What stands to be India’s report card five years from now, the union government’s budget for the year 2019 presented by finance minister Nirmala Sitharaman at the beginning of the month is one that will serve as a checkpoint in the country’s economic trajectory. This budget is of particular importance not only because it’s the maiden budget of both the Modi government 2.0 and Sitharaman but also because it forms the blueprint of the aspirational India it aims to achieve.
A keenly awaited budget, it serves as a curtain-raiser to the government’s list of priorities, fiscal policies, and foreign investment decisions. Borrowing from the past and giving a peek into the current vision of the Modi government 2.0, it unravels as a mixed bag of policies and measures that will be the wheels in motion towards launching the $3 trillion economy into becoming a $5 trillion economy by 2024.
While Prime Minister Narendra Modi has gone on to reiterate that it is in fact time for India to move from being a developing nation to a superpower and that this is achievable with the govt’s vision and policies on raising per capita income, but analysts feel that achieving a $5 trillion economy is a tall claim. Going by the Economic Survey 2018-19, it is clearly stated that “to achieve the objective of becoming a $5 trillion economy by 2024 would require a sustained GDP growth of 8 percent.” This is problematic on many levels.
Firstly, because the projected 8 percent growth that would be required under it is higher than the current 7% growth forecast for the current fiscal year and secondly because at the core of being able to achieve this is an investment – private and international, which will boost the cycle of job opportunities and generate income.
Despite appearing to be solidly backing India’s economy, not everybody was cheering after Sitharaman ended her nearly 10,500 words speech on 5 July. This was also reflected through a stock market slump of almost 800 points after the budget presentation. In order to fully anticipate the journey of the Indian economy with the budget for a steering wheel, let us peep into the mixed bag of its promises to businesses, corporates, and public.
In this budget, the govt revised the fiscal deficit for the financial year 2019-20 to be 3.3%, lower than the 3.4% estimated earlier in the interim budget presented in February. This signals the govt’s commitment to financial consolidation. A lower fiscal deficit also implies that revenues are set to increase over expenditure. To achieve this goal, the govt is bound to rely on disinvestment income, and higher taxes on the rich, and increased excise duties on petrol, diesel, precious metals and tobacco products. While this looks achievable on paper, tax analysts are wary of the target being missed if tax revenue falls short of the target or underperforms.
Taking a cue from model developed nations for propelling India towards becoming an economic superpower, the govt under the budget bolstered infrastructure by proposing to spend almost ` 100 lakh crore towards development of a transportation network and allied services in the next 5 years. Targeting growth in India’s connectivity, the budget maintained focus on expanding the government’s flagship projects such as Bharatmala, Sagarmala, Jal Marg Vikas project, national highway grid, gas grids, water grids, iways, and regional airports, railway network, housing, power grids, etc.
The govt aims to create a network of highways grid of desirable connectivity by restructuring the national highways program. In order to decongest roads and railways, the govt proposed greater use of rivers for cargo transportation. It also mentioned the investment of ` 80,250 crore on upgrading 125,000 km of rural roads in the next five years under the third phase of the Pradhan Mantri Gram Sadak Yojana.
To be able to achieve the goal for larger infrastructure spending and achieve better development of the railways, the govt placed a larger emphasis on unleashing of PPPs. Critics are, however, skeptical on relying on the PPP route as it has not served well in the past.
Strengthening its resolve towards dealing with bad loans in a transparent manner and recovering from stressed accounts, the government went a step further with its budget promise of infusing ` 70,000 crore capital into public sector banks in the current financial year. This will allow banks to be able to lend more due to greater liquidity.
To substantiate the govt’s resolve, Sitharaman pointed out that banks recovered as much as Rs 4 trillion in the last four years under Insolvency and Bankruptcy Code and that six banks have come out prompt corrective action framework that had restricted banks to lend further. As of late June 2019, five banks were still under this framework that imposed certain restrictions on lending. The move for budgetary support through the infusion of capital has been lauded by financial experts who see it as a healthy step as it will also ensure restoration of financial confidence; a key indicator of the health of a country’s financial system.
