UNION BUDGET

2020-21 REPORT
Published By:

Editors:
Akshitaa Bahl
Pranit Sawant
 UNION BUDGET 2020
Finance Minister Nirmala Sitharaman presented the Union Budget 2020-21 in the Lok Sabha on 1st February 2020.
This is the second budget after Narendra Modi led National Democratic Alliance returned to power for a second
term.

This year's Union Budget centers around three ideas — Aspirational India, Economic development, A Caring
Society.

Key Highlights:

New Income Tax slabs:

In Budget 2020, Finance Minister Nirmala Sitharaman proposed a new set of income tax rates for those earning
up to ₹15 lakh a year.

Income New Old

Up to 2.5 Lakh No Tax No Tax
2.5 Lakh – 5 Lakh 5% 5%
5 Lakh – 7.5 Lakh 10% 20%
7.5 Lakh- 10 Lakh 15% 20%
10 Lakh – 12.5 Lakh 20% 30%
12.5 Lakh – 15 Lakh 25 % 30%
15 Lakh & above 30% 30%
* New optional tax slabs: New income tax slabs will be available for those who forgo exemptions.

▪ Opting for the new tax rates proposed in the budget could be beneficial for job-starters, pensioners,
entrepreneurs and those taxpayers unable to claim available deductions and exemptions under the current
tax structure.
▪ To simplify the tax system and lower tax rates, around 70 of more than 100 income tax deductions and
exemptions have been removed.
▪ Dividend Distribution Tax (DDT) abolished: Companies will not be required to pay DDT; dividend to
be taxed only at the hands of recipients, at applicable rates.

Economy and Finance:

▪ Bank deposit insurance cover had been increased from ₹ 1 lakh to ₹ 5 lakh per depositor.
▪ Government plans to amend the Companies Act to decriminalize civil offences.
▪ Government to sell part of its stake in LIC via a public offering.

For agricultural sector:

▪ Finance Ministry will allocate ₹ 2.83 Lakh crore for agriculture and irrigation. ₹1.23 lakh crore will be
allocated to rural development, Panchayati Raj.
▪ Govt has pegged the agricultural credit target at ₹15 lakh crore for fiscal 2020-21.
 ▪ Indian Railways will set up Kisan Rail in public-private-partnership (PPP) mode for cold supply chain
to transport perishable goods.
Finance Minister announced these schemes for the agriculture sector

▪ Civil Aviation Ministry to launch 'Krishi Udaan' for agricultural exports

▪ Krishi Udaan will be launched by the Civil Aviation Ministry to transport Agri-products to national
as well as international destinations.
Finance Minister Nirmala Sitharaman shared measures to be taken to help farmers
▪ Government is expanding 'PM Kusum Scheme' to 20 lakh farmers to set up solar pumps
▪ The government will set up solar power units
▪ Committed to doubling farm income by 2022.
▪ Finance Minister lays down 16 actionable plans to enhance farmer's incomes. Farm markets need to be
liberalised.
Manufacturing:

▪ Schemes focused on encouraging the manufacture of mobile phones, electronic equipment and
semiconductor packaging to be introduced
▪ To encourage the private sector to build Data Centre Parks throughout the country
▪ ₹80 billion ($1.13 billion) over five years to be provided for quantum technologies and applications
▪ Milk processing capacity to be doubled by 2025
For Power sector:
▪ India to provide ₹273 billion ($3.84 billion) for promotion of industry and commerce
▪ Firms operating old thermal power plants advised to shut units if emission norms not
met.
▪ India to allocate ₹44 billion ($619.11 million) for clean air incentives in cities with over 1
million people
▪ FY21 divestment target pegged at ₹2.1 lakh crore
Infra sector:
₹100 lakh crore to be invested on infrastructure over the next 5 years
National Infrastructure Pipeline:
▪ Rs. 103 lakh crore worth projects; launched on 31st December 2019
▪ More than 6500 projects across sectors, to be classified as per their size and stage of development
A National Logistics Policy to be released soon:
▪ To clarify roles of the Union Government, State Governments and key regulators.
▪ A single window e-logistics market to be created
▪ Focus to be on the generation of employment, skills and making MSMEs competitive
More airports, highways:
▪ India to develop 100 more airports by 2024
▪ India to monetize over 6,000 km of highways in 12 lots by 2024
▪ India to privatize at least one major port
The central government is planning to construct
• 2500 access control highway
• 9000 km eco-development corridors
• 200 coastal and port roads
• 2000 km strategic highways
• Delhi-Mumbai expressway and 2 other corridors will be completed by 2023
₹1.7 lakh crore for transport infrastructure
Finance Minister Nirmala Sitharaman proposes to provide ₹1.7 lakh crore for transport infrastructure in 2020-21
Transport sector:

