Today’s budget was expected to set the tone for Modi government 2.0’ vision and long-term systematic growth plan to stabilize and take forward our already $2.7 trillion economy (which will grow to become a $3 trillion economy this year itself) and unravel opportunities of economic development to shape an all-inclusive ‘new India’. The re-appointment of NDA with a strong majority, gave it an opportune time to action the transformation agenda as set forth in the Interim Budget, without being influenced by any political angle.
Given the fact that the new FM, up to this time, was getting the knack of complexity of the daunting tasks and challenges to hand – slowing economy (at 5.8% in last quarter, weakest in last 5 years), dwindling new investments (gloomy statistics again – lowest in the last 14 years; totaling to $138 billion in the latest annual account), sluggish consumption demand, mounting unemployment (currently pegged at over 6%), agrarian/NBFC crisis, and a tough global environment which is negatively impacting the exports; a pragmatic approach to tackle the financial conundrum was expected. Many tactical and metamorphic changes weren’t expected, besides what was tabled back in the Interim Budget session – which set a narrative of insinuated continuance of the reforms agenda and rolled out many major sops and introduced a wide range of financial support packages & was focused on rural India: healthcare & housing, road, infrastructure, farming sector to address the agrarian crisis etc. It warranted equipoising proposals to revive the consumption part of the national economy (ephemerally), together with creating a favorable setting for interminable growth. Whilst there was less space to announce big giveaways, yet the government has seemingly managed to pull it off to some extent.
The center of focus of this budget is on infrastructure (railway, power – one nation one grid, housing, sanitation/toilets, etc.), with continued focus on the micro industries and farmers, increasing the spend on education (currently at 2.7% of GDP vis-à-vis 6% by 2022 as recommended by government think-tank, Niti Aayog) to make India a knowledge economy through NEP/NRF/Study in India scheme etc., strategic disinvestment of PSUs (in the non-financial space as well), capital infusion in the public sector banks (recapitalization of INR 70,000 Crores), incentivizing banks to acquire high-rated pooled assets of sound NBFCs (which would offer the much needed liquidity to them), affordable and accessible public healthcare policy – all in the limited fiscal space, and without disturbing the arithmetical balance.
The FM has announced a number of considerable structural reforms to further the country’s growth prospects, in an attempt to make policy paralysis, red tape and license raj regimes a history – and indicated that on the back of these reforms, sanctity and prudence will generated in the overall economy. These proposals, along with, the government’s proposition to streamline multiple labour laws into a set of four labour codes may enable India Inc. to capitalize on the current global trade scenario. The impetus and sustained thrust provided to investments in urban India, youth, women, sports, start-up India program and tourism, opening of FDI in media/aviation, relaxation of restrictive caps on FDI for proliferation of FDI inflows social stock exchange for listing social enterprises, merger of FPI and NRI portfolio, is all indeed heartening to know. These measures along with focus on AI, IoT, big data, robotics, digitization and automation will especially help the start-ups, SMEs and online businesses become a bigger force to reckon. Some of the other measures announced will give a further thrust to digitalization of services, viz. re investment in infrastructure, accessibility of capital, incentivizing digital payments together with forward-looking regulatory policies for fintech to experiment and succeed.
Specifically, agriculture sector warranted structural reforms besides the usual sops viz. loan waiver, cash transfers etc. that would propel the sector into the much-merited fortune. Some of the key actions expected were: farm to table (getting rid of intermediaries), redistribution or export of surplus (instead of produce getting wasted in storage facilities), irrigation facilities, water management etc., to sustain the output and well-being of the farmers. There are some announcements on this. A detailed perusal will throw more light on them and implement-ability of the same.
Taking a cue from the current trend in GDP and tax/non-tax revenue growth, adhering to fiscal deficit projected at 3.4% of GDP in the Interim Budget, without reducing expenditure, would had been unreal – and it would have a direct impact on the currency as well as the government bond yields. It was expected of the government to stick to its fiscal discipline of keeping the deficit <3.4% – to bring a lot of relief to the market which was markedly apprehensive about the colossal fiscal slippage. And so, the silence on fiscal deficit target was a tad surprising. I understand that it is kept at 3.3% – which is unsurprisingly and quite fair.
