Analyze of Budget 2021 by Finance Minister Nirmala Sitharaman: A Mixed Bag for Investors and the Economy
The budget 2021 presented by Finance Minister Nirmala Sitharaman in India has been the subject of considerable debate and analysis, marking a significant shift in tax policies and economic strategies. This article delves into the key aspects of the budget, discussing both its positive impacts and the shortcomings that may affect various sections of the economy.
Impact on Investors and Middle Class Families
The new budget has introduced a series of changes that could potentially impact investor behavior and the economic stability of middle-class households. One of the most notable changes is the adjustment in the Long Term Capital Gain (LTCG) tax from 10% to 12.5%. This increase is likely to affect investors, particularly those who rely on mutual funds as a savings vehicle to build wealth over the long term. The higher LTCG tax may dissuade middle-class families who regularly invest in mutual funds, as it could reduce their returns and encourage them to seek alternative investment avenues.
In contrast, the Short Term Capital Gain (STCG) tax has been hiked from 15% to 20%, which could further impact the profitability of day traders and swing traders. While this step aims to balance the tax burden, it might limit the flexibility of traders who rely on quick gains from the stock market. Additionally, the removal of indexation benefits for real estate transactions means that potential sellers must consider both the sale price and the cost of the asset, which could delay real estate transactions and make it more expensive for home buyers.
Neglect of Old Tax Regime
A significant upside of the budget, in the eyes of many, was the complete disregard for the old tax regime. The old tax regime offered taxpayers avenues to invest in schemes such as Public Provident Fund (PPF), National Pension Scheme (NPS), and Equity Linked Savings Scheme (ELSS) funds, which provided tax benefits. The budget missed an opportunity to continue these incentives, which could have been beneficial for long-term savings and retirement planning.
Deviating from Traditional Fiscal Practices
One of the standout features of the budget was the departure from traditional fiscal practices. Historically, the government would often distribute freebies or subsidies to garner political support before elections. However, this time the Modi government made a conscious effort to refrain from such actions. The expectation for an increase in the Kisan Samman Nidhi (a scheme for farmers) and additional funding for women farmers was not met, indicating a shift towards more sustainable and structured financial policies.
Despite this, the budget presented a cautious approach, likely influenced by the continuous increase in revenue under the Goods and Services Tax (GST) system. There was optimism for the inclusion of a separate fund for the youth, but unfortunately, this did not materialize. The MSME (Micro, Small, and Medium Enterprises) sector, which provides employment for millions, was highlighted as needing urgent support, disproportionately affected by increasing unemployment and reduced private investment. Consequently, the government had to increase its capital expenditure (CapEx) to stimulate growth, which could lead to higher fiscal deficits.
Economic Determination and Long-Term Benefits
Of note is the determination displayed by the government in addressing these challenges. If the incumbent government is re-elected, further investments will be required in the areas of education and healthcare. While the short-term benefits of such policies might not be immediately apparent, they promise significant long-term returns in the form of a more productive and healthier workforce.
In conclusion, the budget of 2021 presents a mixed picture. While it addresses some pressing issues, it also introduces changes that may have a dampening effect on certain sectors of the economy. The performance of the Modi government in the upcoming elections will be a crucial determinant of whether these short-term hiccups are outweighed by the long-term benefits of the budget.