• Centre to provide 20% equity for Bengaluru Suburban Transportation Raj

• 100 more airports to be developed by 2024 to support the Central government's "Udaan" scheme.
Connecting India:
• Finance Minister Nirmala Sitharaman said ₹6,000 crores allocated for BharatNet program
• Around 1 lakh gram panchayats to be linked with BharatNet this year
Skill India initiative:
• Government proposed ₹3,000 crores for 'Skill India' to provide relevant skill training to the
youth in the country, said Finance Minister Nirmala Sitharaman.
• Government to sell govt stake in IDBI Bank to private investors.
Swachh Bharat Mission:
• The Finance Minister announced that the total allocation proposed for Swachh Bharat Mission
is ₹12,300 crore.
For health sector:
• Union Budget 2020 provided an additional ₹69,000 crore for the health sector
• Finance Minister proposed to attach a medical college to a district hospital in PPP model
Ayushman Bharat:
• Out of the total amount, ₹6,400 crores will be sanctioned for Ayushman Bharat Yojna.
• Ayushman Bharat scheme provides health assurance cover of up to ₹5 lakh per family and
is targeted to cover over 10 crore poor and vulnerable families.
To clean air and pollution-free cities:

• Power plants with emissions above prescribed limits will be asked to close down.
• India's commitment towards tackling climate change made at the Paris conference kick starts from
January 1, 2021.
• FM said ₹4,400 crores has been allocated for states that work towards clean air.
Say 'no' to pollution:
• Govt will encourage states which formulate plans for air pollution scheme soon. ₹4,400 crores allocated
for 2020-21: Sitharaman
• ₹8,000 crores allocated over 5 years for National Mission on Quantum Technology, said Finance
Minister Nirmala Sitharaman
Push for the renewable energy sector:
• FM announced ₹20,000 crores for the renewable energy sector
For education sector:
▪ 150 higher education institutions to offer apprenticeship diplomas by March 2021. The government will
promote 'Study in India' initiative.
New education policy to be announced soon
▪ Govt to provide ₹99,300 crores for the educational sector in FY21
▪ Government proposes to attach a medical college in existing district hospitals, said FM
For Indian Railways:
▪ 4 station redevelopment projects in railways via PPP models
▪ To develop solar capacity in Indian railways
▪ Plan more Tejas-like trains to connect tourist locations.
▪ Govt to launch ₹18,600 crores worth the Bengaluru Suburban Transportation project.
Things that will become dearer:
▪ Customs duty on walnuts raised to 100% from 30%
▪ Customs duty on autos and auto parts raised by up to 10%
▪ Customs duty on platinum and palladium cut to 7.5% from 12.5% for certain purposes
▪ Nominal health cess of 5% on import of medical devices
Growth/deficit:

▪ Nominal GDP growth in 2020/21 estimated at 10%

▪ Fiscal deficit for 2019/20 seen at 3.8% of GDP
▪ Revenue deficit seen at 2.7% of GDP in FY21
▪ FY21 fiscal deficit target pegged at 3.5% of GDP

IMPACT OF THE BUDGET ON THE FINANCIAL MARKETS

Domestic equity benchmarks Sensex and Nifty crashed over 2.5 percent each, as Union Budget
disappointed the investors in the trade on the budget day.

