By TV Mohandas Pai & Yash Baid
Union Budget 2019: The mandate for the first budget under Modi 2.0 was given to Nirmala Sitharaman under stressed growth conditions. The Budget’s emphasis was rightly on laying down a strong vision for the next five years as opposed to announcing large outlays. This is a welcome move, addressing the need for strengthening the economy, and improving citizens’ lives. The FM further lowered the fiscal deficit target for FY20 to 3.3% of GDP from 3.4%.
The focus of the government since the last term has been to provide the bare necessities to every Indian citizen and it is well on its way to success. Substantial expenditure on social infrastructure is continued in this budget. The most far reaching impact of these reforms will come in the boost given to higher education. The proposed National Education Policy will help groom and retain India’s top talent. There has not been enough quality research output from our universities. The creation of the National Research Foundation to foster research is, thus, timely. Setting up the Higher Education Commission to bring in greater autonomy to institutes will create better academic outcomes.
Large-scale infrastructure development will be the next frontier for this government, catalysing and supporting the growth from other sectors. Logistics in India accounts for 14.4% of GDP—twice as much as those of western economies. There is tremendous potential for bringing in efficiencies here. The government announced its intention to invest Rs 100 lakh crore in infrastructure over the next five years. Projects from the current budget to restructure the National Highway Programme, upgrading the Railway and Inland Waterway infrastructure, and making power accessible across states at consistent costs will lend more efficiency in the logistical network post the GST reforms that eased cross-state goods movement.
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Streamlining the 44 existing labour laws and structuring them into four labour codes will standardise compliance processes for businesses. Easing the tedious bureaucracy around registration and returns filing will help bring down business costs and also invite foreign investment in labour-intensive industries. The formalisation of labour will help bring in wage parity and reduce labour disputes and harassment.
Critical mandates were taken up by the FM to propel some upcoming sectors. Investment-linked income tax deduction will help attract global companies to set up mega-manufacturing plants in sunrise and advanced technology areas like semiconductor fabrication (FAB), solar photo voltaic cells, lithium storage batteries, solar electric charging infrastructure, computer servers, laptops, etc. In a dedicated move to help India’s growth complement the protection of the environment, the government has given a big boost to the development of India as a manufacturing hub for Electric Mobility and its adoption within the country. Phase-II of the FAME scheme will make an outlay of Rs 10,000 crore to encourage faster adoption of electric vehicles. From income tax deductions to the tune of Rs 1.5 lakh on EV loans to reduction of GST and custom duties, the sector as a whole has been given a very healthy push.
In the most important announcement from the current Budget, the FM announced the initiative to increase sovereign borrowings in external currencies. This will ease pressure on domestic savings and interest rates and bring in much needed liquidity to the market, providing good support to bolster consumption. To grow at a rate of 8-9%, the country needs more inflow of overseas capital. Initiatives to make the FDI program more lucrative for investors were much needed, especially in the sectors targeted—aviation, media, and insurance. The disinvestment target of Rs 1.05 lakh crore will be achieved on the back of the healthy growth in popularity of ETFs.
Corporate tax rate of 25% was widened to include companies with annual turnover up to Rs 400 crore, covering 99.3% of the companies. What the government does not account for, however, is that the remaining 0.7% of companies are the ones largely competing against international companies in markets where corporate tax rates have been lowered in the past couple of years. These are the companies that are grooming the best of India’s formal sector talent and, hence, must be supported in their growth. At the same time, the benefits to MSMEs in this budget are laudable and helps sustain the entrepreneurial zeal of Indians.
Easing credit access to businesses post the NBFC crisis last year while strengthening the banking infrastructure was the absolute need of the hour. The FM has taken good steps in this direction.
To help financially sound NBFCs raise capital, the government allocated Rs 1,00,000 crore to make a partial credit guarantee of six months for PSBs to purchase high-rated pooled assets for first loss of up to 10%. Further, the requirement of Debenture Redemption Reserve for public issues of debt by NBFCs will also be removed. Building a deeper corporate bond market to increase access to low cost capital will help drive investment-led growth. PSU banks, too, have been given a strong capital boost of Rs 70,000 crore.
The NDA government continued its fight against the black economy, incentivising digital payments in business transactions by levying TDS of 2% on withdrawals over Rs 1 crore from a single bank account. The interchangeability between Aadhar and PAN cards for filing tax returns will also help. Back in 2014, Arun Jaitley had made a commitment to rein in tax evasion.
Since then, the government has only increased the tax burden on honest taxpayers and tax terrorism has not seen any substantial reduction. People who have diligently been following the law and declaring their true income are penalised with a higher tax rate every year. In 2016, the FM increased surcharge by 3% on individuals with income over Rs 1 crore. In 2017, the surcharge became 10% for individuals with income between Rs 50 lakh and Rs 1 crore. This year again, individual with incomes over Rs 2 & Rs 5 crore will be charged a higher rate of tax, with surcharges of 10% & 15% respectively. Must there be such a premium on honesty? No effective steps for reducing tax terrorism, perverse assessments, or tax disputes have been announced.
The FM removed the angel tax harassment from AIF Category I & II investors, which is a much-anticipated relief. However, to encourage investors to invest in high-risk, low-liquidity startups, capital gains must be brought down from 20% to 10%. If not incentivised, these investors will flock back to the less risky public markets. The startup ecosystem must be encouraged in order to grow and create better-paying long-term jobs for the country and incentivise Indian investors. Today, India is well on its way to becoming a digital colony as most of our largest digital startups are substantially owned by overseas investors; the government must remedy this on a priority basis. The lack of clarity on the creation and disbursement of the Rs 20,000 crore Startup Seed Fund has been disappointing.
ESOP taxation, which currently places undue burden upon employees by taxing them on exercise based on the price paid by investors, has not seen any change either. Finally, the new budgetary provisions for the GIFT City will attract global companies to make long-term investments and help India make a mark as a global financial hub.
Considering the headwinds in the global economy and India’s growth opportunity, the reforms announced in this budget will hopefully be transformative and play a crucial role in setting a stable platform for the next five years.
(Pai is Chairman, Aarin Capital & Baid is Head of research, 3one4 Capital)