On tax, moderate tax collection figures in the recent fiscal had reduced the leeway for across-the-board tax cuts. Largely, on this aspect, after a big built-up, it’s a mix of sweet-&-spicy, old-school and damp. But directionally, this Budget has ushered in a fiscally predictable tax regime in many areas. Perhaps, we may expect more reforms in the new Direct Taxes Code – expected during this year.
The corporate tax rate is currently 25%, but only applicable to companies with annual turnover up to INR 250 Crores. This reduced tax rate of 25% is now being extended to all companies in India, having turnover up to INR 400 Crores. Only 0.7% companies will therefore remain outside of this 25% rate (why?). This will increase net profit available for dividends and also lead to higher tax buoyancy. Also, in view of the ongoing US China trade wars, this step should make some Indian companies marginally competitive compared to other Asian economies. A 5-year road map on corporate tax rate was expected, but missing. Tax announcements on start-ups was long overdue. Resolving the angle tax issue would further provide much needed impetus to a larger number of start-ups in the country and would enable them to spend more time on growing their businesses, rather than on tax compliances and scrutiny. STT has been high for a long time and the investors were waiting for this to be brought down. Lowering it, to be restricted to the difference between settlement and strike price of options, will be positive for the domestic stock markets. Buyback tax (DDT) introduced for listed companies will plug the leakages. I was hoping to see some concrete measures the FM would announce to resolve the high-pitched tax disputes in the country. That’s missing. I was also expecting to see proposals to extend the sunset clause on SEZ tax holiday, boost the tax base and introduce bold reforms to do away with tax evasion. I don’t think there is much on these aspects.
On personal tax frontage, most Indian taxpayers (esp. the 65 million individuals filing their tax returns) had high expectation about tax rebate and standard deductions. Unlike economists/finance gurus who judge any budget presentation on a very complex set of parameters, the salaried middle-class taxpayers typically look at the relief in taxation (that too, unfortunately, only direct) – and the impact it has on his/her cash in hand. But this time around, even the economists were looking forward to steps in the budget that would leave more disposable income in the hands of common taxpayers – as higher disposable income would boost the consumption again, demand and investment story. While a few changes have been proposed on the personal tax front, there are no big bang changes. No change in income tax rate or slabs for the individuals. The move to not introduce inheritance tax or increase in LTCG, at this point in time, is a good decision. Surcharge has been levied on HNIs with taxable income of INR 2 to 5 Crores & INR 5 Crores and above. The effective tax rate for these categories will increase by ~3% & 7%, respectively – which is quite steep and seemingly a trade-off for non-introduction of inheritance tax. The government has taken a target for homes for all by 2022 and I expected further reforms for the affordable housing segments – additional income tax deductions of INR 1.5 lacs proposed on loans for affordable houses up to INR 45 lacs is a welcome move. It was believed in some quarters that this time individuals whose income and taxes details are already to hand with the exchequer and are required to filed simple returns, would be exempted to do so – thereby, reducing the cost of managing/processing large number of ITRs. That didn’t happen. And although the FM has proposed to provide pre-filled tax returns, there is a likelihood of this leading to administrative hassles for taxpayers to reconcile any differences. TDS on cash withdrawal over INR 1 Crore is a great initiative to curb black money. Series of measures proposed to leverage technology and make compliance easier (including faceless e-assessment) for taxpayer, was expected, and will go long way in ease of compliance and administration.
Some reclassification and re-ordering of GST and Customs categories for industries (including consumer-facing industries) has happened. This would have an impact on demand – on the back of price changes. Additional excise duty of Re 1 on petrol and diesel (permanent?) was unexpected. Measures being worked out to ease GST filing returns and tax compliance, should help.
But overall, it is a balanced, development oriented, forward looking and inclusive budget that has laid out and set a clear and tangible roadmap for a progressive future. It is pro-rural/gramin, pro-growth (a more equitable growth) & oriented at sustainable growth and economic development – with a large section of population being the primary beneficiary. Given the fiscal and other constraints, it has done whatever a budget can do to foster savings, investment and growth.
As always, a more detailed view of the fine prints is critical to appreciate these announcements in entirety.