25 out of 30 Sensex stocks finished in red at the end of the trading session.

ITC was the top loser on the Sensex pack, down 7 percent, followed by LT and HDFC, down
6 percent each. SBI, ONGC, ICICI Bank were among the other laggards on the index.

Conversely, TCS, Hindustan Unilever, Nestle India, Tech Mahindra and Infosys were the only
gainers.

Clearly, the budget didn’t go down well with the market.

 • New Income Tax Regime Impact

The budget 2020 has offered the taxpayers the option to choose between the existing income
tax regime (which allows availing existing income tax exemptions and deductions) and a new
tax regime which offers lower tax rates and new tax slabs and simultaneously removes tax
exemptions and will result in lower tax outgo for the taxpayer.

o Impact on Real Estate Sector

However, if a large number of taxpayers chose to forgo exemptions, it will lead to a revenue
sacrifice of Rs 40,000 crore per annum, and most importantly would remove a key trigger to
borrow for the purchase of real estate. Housing loan is a key exemption item and this leeway
has been a major factor in enticing Indians to borrow to purchase homes over the years. This
exemption has not only boosted the demand for real estate but also helped housing finance
companies to grow and thrive.

The threat to the exemptions regime also led to the downfall of the Nifty Realty index by
nearly 8%, while most housing finance companies dropped between 3-8% on Saturday.
It also led to a sell-off in shares of insurance companies.

On the upside, the reduction in personal income tax slabs will provide some relief to the middle
class, which in turn will increase disposable income and drive demand.

o Impact on Life Insurance Sector

Tax exemptions are an important incentive for the purchase of life insurance.

It is likely that those earning an annual income between Rs 5 lakh to 7.5 lakh could switch to
the new regime and hence will not have any incentive to buy an insurance product.

Though tax saving is not the only objective to buy life insurance, it is one of the motivators.
Life insurers are hopeful that fewer people opt for the new regime.

As soon as the new regime was announced on February 1, life insurers' stocks were hit.
Currently, HDFC Life Insurance, ICICI Prudential Life Insurance and SBI Life are listed on
the stock market.

Shares of Max Financial, which holds Max Life, gained 8.65 percent intraday today (against a
12.8 percent fall on Budget day), ICICI Prudential rose 1.69 percent (against a correction of
10.93 percent), HDFC Life gained 1.80 percent (against a fall of 6 percent) and SBI Life was
up 3.12 percent (against a decline of 10 percent).
 • The DDT Impact

The dividend distribution tax (DDT) has been abolished at both the company and mutual fund
levels. Instead, dividends will be taxable in the hands of investors and will be taxed at their
slab rates. In addition, the tax will be deducted at source (TDS) on mutual fund dividends in
excess of ₹5,000 per year at the rate of 10%.

The DDT abolition brings in several changes for mutual fund investors. Earlier, DDT of
20.56% was deducted on dividends paid by companies to mutual funds. Now, this amount will
flow directly into the net asset value (NAV) of mutual funds. However, this may not have a
huge impact on returns.

The axing of dividends for stocks and mutual funds will be favourable for investors who are in
the lower tax brackets, while resulting in additional outgo for those in the higher tax brackets.

• Side-Pocketing Relief

The budget also brought relief for investors in side-pocketed units. Side-pocketing is the
creation of separate portfolios of mutual funds in lieu of bad debt.

Earlier, in the absence of specific provisions, the cost of the original units or the actual holding
period of investors was not considered for taxation. For example, if a fund purchased by an
investor in 2017 was side pocketed in 2019, the cost would be taken as zero and the date of
acquisition as 2019. This would make the investor liable for a higher tax than what was actually
due. This anomaly has been fixed.

• G-sec ETFs

Budget 2020 also proposed additional issues of G-sec ETFs, following the successful launch
of the Bharat Bond ETF in December 2019. This step will help in deepening the sovereign
bond market and building a solid yield curve on the lines of what Bharat Bond ETF is to the
corporate bond market.