In line with easing the credit capacity of the banking sector, the govt aims to catalyze stressed NBFCs to improve their access to funding by providing a limited backstop for purchases of their assets. To achieve this, it will provide a one-time six-month partial guarantee of ` 1 lakh crore to state-run banks for purchasing consolidated high-rated pooled assets of financially-sound NBFCs. This will cover their first loss of up to 10 percent and help beleaguered NBFCs sell their highly-rated retail pool of assets and address their immediate liquidity needs. This essentially means that fundamentally sound NBFCs will continue to get funding from banks and mutual funds.
Explaining how this well thought out move will infuse liquidity to the NBFC sector, Amit Goenka, MD & CEO at Nisus Finance said, “This will accelerate the monetization of assets by NBFCs since banks will be able to now quickly acquire pooled loan assets without extraordinary caution on asset quality. Many of these pooled assets include developer loans and home mortgages which will provide a huge liquidity fillip to NBFCs. It will also enable such loan assets to remain standard and current with PSUs providing liquidity to maintain this real estate backed loan assets”. This move will certainly strengthen the economy by bringing in external cash inflow and therefore enable liquidity. What may be seen as a drawback is the lack of understanding of the norms and regulations by these investors for which a robust and watertight framework may be necessary.
Among others measures, Sitharaman, allowed NBFCs to raise funds in public issues, and the requirement of creating a debenture redemption reserve, which is currently applicable for only public issues as private placements are exempt, was done away with. The withdrawal of debenture redemption reserve requirements will also allow higher allocation of capital and lower cost of capital by NBFCs to real estate sector since a significant part of the financing for real estate occurs through nonconvertible debentures.
Through its proposal to allow foreign portfolio investors to invest in debt securities offered by NBFCs, the govt aims to help the liquidity crisis that the sector has been experiencing. Relaxation in the FPI guidelines is also expected to go a long way in supporting credit flow to smaller/mid-sized NBFCs which have not been able to raise funds.
The govt has also proposed to bring NBFCs and its auditors under the regulatory gaze of the RBI under the budget while giving the RBI sweeping powers over housing finance companies too including the power to change the management at these firms. Also, it has been proposed that the RBI can amalgamate one NBFC with another, reconstruct an NBFC, or split an NBFC into various units.
It further relieved the National Housing Bank (NHB) of its regulatory powers over HFCs and handed them back to the RBI. This comes across as a good move, considering that banks, NBFCs, and HFCs will now come under a single regulator. “Also, since the HFCs are proposed to be brought under RBI, a unified regulation will help capitalization, governance and credit disbursements are uniform and competitive rates”, Goenka explained.
The budget through a slew of measures has paved a vision for robust revival and growth of the real estate sector. It has created directional incentives in capitalization and development of the real estate, especially in the affordable housing space. Among these is raising the tax deduction limit on home loans is reflective of the govt’s vision to open up the real estate sector to the middle and lower middle class. It has proposed interest deduction up to ` 3.5 lakh for affordable housing priced below ` 45 lakh as against ` 2 lakh earlier for loans availed until March 31, 2020. “This will translate into a benefit of around ` 7 lakh to the middle-class home-buyers over their loan period of 15 years”, Sitharaman said while presenting the budget.
The finance minister also proposed that 1.95 crore houses will be constructed under Pradhan Mantri Awas Yojana (PMAY) from FY20-22. These will be supplemented by amenities such as toilets, electrification and LPG connections.
In its continued effort to achieve the ‘Housing for All’ target by 2022, the government also proposed to introduce a new model tenancy law to boost the fragmented rental housing market. The rationale behind this is the lack of clarity in the archaic rules and regulations of the tenancy. This is expected to cater to the growing demand for rentals by the working class, startups, and other co-living spaces.
A good budget is an indicator of not only by its ability to handle the financial health of the country but also its capability of making the common man’s life easier. There was more than one instance when Sitharaman in her budget presentation speech spoke about the govt’s aim of catering to “ease of life” component and this is reflected through various incentives under the budget.
The NDA-led BJP govt which has always stood for a digital economy continued in its resolve by setting a tone for incentivizing digital payments under the budget. In her maiden budget, Sitharaman announced a slew of measures including a penalty for use of cash beyond a certain level by levying 2% tax deducted at source on cash withdrawals exceeding Rs 1 crore in a year from a bank account. This could help push large chunks of cash payments by businesses towards a digital mode. The measures also encompassed low-cost digital modes of payment such as BHIM UPI, UPI-QR Code, Aadhaar Pay, NEFT and RTGS which can additionally be used to promote cashless economy by providing that businesses with an annual turnover of over Rs 50 crore could offer these payments options and charges or merchant discount rate would be waived off.
