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What do you think about India’s 2020 budget?

This budget was particularly unique in recent past due to the dismal economic backdrop in which it was presented. Growth had slumped to a 11 year low in the current financial year and is projected to be 5% by the RBI for FY 2020. In the current scenario, the government was expected to deliver an impetus-oriented budget to ensure that the positive sentiment translates into economic momentum, supporting PM’s vision to India becoming a US$ 5 trillion economy. As the economy was at the slowdown in these past 2-3 quarters, the government needed to step up its own expenditure. To analyse this budget the context of the economic scenario needs to be looked into for a holistic assessment:-

  • After PM Modi getting a thumping mandate in 2019 elections, not many economists, analysts or rating agencies would have predicted in their wildest imagination that India would undergo a historic slowdown. Thus, the expectations from this budget had increased as the common man, industrial & corporate sector anticipated that this budget will alleviate economic ailments through measures like subsidies, relief for taxpayers and stimulus package to revive growth.
  • The global geo-political scenario at present is also gloomy with 2020 beginning on a disturbing note- Coronavirus spread in China & beyond, Australia wildfires & Indonesia floods signalling rapid climate change, Iran-US tension in the volatile Middle-East, Trump impeachment & impact of Brexit on Euro increase the global policy uncertainty & geo-political tension. Especially threat of Coronavirus turning into a global pandemic & its impact on global economy in general & China in particular is yet to be ascertained.
  • Over the last few years, the Union budget has become as more of a media created hype & cause for irrational exuberance coz many crucial policy decisions are taken outside the Budget. Given the state of Economy this time too in Sep 2019, the government had slashed tax rates to 15% for new manufacturers and 22% for existing companies from about 30% to energise the Indian corporate sector. Similarly, last year also saw several big changes in relation to insolvency law and the GST.
  • On the monetary policy front, the RBI had already done its part by reducing the interest rate cumulatively by 135 basis points in 5 moves given the relatively docile inflation levels (average below 4% since 2017-18). The recent growth slowdown has given rise to a debate on whether the current slowdown is cyclical or structural. But as the RBI Governer had stated that Monetary policy has limits, structural reforms from Government is required to tackle the pain along with simplifying tax issues & promote investment flows.
  • GST has shorn the Budget of its suspense & mystery by taking away its major burden, the indirect taxes, which is now under GST Council’s purview. The Budget is now mostly about allocations, direct taxes, customs duties & levies. Now, except income tax, there is little in the Budget that would make an instant connect with the masses.
  • For Union budget 2020-21 the precarious task before Fin Min was to ensure that all the 4 engines of growth—domestic consumption, private investment, exports & public investment deliver simultaneously; moreover, it was expected that we would find solutions for vexed problems such as Real estate/Auto/Telecom sector distress, weak employment & revival of domestic demand.
  • The perennial conundrum of whether PM Modi will choose to stick to the road of fiscal rectitude or, instead, give FM the nod to open the spigots of government spending continues. At one end, there are those who want a reduction in the fiscal deficit in conformity with the targets: at the other end, there are those who want fiscal expansion to boost growth in the economy through domestic demand in the face of a global slowdown.
  • The Economic Survey projected India’s economic growth at 6%- 6.5% in the next financial year saying growth has bottomed out. The growth in 2020-21 compares to a projected 5% expansion in 2019-20. IMF also reassured that the abrupt slowdown in 2019 was due to measures like demonetisation and GST- It appears that the main reason for this slowdown was the NBFC’s experiencing turbulence, GST, and the demonetisation that took place. To put things in context, Global growth is projected to rise from an estimated 2.9% in 2019 to 3.3% in 2020 and 3.4% for 2021 according to the IMF’s World Economic Outlook
  • On the positive side India climbed 14 rungs in the World Bank’s Ease of Doing Business 2020 survey to stand at 63, among 190 countries, making it the one of world’s top 10 most improved countries for the 3rd consecutive time

Budget Outcome

The relevance & importance of this Budget for the Government was emphasized by the fact that this was the longest budget speech ever given by any FM & when it ended both FM Sitharaman & the stock markets literally went down. From the market’s perspective, neither the Long-Term Capital Gains Tax nor the Securities Transaction Tax were tinkered, only DDT abolished which was not sufficient. Any change in either of these two taxes could have boosted the inflows into stock market. FM stated that this budget was aimed to boosting incomes and enhancing purchasing power, stressing that the economy’s fundamentals were strong and inflation was well contained.

