Budget FY2021: Focus on Macro Stability with Limited Growth Stimulus

03 FEBRUARY 2020

Indian Finance Minister Nirmala Sitharaman presented the Annual Budget for fiscal year 2020-21 on 1st February 2020. In the longest budget speech in history, the Finance Minister chose to stick with fiscal discipline and refrained from providing significant expenditure-led stimulus to growth. Given high expectations in the run up to the budget, BSE Sensex fell 2.43%, with most sectoral indices ending the day in red, reflecting some disappointment.

Growth in government’s budgeted infrastructure spends slowed in FY21BE (Base Estimate), while ailing sectors like real estate, NBFCs, MSMEs and autos did not receive any significant budgetary support. The government increased customs duty on several goods in an attempt to encourage domestic manufacturing and ‘Make in India’ through protectionism.

Sticking to the path of fiscal prudence may alleviate the risk of a sovereign rating downgrade for now, however, with no significant increase in nominal GDP estimates, the debt-to-GDP ratio may not see any imminent improvement. The new direct income tax structure may likely have limited stimulative impact as per Citi analysts, given the absence of exemptions/deductions. With DDT abolition being a positive for corporates, Citi analysts expect buybacks to now be modestly more attractive. Elimination of incentives under Section 80C under the new tax structure may have a negative impact on insurance and equity mutual fund (ELSS/ULIPS) sales.

With a fiscally conservative Budget, Citi analysts believe that the MPC may feel reduced pressure to turn hawkish during its Feb 6th policy review. They expect 10yr G-sec bond yields to stay above 6.50% and gradually move towards 7%, with market stabilization activities from the RBI keeping the yields in check. INR may strengthen below 70/dollar towards the end of the fiscal year led by current account inflows.

We present to you the key highlights of the Budget proposal*:


  • Fiscal deficit estimate revised to 3.8% of GDP for FY20 (50bps above the budget target). The Government plans to bring down the fiscal deficit to 3.5% of GDP by FY21 and further down to 3.3% in FY22.
  • Expecting a nominal GDP growth rate of 10% YoY for FY21, the Government targets a gross tax revenue growth of 12% YoY for FY21 (vs a 4% YoY growth in FY20E), implying a tax buoyancy of 1.2 – in line with long-term trends.
  • Corporate taxes estimated to grow 11.5% YoY, while GST collections are estimated to grow by 12.8% YoY in FY21, in-line with the nominal GDP growth target.
  • The Government budgeted for INR 2.1tn (~0.9% of GDP) divestment revenues in FY21, including proceeds from planned listing of LIC and strategic divestments. Dues from Telecom companies, disinvestment through ETFs, dividends from PSUs and the RBI also form significant part of non-tax revenue estimates for the Center.
  • Expenditure growth budgeted at 12.7% YoY for FY21, lower than the 16.6% YoY in FY20E. Conservative expenditure projections imply lesser tailwinds for GDP growth as per Citi analysts.
  • Revenue expenditure budgeted to grow ~12% YoY (down from 17% in FY20E), while Capital expenditure is budgeted to grow by ~18% YoY in FY21 (~1.8% of GDP), up from 13.4% YoY in FY20E.


  • Key infrastructure ministries received a budgetary allocations of INR 2.7tn, up 6% YoY in FY21E (down from 16% in FY20E). Including revenue expenditure, total budgetary allocation grew 3% YoY in FY21E (versus 10% in FY20E).
  • 100% tax exemption on interest, dividend and capital gains received by Sovereign Wealth Funds (SWFs) of foreign governments for investment into infrastructure and other notified sectors. Eligible investments will have to be made before 31st March 2024, with a minimum three year lock-in period.
  • Budgetary allocation increased for defense by 3% YoY (versus 16% in FY20E), for roads by 14% YoY (versus 7% in FY20E), while planned capex for railways increased 3% YoY in FY21 (versus 17% in FY20E).


  • Personal income tax rates lowered for income up to INR 15 lakhs per annum. Individuals opting for the new regime will have to forego much of the tax exemptions and deductions (e.g. HRA, home loan, equity/insurance investments etc.) available under the older tax structure. New income tax slabs are as below:
    • Income between INR 5 lakh – INR 7.5 lakh will be taxed at 10% (down from 20% earlier)
    • Income between INR 7.5 lakh – INR 10 lakh will be taxed at 15% (down from 20% earlier)
    • Income between INR 10 lakh – INR 12.5 lakh will be taxed at 20% (down from 30% earlier)
    • Income between INR 12.5 lakh – INR 15 lakh will be taxed at 25% (down from 30% earlier)
    • Income above INR 15 lakh will continue to be taxed at 30%
  • Significant increase in customs duty announced for several household goods, chemicals, metals, electrical vehicle parts, cellular mobile phone parts, and few other electronic goods & machinery.
  • Additional tax deduction of up to INR 1.5 lakhs against interest paid on loans taken for affordable homes. Tax holiday announced on profits earned by affordable housing project developers.

Financial Markets:

  • Foreign Portfolio Investment limit on corporate bonds increased to 15% of outstanding from 9% previously. Limits on foreign investment in select categories of government securities was also removed.
  • Dividend Distribution Tax (DDT) charged on dividends paid by companies stands withdrawn. Dividends will now be taxed in the hands of the investors at applicable tax rates.


  • Spending by rural /agri focused ministries is expected to increase by ~13% YoY in FY21 (down from ~40% YoY in FY20BE).
  • Allocation to MNREGA (rural employment scheme) was reduced by ~13% YoY in FY21, to INR 615bn (0.27% of GDP).


  • Bank deposit insurance coverage increased from the current INR 1 lakh to INR 5 lakh per depositor.
  • 100% deduction in profits for startups with an annual revenue of up to INR 1bn for three consecutive years out of the first 10 years.
  • 5% TDS to be levied on foreign remittances through Liberalized Remittance Scheme (LRS) and overseas tourism spends in excess on INR 7 lakhs per annum. Individuals staying outside India for 240 days will be eligible for non-resident status (up from 182 days earlier).
  • In a move to assist smaller NBFCs, eligibility limit for debt recovery under SARFAESI act was reduced to INR 1bn (from INR 5bn earlier) of asset size or INR 5mn (from INR 10mn) of loan size.
  • Proposed to extend the scheme for restructuring of MSME loans till 31st March 2021 (from Mar’20 currently).

*For more details, please refer to the Budget Document.



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