Since these incentives would help in the creation of a robust payments infrastructure in the country, they have been welcomed by the digital payments industry. Industry leaders, however, have emphasized meeting the requirement for greater internet penetration for the complete success of these incentives.
The union budget provided for Aadhaar-PAN interchangeability for filing tax which will go a long way in simplifying things for the common man. From now on, individuals who do not have PAN card will be allowed to file income tax returns by simply quoting their Aadhaar number. This gives the taxpayer the option to furnish Aadhaar under the IT Act wherever PAN is required. All this while the PAN-Aadhaar linking date remains unchanged, i.e. 30 September 2019.
This move not only provides ease of living through the ease of tax compliance but is also indicative of the govt’s intention to use Aadhaar as a sole tracker for all financial transactions. What will be interesting in this scenario will be to see how high-value transactions where PAN is the requirement are treated. It is also expected that the tax base will increase as a result of this.
With a host of fiscal incentives and a favorable regulatory environment for electric vehicles, the government has shown its resolve to be a leader of change for a cleaner tomorrow. Among these are income tax rebates of up to Rs1.5 lakh to customers on interest paid on loans to buy electric vehicles, with a total exemption benefit of Rs 2.5 lakh over the entire loan period. Taking it a step further, the govt also proposed customs duty exemption on lithium-ion cells, a move that will help lower the cost of lithium-ion batteries in India.
What stands out among the type of incentives is that most of these are along the lines taken up by China and Europe that are among leaders in the global EV ecosystem. Such steps will provide a positive framework for opening up the EV industry to customers while being able to deliver on the promise of a greener future.
While the govt aims at transforming the EV industry into a global manufacturing hub in a timebound manner (by 2025), there are still few gaps to be plugged to make the EV industry a success. According to Chaudhary the GST on components is still high because of which the cost of manufacturing is still at 18 or 28% GST. But over time, he believes, that will also be taken care of.
While the focus of the govt’s budget lay towards achieving better fiscal results, it was sufficiently inclusive of measures to strengthen the tenets of entrepreneurship. In a major boost to thousands of startups in India, the budget included a host of incentives to celebrate the entrepreneurial spirit of its people, extending to women in rural parts of the country.
To begin, the govt is slated to launch a new TV program on Doordarshan exclusively for startups which will serve as a platform to match venture capitalists with emerging start-ups. Apart from this, around 80 livelihood business incubators and 20 tech business incubators will help to create 75,000 skilled entrepreneurs in agricultural industry sectors. It also addressed the issue of angel tax by holding that startups and investors filing necessary declarations would no longer be constrained to any kind of scrutiny with respect to the valuation of the share premium. Additionally, several measures to streamline labour laws, education, and rentals on housing will also have a direct impact on startups in the country.
As part of the NDA govt’s scheme of bringing micro, small and medium enterprises (MSMEs) under the formal economy’s fold, a payment platform for the MSMEs will be set up under the budget proposal. In yet a major impetus for this sector, two percent interest subvention for MSMEs under the GST on fresh or incremental loans was also announced. This comes in the backdrop of the recognition of the MSME sector being a big driver of India’s manufacturing sector and playing an essential role in the creation of more formal jobs.
Aiming to design a road map where women were equal participants in the drivers of change, the govt settled for gender budgeting by offering sops focused on women. Driving women entrepreneurship through various schemes such as MUDRA, Stand up India and the SHG movement, the budget proposed to expand the women’s SHG movement to all districts. Every woman SHG member having a verified Jan Dhan account would now get an overdraft facility of Rs 5,000 and measures also provided for a Rs 1,00,000 loan for women under the MUDRA scheme. This has been coupled with several other measures for the MSME sector, the benefits of which will trickle down to the creation of formal jobs for women.
By providing for measures to strengthen the tenets of the rural economy, the govt showed what an inclusive budget means for a country like India where rural development is imperative for the growth of the economy. Through various schemes, for instance, the second phase of Pradhan Mantri Awas Yojana-Gramin targets delivering 1.95 crore houses to beneficiaries. The beneficiaries will be provided with amenities like toilets, electricity and LPG connections.
