Budget 2020 and its implications at a glance

BUDGET 2020 AND ITS IMPLICATIONS AT A GLANCE

“Don't tell me what you value, show me your budget, and I'll tell you what you value.”  ― Joe Biden

          The Finance Minister was faced with the unenviable task of immediate challenges of the slowdown in growth and investments along with frequent global event risks including the recent outbreak of the corona virus.  The longer term challenges of climate change, demographic shifts and technological disruptions were also staring her in the face.

          Amidst all this and varying comments, both good and bad and brickbats, the Finance Minister should be commended for designing and handing out a Budget proactive during stressed times.  She has managed to keep the capital expenditure steady amid receipts shortfall.  But, sadly her overall plan does not meet market expectations of sweeping reforms.

          Well !  There can never be one Budget that is welcome to all.  Some ayes and some neys are the hallmarks of any Budget.  Let’s now get down to seeing what Budget 2020 is actually about. 

          The Finance Minister’s job is a greatly coveted one.  But, no politician would have wanted to fill her shoes this Budget Day. 

          According to a quote from The Hindu : “The Indian economy has slowed to a 5% crawl.  The financial system is under considerable stress.  Assumptions about tax revenues have gone awry.  The clamour for government to do something to get the economy going is deafening but there are simply no quick fixes.”

          What exactly could the Finance Minster have done? She could have pushed growth along  through a higher-than-normal increase in government capital expenditure and ushered in reforms that would kick in quickly for long run pay-offs. It is a well rounded Budget.  But there is also an underlying fear that its performance may fall short of market expectations. 

          Amid persistent and loud criticisms about the economy being in a free fall mode and the danger that the nose diving GDP numbers and social unrest would eventually spark off unrest leading to destabilisation of strong regimes in other parts, the Government is steadfast about proceeding on the path vehemently attacked by all and sundry both locally and abroad.  It has also resisted the temptation to abandon the road of rectitude to buy peace with sections that are identified to be sullen and unhappy all the time.. 

          The revenue so collected due to initiatives drawn out in this Budget will develop infrastructure needs which will be in line with the Vision Statement of a “powerful nation” that Modi has successfully pushed since 2014. 

           The “aspiring” chunk who have been a big factor in BJP’s success, will certainly be strengthened by the concessions. They will be enthused by his latest move to sheer NRIs of their tax immunity and glamour. 

          True, the promises made in the last term have not yet borne fruit.  The schemes to create a network of cold chains and running of special trains and flights to transport perishables are still to see the light of the day.  However, there is a fervent hope that steps will be initiated to remedy the ‘raw deal’ meted out to farmers over the decades.

I was greatly impressed with the 16 point agenda the Government targeted under rural development.  The forecast about doubling farmers’ income by 2020, solar pumps for farmers, warehousing and cold storage to water sufficiency measures for over 100 water stressed districts are all impressive as Budget declarations.  But a lot depends on proficient execution.  This focus on the rural and farm sector would help facilitate smooth functioning in the sector with a rise in farm income.

          The Finance Minister proposed a personal income tax regime with reduced rates for those earning up to Rs.15 lakhs.  Tax payers have been given the choice to choose between the new and old regimes. But most exemptions used by salaried employees for leave travel allowance, house rent allowance, housing loan repayments, savings instruments such as PPF and LIC as also the standard deduction will cease to exist. 

          She opined that this could result in savings of Rs.78,000/- for someone earning Rs.15 lakhs and not availing any incentives in the existing regime. 

Given the slowdown of consumption, reduction of Individual Taxes for income brackets Rs.5-15 lakhs resulting in Rs.40,000 crore revenue loss will prove to be positive for consumption spends, provided it works. This will, in turn, spike the “buying spree” and raise up the spurt in demand.

          However, the hitch is that the new regime would only serve as attraction to non salaried tax payers or those who don’t avail any exemption as of now.  For those taxpayers who avail benefits, the difference in tax outgo is not substantial.  The lower tax rates that the tax payers enjoy will be negated by the absence of sizeable deductions for those who are already claiming them.  If the taxpayers felt they are disappointed, it is understandable. 

          In addition, the Finance Bill also initiated three major changes to prevent tax abuse by citizens who don’t pay taxes anywhere in the world.

           There are a number of policy announcements in the Budget which would boost private investments.  These include the abolition of Dividend Distribution Tax, the exemption on interest, dividends and capital gains for investment in infrastructure projects by sovereign wealth funds and the relaxation in the limits of foreign portfolio investment in corporate bonds from 9% to 15% (of the outstanding value of the bonds).  This will increase investments in the Indian bond market. 

