No big-bang reform Budget

Nirmala Sitharaman presented her first Budget yesterday amid concerns over a slowing economy, rural distress and high unemployment. She ditched the traditional briefcase for the bahikhata, which created a flutter. She had the daunting task of providing impetus to the economy while maintaining tight fiscal discipline. 

The Budget proposes to boost revenues through surcharge on rich, manage the liquidity crunch of the banking/non-banking financial companies (NBFC) sector through capital infusion and continue with the Modi 1.0 thrust on infrastructure. And all this while maintaining a fiscal deficit of 3.3%, 0.1% lower than the Interim Budget.

Piyush Goyal stepping in for Arun Jaitley had presented the interim budget in February, 2019. 

Much water has flowed under the bridge since then. Q4 FY 2018-19 GDP growth fell to 5.8%, the lowest in five years. Government’s revenue collections also fell sharply and central GST collections came down to Rs. 4.58 trillion versus Rs 6.04 trillion originally envisaged (-24%). 

Income tax collections were also lower at Rs 4.67 trillion versus Rs 5.29 trillion (-12%). This disturbed the entire Budget math, as the government had launched an ambitious PM Kisan Yojana worth Rs 72,000 crore and hiked the exemption limit of income from Rs 2.5 lakh to Rs 5 lakh per annum, leaving 3 crore tax payers out of the tax net.

There was pressure to cut down on expenditure, but any move to reduce budgetary allocations on social welfare projects/schemes like NREGA, Food Security Bill, Fertiliser /Petroleum subsidies and PM Kisan Yojana, would have backfired politically. 

This would have also impacted consumption, the key lever of the Indian economy, which had decelerated in the last two quarters. This meant government had to find new avenues for revenue collection. 

Following the principle of taxing the super-rich to pay for the poor, the government has introduced surcharge that will hike the effective tax rate by 3% for individuals who have an income between Rs 2 to 5 crore and 7% for those above Rs 5 crore. This is likely to impact less than 15,000 individuals based on AY 2017-18 income tax data. Custom duty on gold and precious metals has also been increased by 2.5%.

Taking advantage of low oil prices, the government has increased special additional excise duty and road cess on petrol and diesel by Re 1 per litre each. 

This is likely to increase indirect tax revenue and compensate for low revenue collections in income tax and GST. This may have a negative impact on inflation, but with CPI below the RBI target levels, the government has some leeway here. This is one decision that is likely to be criticised heavily.  

To boost consumption, government has kept its promise of hiking the exemption limit to Rs 5 lakh for individuals. This is likely to result in a revenue loss of Rs 1 lakh crore. However, this leaves more money in the hands of taxpayers, which is likely to drive demand for goods and services, and more than compensate for the revenue loss through multiplier effect.

Corporates have often complained about high income tax rates. With a view to activate animal spirits and spur investment, income tax rate for companies with a turnover of up to Rs 400 crore (earlier Rs 250 crore) has been slashed from 30% to 25%. This covers literally the entire corporate set in India (99.3%).

Private investment as a percentage of GDP has been declining for the past many years. Banks reeling under NPAs have been suffering from liquidity crunch. This has affected credit growth in the economy. The finance minister has allocated Rs 70,000 crore for public sector banks recapitalisation. 

The NBFC sector, which provides a key role in generating consumption demand and capital to the MSME sector, has been reeling under liquidity crunch after the IL&FS default. 

Handing a lifeline to the sector, the government will provide one-time six months’ partial credit guarantee to public sector banks for the purchase of high-rated pooled assets of financially sound NBFCs, up to a total of Rs 1 lakh crore. 

In a bid to provide a boost to the housing sector reeling in the aftermath of demonetisation and slowdown in economy, Sitharaman has hiked the interest deduction on home loans from Rs 2 lakh per annum to Rs 3.5 lakh per annum for purchase of first home worth Rs 45 lakh. 

Continuing with the focus to create and upgrade infrastructure, the government plans to augment 1.25 lakh km rural roads under the Pradhan Mantri Gram Sadak Yojana for Rs 80,250 crore. This is likely to boost rural connectivity.  

To give a greater push to Digital India and reduce the circulation of black money, the government has proposed a TDS of 2% on cash withdrawals exceeding Rs 1 crore by companies. 

To boost FDI inflow, the government has proposed 100% FDI in insurance intermediaries and easing of local sourcing norms for single-brand retail.

Addressing the long-pending issue of Angel Tax, start-ups and investors who file requisite declarations will not be subjected to any kind of scrutiny in respect of valuation of share premium. 

The finance minister had very little leg room to experiment with big bang reforms given the tight fiscal math. She has provided incentives for focus areas like affordable housing and greener India (electrical vehicles). 

The budget has taken small, but important, steps to realise Prime Minister Narendra Modi’s target of making India a $5-trillion economy by 2025. 

The author is a political and economic analyst