The decision to set up 10,000 farmer producer organizations, leveraging the benefits of e-NAM for getting the fair and remunerative price, and having zero-based budgeting for agriculture-based activity have also been positively received by the sector. The impetus to rural housing and development of rural roads to upgrade 1,25,000 km of road length at an estimated cost of Rs 80,250 crore is expected to boost universal connectivity.
At present, bringing foreign investment in the country is not an easy task and is stifled by foreign investment rules, political stability, and an inefficient judiciary. In order to attract global investment and make India a more FDI friendly destination, the govt has said that it will consider further opening up foreign investment in aviation, media, AVGC, single-brand retail, tourism, and insurance. A 100% FDI for insurance intermediaries is expected. The impact of these measures will be positive for each sector. For instance, increasing FDI limits in aviation from the current 49% could help troubled and cash strapped airlines such as Air India and Jet Airways find buyers.
The media industry also welcomed the proposal for increased FDI. “The proposal to ease FDI norms for the media industry has come at an opportune time. It will allow us to invest in digital assets, upgrade technology and human skill enhancement. From a news broadcaster’s perspective, it is now possible to envision a scenario when an Indian player can go international like the CNN, the BBC, and the CGTN”, said Avinash Pandey, CEO, ABP News Network.
The budget is clear on the fact that the super-rich will now have to pay more towards tax collection. Going forward, those earning between Rs 2 crore and Rs 5 crore will have to pay 25% surcharge on the tax amount, whereas those earning over₹5 crore will have to pay 37% as a surcharge on the tax amount. Until now they were paying 15% as a surcharge. The extra surcharge on the tax on individuals with very high income was to be seen as a small contribution to nation-building, Sitharaman said.
The numbers may have increased but the Indian wealthy will still end up paying fewer taxes compared to countries like the UK, Japan, Canada or France. The increase in surcharge has drawn flak from various quarters including corporate and tax experts who believe that it will have limited impact. One flip side could be that the capital that could have been put for productive purposes would be choked as high taxes lead to greater tax evasion. Another theory is of the higher surcharge pushing high net worth individuals on taking up permanent resident ship and citizenship by investing in other developed nations that often use such tactics to entice high net, worth individuals.
At a time when India’s security costs are likely to increase, the union budget turned out to be a dampener as there was no increase from the previously allocated budget amount. This comes as a surprise, especially from a govt that places national security issues at the helm of issues.
In order to spur growth by boosting revenue, excise duty and cess on petrol and diesel were hiked by ` 2 per ltr each and import duty on dozens of items ranging from gold to automobile parts and tobacco products was increased under the budget.
This boost on the demand side was clearly needed considering that many homebuyers have turned fence-sitters, awaiting such tax sops or correction in prices. On the supply side, over 81 lakh houses have been sanctioned, out of which construction has been completed for 26 lakh houses under the PMAY Urban scheme and this too, shall continue to boost the market for affordable homes.
These incentives are steps being taken in the right direction and show the intent of the govt in promoting electric mobility. If you look at EV as an industry, it is at a nascent stage right now and contributes only 1% of the total two-wheeler sales right now. Its contribution to the overall GDP is negligible as of now. If the industry actually follows Niti Aayog’s plan of switching to electric vehicles by 2025, that means that the size of this industry will be anywhere between $ 20-30 billion. If you have to build an industry of that size from scratch, measures like these can push the industry to that level. Also, if these measures are not taken then the consumer propensity to buy those vehicles remains low. As technology has improved so has the recharge cycle and the consumer experience is bound to improve over a period of time with steps like these.
The Indian start-up community will soon be witnessing another wave of start-up boom from rural geographies as well. The govt will be launching a dedicated start-up program, 80 livelihood business incubators and 20 tech business incubators for rural artisans. This is being done while promoting research and development around avant-garde technologies including artificial intelligence and big data. Perhaps, these measures were the need of the hour for our start-up community and will create a conducive environment for futuristic and globally scalable businesses in India.
The budget recognizes that MSME entrepreneurs today are getting savvier and a dedicated online payment platform for the MSMEs will be a big boost to small businesses as it will reduce their credit cycle. Being able to digitize their data will be a useful tool for their future funding requirements because this group often gets rejected at the first step of a loan application. Through the new e-marketplace platform, MSMEs can increase their economic potential and sales reach beyond their local regions with new e-channels that will allow them to sell their products easily.
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