about the stressed assets, they will get at least something from the ARC which is better than getting nothing from the borrowers.
The government which holds 47.11% stake in industrial Development Bank of India (IDBI) will sell the stake to investors through Stock Exchange. Further, it will privatize two other public sector banks. Privatization is always a great move to cope up with inefficiency of the organization. Sin
ce private investors will be involved, it is expected that IDBI will become efficient in running its operations and quality of services that it provides to bank customers will improve drastically.
Further the Deposit Insurance has been raised from RS.1 lakh to Rs. 5 lakhs. Deposit Insurance is insurance cover that the depositors get in case bank has declared itself bankrupt and is not able to pay the money they had deposited in it. This will provide more sense of security to the bank customers will help in regaining their trust in banking.
Financial services industry
The government has focused on increasing capital expenditure with an aim to develop infrastructure that is required for economic growth in India. To boost investment in infrastructure, the government will set up a development financial institution (DFI) which will lend long term debt for investing in infrastructure projects. Add will provide capital of Rs. 20,000 crores to this institution. Due to availability of credit, the private investment on infrastructure projects may increase and will help in job creation and economy growth. For further inviting funds for infrastructure and real estate sectors, certain legislations will be amended for making foreign portfolio investors (FPI) eligible to invest in infrastructure investment trusts (InvITs) add real estate investment trusts (REITs). The result of all these schemes would be increase in a number and amount of debt taken especially by the investors.
Apart from the announcement of initial public offer of LIC, the foreign direct investment limit in insurance companies have been raised from 49% to 74% which means foreign investors can buy stake up to 74% in insurance companies which will give th
em power and control over the businesses. Since this gives an opportunity for foreign investors or companies to enter into India’s low penetrated insurance industry with more management control, it is expected that FDA will increase. This way more capital will be introduced in this industry and India's domestic companies.
Iron and steel industry
The key point for this industry is removal of Anti-dumping duty (ADD) and countervailing duty (CVD) on some steel products which are implied to protect the domestic producers from the foreign manufacturers who had been selling their products at cheaper price then the Indian manufacturers. Since ADD and CVD have been abolished that certain steel products will now be available to Indian buyers at a cheaper price than the domestic price, so overall cost of industries will decrease. Apart from, custom duty has been revoked on various products like copper scrap, steel scrap, stainless steel etc. This will provide some relaxation to the metal recyclers. The government has tried to push the economic growth by infusing a big amount of capital in the various industries. If the schemes are implemented efficiently, then this financial year will the year of economic recovery and resilience.