• Mutual Funds

Removal of tax exemptions under Section 80C in the new tax regime could be a dampener for
life insurance products as well as equity-linked savings schemes (ELSS) of mutual funds.

On the mutual funds front, fund officials said that the ones who opt for the old regime will
receive the ELSS exemption.

In the past few years, mutual funds have witnessed robust inflows in ELSS schemes
considering that there is a lock-in of three years as against five years in life insurance.
Millennials may opt for the new regime to avoid the investment hassles as some of their
investment burden is already borne by their parents. To that extent, life insurance and ELSS
schemes may take a hit. Also, the new regime would not create more tax liability compared to
the existing scheme.

• Disinvestment

This year's disinvestment target has two components – Rs. 120,000 crores from disinvestment
receipts and Rs 90,000 crore from disinvestment of PSU banks and financial institutions. If the
disinvestment target is achieved it would help to bring down the fiscal deficit target to 3.5% of
GDP next year and help draw more foreign investments into the country.

o IDBI Disinvestment

The finance minister in her Budget speech said the government is proposing to sell its balance
holding in IDBI Bank to private, retail and institutional investors through the stock exchange.
At present, the Government of India holds a 47.11 percent stake in the bank. At the current
market price, the government's stake in IDBI Bank would fetch it over Rs 18,250 crore.

o LIC IPO

For covering the rest of the disinvestment target, the government has again relied on its old
cash cow Life Insurance Corporation of India (LIC). The budget has proposed to offload the
government’s stake in LIC through an initial public offering.

When such large companies get listed, the weight in the MSCI Emerging Market index goes
up and it helps attract passive index ETF (exchange-traded fund) money and active investor
money. So, India will receive more foreign portfolio courtesy this step.

o Tower Infrastructure Trust IPO

Meanwhile, another big deal is also lining up: Tower Infrastructure Trust, the investment
trust that manages the mobile-phone tower business of Reliance Industries Ltd., filed last week
for an IPO of as much as $3.5 billion. Canadian asset manager Brookfield Asset Management
Inc. has a stake in the trust. Excluding the potential float of LIC, Tower Infrastructure Trust
stands to be the largest Indian IPO on record, data compiled by Bloomberg show.

• Impact on Government 10-year bond yield

The yield on the government's 10-year bond fell nearly 10 basis points on Monday, its
biggest slump in nearly seven weeks, as prices surged after the Union Budget avoided extra
government borrowing for the current fiscal. The yield on the 10-year government bond was
at 6.503% compared with the previous close of 6.601%.
The market also cheered steps to allow better access to government bonds, and that certain
government securities would be opened fully to non-resident investors.

The government hiked participating limit for foreign portfolio investors (FPIs) in corporate
bonds to 15% from 9% of outstanding currently.

Also, importantly, certain specified categories of government securities would be opened fully
for non-resident investors, apart from being available to domestic investors as well.

• Stock Market Recovers on Monday after a disappointing start of the month

Equities benchmark BSE Sensex ended 137 points higher on Monday led by gains in HUL,
ICICI Bank and Asian Paints amid broad-based buying in the market.

The broader NSE Nifty finished higher by 46.05 points, or 0.39 percent, at 11,707.90.

Asian Paints was the top gainer in the Sensex pack, rallying 6.32 percent, followed by Nestle
India, HUL, Bajaj Auto, IndusInd Bank, Tata Steel, Maruti and PowerGrid.

On the other hand, ITC cracked 5.09 percent. TCS, HCL Tech, Hero MotoCorp and Tech
Mahindra too ended in the red.

Markets turned positive in the afternoon session after a monthly survey said the country’s
manufacturing sector activity climbed to a near eight-year high in January, he said.

The IHS Markit India Manufacturing PMI rose from 52.7 in December to 55.3 in January,
driven by a sharp rise in new business orders amid a rebound in demand conditions that led to
a rise in production and hiring activity.

REFERENCES

• https://www.livemint.com/
• https://economictimes.indiatimes.com/
• https://www.financialexpress.com/
• https://www.news18.com/
• https://www.thehindu.com/
• https://www.businesstoday.in/