The budget recognised that it would be difficult to kick-start growth without improvement in the business sentiment. 

The Finance Minister has been able to keep Budget deficit within reasonable limits largely on account of huge expectations from disinvestment and monetisation of assets.

It is probably unfair to expect miracles from the FM, given the complex challenges facing the economy.  Between keeping the fiscal deficit within reasonable limits, satisfying the clamour for lower rates of personal taxation and simultaneously providing a thrust to growth must have been clearly a Himalayan task.  Be that as it may, we would still have to conclude that even the most moderate of expectations have been belied.  What we are left with now is surplus capacity, depressed consumer sentiment, unaddressed unemployment heightened risk aversion and a very uncertain global environment.  This pushes us to think that the Budget was long on words and short on numbers.

          The removal of dividend distribution tax will enhance the rate of return on equity.  In the coming months, the government should take forward the measures announced in the Budget and ensure that they are implemented.  For example, the disinvestment target has been set at an ambitious level of Rs.2.1 lakh crores.  Investment in loss making public sector undertaking like Air India and Railways would be hard to come by. The government should ensure that it is realised unlike in the current financial year when only a small percentage of the target was raised.

          The expectations of Corporate India from this Budget were very high.  By and large, the supply side had been taken care of by many steps that were initiated post July 5 till before the Budget.  However, something more could have been put in place for immediate revival of demand.  The fiscal deficit of 3.5% though more than 3.3 of last year, could have been hiked up a little more to 3.8%.  This could have left the Government with a wee bit more to raise expenditure and thus revive or sustain demand. 

          Dr.Pawan Goenka, M.D., Mahindra & Mahindra Ltd. calls it a Budget that will positively spur mid-long term growth. 

          In the limited fiscal room that the government had, the FM has announced several measures and initiatives to address these challenges and built them around the themes of Aspirational India, Economic Development and Caring Society.  He strongly feels that the review of rules of origin norms under the FTAs and provisions against dumping are very welcome steps in the right direction.

          Caring Society, the third theme of the FM focused on Women & Child as its first pillar.  Gross enrolment of girls across all stages of schooling exceeds boys is clearly a worthwhile achievement.

          Governance was the second theme under Caring Society and decriminalization of Offences under Companies Act is laudable as it has all along been advocated to attract foreign investors. 

          Given that the macroeconmic fundamentals are sound, currency is stable, inflation manageable, commodity prices are low, could it have taken more risks to pull the county out of its growth quagmire? That question does remain unanswered.

          According to Shri Sunil Bharti Mittal, Chairman Bharti Enterprises “the biggest takeaway from the Budget for me was the call out from the FM that wealth creators will be respected”.

          A need has also been felt to regulate imports from FTA (Free Trade Agreement) countries as there is a view that several entities are taking undue advantage of the benefits provided by FTAs.  Unregulated imports under the existing FTAs appear to be causing distress to domestic producers.  The norms relating to rules of origin, value addition requirements etc. should be more effectively enforced in order to ensure that only those imports that fulfil FTA requirements are permitted.

          The Customs duty changes are oriented towards promoting and protecting domestic businesses and ensuring that they have a level playing field whilst they deal with global headwinds.

          On the other side of the coin, the former Union Finance Minister opined that the government had given up on reviving the economy or accelerating the growth rate. 

          CPI(M) General Secretary, Sitaram Yechury stated that the Budget failed to give a clear road map on how to pull the economy out of the slump and categorically gave it the thumbs down.  

          The gross tax revenue growth projection of 11.99% appears very optimistic especially because it has been built on the premise of an 11.54% rise in corporate tax collection.  Given the slowdown in profit growth and the lower corporate tax rate now, it is questionable and debatable if this projection can be met.  The compression in spending is a strong reflection of the extent of revenue shortfall this fiscal.       

          While there have been statements in the Budget on rationalising the GST, what the Budget has done with personal income tax is quizzical and inexplicable.  On this score, the feeling is a combination of appreciation and yet bewilderment.  As such, the long-term growth story of India is an organic consumption-led growth story and the FM has played out this assumption only.  However, that could have been possible without introducing multiple tax rates across income slabs.  Like the GST, this may deter compliance. 

          Despite these and many other lacunae, this Budget seems to be heading in the right direction and appears to have a broader long-term vision.  Such a holistic framework approach is indeed unprecedented and looks like marking a new era of out of the box development thinking !

          To conclude and to sum up, there is nothing spectacular about this Budget which seems to ride more on optimistic growth estimates.  Whether it flies or falls flat depends on how growth plays out in the economy in the next four quarters.

          Let’s hope for our own sakes and for the sake of Modi’s Government  that this Budget 2020 works and works well.