Facing one of the steepest slides in growth and just into the first year of its second term, the NDA-2 government decided to play safe when it came to imparting a positive impulse to the economy.
Union Budget 2020-21, presented by Finance Minister Nirmala Sitharaman Saturday, carried a visible imprint of the Prime Minister’s fiscal conservatism, inasmuch as it kept a tight leash on expenditure, tacitly admitting there was little headroom for higher spending.
In doing so, however, the Budget reconciled to a new normal of sub-par growth, almost conceding it was unable to do the heavy lifting, particularly at a time when private investment has failed to revive, consumption has collapsed, and exports have shown no signs of a pick-up.
For 2020-21, it projected a nominal growth rate of 10 per cent, translating into a real growth of 5.5-6 per cent, given that average inflation for the year may hover around 4-4.5 per cent.
Despite a sharp cut in expenditure, necessitated more due to falling receipts, the Centre’s fiscal deficit was 0.5 percentage points higher than budgeted for 2019-20 at 3.8 per cent of the GDP. For the next year too, the Budget has curtailed spending across sectors including the flagship schemes, hoping to rein in the deficit at 3.3 per cent of GDP. This, however, excludes a bevy of off-Budget borrowing items.
Sitharaman’s only significant intervention related to the overhaul of the personal income tax structure. While she proposed doing away with 70 of the 100 exemptions, she added two more slabs of 15 per cent and 25 per cent. She claimed the effort was aimed at simplifying the tax regime and would give more money in the hands of the middle class.
Tax experts, however, are not sure. Many argued there was no substantial benefit across different levels of income for individual taxpayers and made the new regime more unwieldy and complicated.
While the Finance Minister said there would be a revenue loss of Rs 40,000 crore if all taxpayers shifted to the new regime, the Budget has estimated personal income tax collections to grow 14 per cent.
Finance ministry officials said the restructuring of rates was the first move, and may over a period of time, replace the existing regime where exemptions on housing loans, provident funds, life and health insurance, leave travel concessions, house rent allowance, and standard deduction are allowed.
The Budget sent the Bombay Stock Exchange Sensitive Index dropping almost 2.5 per cent or 988 points, the biggest fall ever on Budget day since Pranab Mukherjee presented the first Budget of UPA-2 in July 2009.
While low growth estimates for 2020-21 forced the Finance Minister’s hands in rasing tax receipts, she turned to disinvestments, including a public listing of state-owned insurance behemoth LIC.
LIC alone is estimated to rake in Rs 90,000 crore in the total disinvestment receipts of Rs 2,10,000 crore, the highest-ever target set in any Budget. Raising such huge sums from the market carries a substantial execution risk. The chequered history in achieving stake sale targets is a further dampener for the markets.
Similarly, Sitharaman has estimated a one-time windfall from telecom sector, and hoped to realise Rs 1,33,027 crore next year, a 126 per cent increase from 2019-20.
Explained | Decoding the Budget
Her estimates on tax receipts for the next year also raise questions even if they were way off the mark in 2019-20. The estimates for corporate tax collection growth at 11.5 per cent look ambitious, more so when it had dipped by 8 per cent in 2019-20. Corporate tax accounts for roughly 18 per cent of all receipts.
The unprecedented political mandate to the Narendra Modi Government in 2019 Lok Sabha elections did not reflect in the risk-averse Budget that Sitharaman presented. She could have done much more for the non-banking financial sector (NBFCs) that has choked due to lack of funds, lurching from one crisis to the other.
The signs were all too visible for the last 15 months but the government stayed away from proactively intervening to stem the bleeding. Surprisingly, even for the banking sector, the government did not provision any recapitalisation through bonds, which would have hardly cost the exchequer. The lack of a coherent strategy to resolve this logjam in the financial sector could only prolong the slowdown in both investment and consumption.
In line with protectionist tendencies across major world economies and giving in to domestic industry demands, Sitharaman raised import duty on more than 20 products ranging from toys, footwear and furniture to electrical appliances. The highest increase in duty is on walnuts (30 per cent to 100 per cent), surprising given that the government is setting the stage for a trade deal with the United States.
The Finance Minister also accepted India Inc’s demand to reverse the taxability of dividends back to the recipients. Now, dividends will be taxed in the hands of recipients, a move that will cost the exchequer Rs 25,000 crore. Companies paid a 10 per cent tax on dividends, whereas individuals would pay as much as 42 per cent at the highest income tax bracket.
Some measures that Sitharaman announced to attract equity flows include tax exemptions on foreign sovereign wealth fund investments in infrastructure, a hike in FPI limits for corporate bonds to 15 per cent of outstanding (from 9 per cent) and the opening of certain specified categories of government securities to non-resident investors. This may lead to an inclusion in foreign bond indices.
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