The Modi government’s first Budget after returning to power with an even bigger mandate is by and large incremental, does little to stoke private investment and consumption demand despite a slowing economy, but adheres to a prudent fiscal roadmap. Presenting her debut Budget for 2019-20, Finance Minister Nirmala Sitharaman has projected the economy to grow 8-8.5 per cent, assuming inflation to remain range-bound at 3.5-4 per cent during the year. The high growth assumptions do not, however, square up with the modest increase in tax revenues and a marginal growth in capital expenditure.
Instead of risking a fiscal stimulus to give a boost to growth that has slid to its 20-quarter low of 5.8 per cent in January-March 2019, Sitharaman has preferred the path of fiscal rectitude and announced a series of policy intents that fell short of market expectations. The Sensex gave the Budget a thumbs-down, dropping 394 points or almost 1 per cent to close at 39,513.
The Finance Minister’s big bold move, which may free up space for domestic private sector borrowing, aims at the sovereign raising funds in foreign currency in overseas markets to partly meet the government’s borrowing programme. This may also help companies raise domestic debt at lower interest rate. On the flip side though, it can potentially increase India’s vulnerability to external shocks.
Simultaneously, her push to attract foreign investment seems to be a good bet to give growth a fillip. From proposing to raise FDI caps in aviation, media and insurance, to allowing FPIs to increase their stake beyond the stipulated 24 per cent cap to go up to sectoral foreign investment limits, Sitharaman has promised to streamline KYC norms for FPIs and let them subscribe to listed debt issued by real estate investment trusts (ReITs) and infrastructure investment trusts (InvITs). Besides, she also said local sourcing norms for single-brand retail would be eased.
Among the few proposals aimed at a consumption push, the Budget proposed additional interest deduction on affordable housing home loans and relief on purchase of e-vehicles.
Foreign investors may be pleased, but for the super-rich at home, she has touched a raw nerve. It appears to be a big political signal — tax the rich, but goes against the grain of this government’s stated belief as spelled out by Sitharaman herself early in her speech. “We do not look down upon legitimate profit-earning,” she said.
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Government officials said that the 3 per cent and 7 per cent extra income-tax on those earning Rs 2-5 crore and over Rs 5 crore, respectively, will add just about Rs 12,000 crore to the tax kitty. She also proposed a 2 per cent TDS on cash withdrawals of over Rs 1 crore a year from a single bank account.
The government’s tax collection targets for the current year remain modest, just over 11 per cent when the economy is estimated to grow 8-8.5 per cent. This belies the assumption that the economy will grow at such a high rate, especially when both the RBI and the Economic Survey have forecast the GDP to grow just about marginally higher at 7 per cent compared with 6.8 per cent last year.
The Finance Minister hence has focused her attention on the non-tax front to shore up revenues. Marking a significant shift in its disinvestment policy, she said the government may decide to let its equity in non-financial PSUs fall below 51 per cent on a case-to-case basis. Further, in case of PSUs where the government wants to retain 51 per cent stake, it has decided to include the holding of state-owned institutions such as LIC, GIC and SBI — essentially allowing it to pare its shareholding. Sitharaman has set an ambitious target of raising Rs 1,05,000 crore through disinvestment this year, 31 per cent more than 2018-19. She has also budgeted for a record dividend payout — Rs 1,06,042 crore, or 43 per cent higher — from the Reserve Bank of India and other nationalised banks, to shore up revenues.
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But for off-Budget borrowings including food subsidy and around Rs 90,000 crore from the Small Savings Fund, the government would have found it difficult to meet the fiscal deficit target of 3.4 per cent of GDP. Economists doubt the ability of the government to meet the deficit target this year too. “There is a risk that India could miss its deficit target. if income from tax revenue underperforms projections, as it did last year. More generally, the headline deficit may be achieved but through reliance on one-off revenue such as disinvestments and transfers from the central bank, and off-Budget spending,” said Moody’s Investor Services.
For India Inc, the Finance Minister has allowed a lower 25 per cent corporation tax for companies with a turnover of up to Rs 400 crore. This was available only for companies with a lower Rs 250 crore turnover earlier. She also provided crutches to certain segments of the industry. She did not resist the protectionist tendencies that have enveloped the broader global trade environment. The Budget for 2019-20 continued with earlier rounds of tariff increases with a hike in basic customs duty on 30 items including 13 automobile parts, seven precious metals, and five electronics and electrical equipment. A 10 per cent duty on newsprint imports has also been announced.
The Budget also hiked special additional excise duty and the road and infrastructure cess by a rupee each per litre on both petrol and diesel which will result in higher fuel prices.
She also soothed the frayed nerves of start-ups on the so-called ‘angel tax’. Start-ups and their investors would no longer be subject to scrutiny in respect of valuations of share premiums by the tax man if they file declarations and provide information in their returns. The issue of establishing identity of the investor and source of his funds will be resolved by putting in place a mechanism of e-verification. “With this, funds raised by start-ups will not require any kind of scrutiny by the Income Tax department,” she said. Further, no enquiry or verification of cases would be done without the assessing officer obtaining approval of his supervisor.
On the other hand, she made it difficult for the corporate sector by asking Sebi to consider a proposal to hike public shareholding in listed firms from 25 per cent to 35 per cent. Estimates suggest that 1,174 companies will have to offload Rs 3.7 lakh crore worth shares to meet the new norm as and when it is announced.
Given the high NPAs of banks, the government continued with its programme of capital infusion. In 2019-20, it plans to infuse Rs 70,000 crore in public sector banks. To address liquidity concerns in the NBFC sector, the Budget also announced that for purchase of high-rated pooled assets of Rs 1 lakh crore belonging to financially sound NBFCs, the government would extend a partial credit guarantee for six months to public sector banks for first loss of up to 10 per cent.