  • FM raised fiscal deficit target to 3.8% of the GDP from 3.3% pegged earlier for 2019-20 due to revenue shortage & it has been pegged at 3.5% for 2020‐21. Despite continuing sluggishness in global demand, the current account deficit narrowed to 1.5% of GDP in the first half of 2019-20 from 2.1% in 2018-19.
  • On the basis of trends available, nominal GDP growth rate was estimated at 10% in the next fiscal & the capital expenditure is scaled up by 21% to prop up the economy. India’s nominal GDP growth rate for 2019-20 is estimated at 7.5% after growing by 11.2% in FY 2018-19, as per the documents. To put things in perspective, during 2014-19, India clocked growth of 7.4% on average with inflation, averaging around 4.5%. Seems like Real GDP growth has figures have been avoided so that the growth number is in double digits given the inflation levels are spiking.
  • Previous Budget had set a target of earning Rs 1.05 lakh crore from divestment, but according to its latest data it has managed to earn just Rs 18,095 crore, not even one-fourth of the target. For the coming year, the government has estimated it will raise Rs 2.1 lakh crore from divestments, with the major contributor being LIC, which is expected to fetch nearly Rs 90,000 crore. The other asset sales lined up are BPCL and debt-ridden Air India, which better happen fast to help Govt in sticking to fiscal deficit target.
  • This Budget is woven around three prominent things – aspirational India to boost the standard of living; economic development for all; and building a humane and compassionate society. The Modi government came up with a 16-point plan to ease the farm crisis, including liberalising the agri sector.
  • Under aspirational India, FM touched upon agriculture along with irrigation, rural development, wellness, water, and sanitation apart from education and skills. For the sector comprising agriculture and allied activities, irrigation and rural development, an allocation of about 2.83 lakh crore has been made in the Budget for FY21.
  • On the back of bank consolidation and capital infusion of Rs 3.5 lakh crore into public sector banks, the FM said governance reforms will be carried out to make them more competitive, transparent and professional, thereby ensure a robust banking system. Centre increased deposit insurance coverage to Rs 5 lakh per depositor from the current Rs 1 lakh.
  • Telecom sector is reeling under the burden of colossal adjusted gross revenue (AGR) dues and the industry exposed to the possibility of a private player duopoly. But the budget is pinning its hopes of a revenue of a whopping Rs 1.33 trillion from the licence fee and spectrum usage charge payments by telecom licencees in FY21.
  • Dividend distribution tax (DDT) has been abolished but there is a catch- dividend is not getting taxed at the mutual fund level anymore, the same will be added to the income of the investor, and taxed at marginal rate of tax. However, the provision of TDS at 10% of the dividend announced for pay-outs in excess of Rs 5,000 is a dampener. This will leave less cash in the hands of the investors, but only when they get larger pay-outs as dividends.
  • In a major move that is likely to help finance a huge infrastructure outlay, Budget incentivised investment by sovereign wealth funds of foreign governments in the sector. Granted 100% tax exemption to their interest, dividend, and capital gains income on the investment made in infrastructure and other notified sectors before March 2024 end, with a minimum lock-in period of three years.
  • It has allocated Rs 99,300 crore for the education sector for FY21 in the Union Budget 2020. FM announces degree-level full-fledged online education programme to be offered by the top 100 institutions in the country. FM announced the introduction of ‘Ind-SAT’, an exam for Asian and African countries to help make India a higher education destination.
  • For start-ups government would provide funding support and other assistance by setting up an ‘Investment Clearance Cell’ which would offer end-to-end facilitation and support, including pre-investment advisory, information on land banks, and facilitate clearance at the central and state levels. Proposal to provide an outlay of Rs 8,000 crore over a period of five years for the National Mission on Quantum Technologies and Applications was unexpected but laudable.
  • Real estate was one sector where a lot of hopes were pinned to revive consumer demand & employment. The affordable housing segment received some support from the budget with an extended tax holiday, while those who buy more premium homes don’t have reason to cheer. In fact, the removal of exemptions under the new income tax regime, implying no tax benefit on principal and interest for home loans, comes as dampener for the sector.
  • On the personal tax front most analysts & news reports were hoping that the exemption limits shall be enhanced especially in home loan & section 80C. FM wanted to simplify the direct taxation system by removing exemptions, but introduced three more slabs and made things complicated instead. The interesting part is, it is optional & taxpayers can opt for it or stick to the current regime. The Government, essentially asking people to stop investing in Long Term Savings and Spend Today, without providing them any Social Security Benefits till date (as prevalent in other countries). Somehow, I get the feeling that this new income tax choice is an outcome of the behaviour pattern of the millennials where they are more inclined to spend on experiences rather than on acquiring assets.
  • This optional move on personal income tax would adversely impact insurance sector & mutual funds. It has given rise to concerns on whether individual taxpayers would end up buying the quantum of insurance that they did earlier to bring down their taxable salary.

Despite considerable focus of the speech on infrastructure, rural development, health and education, in terms of fund allocation and concrete near-term measures, there have not been many big changes. Especially two critical sectors – Real estate & Automobile were left high & dry, maybe they can look forward with some hope in the next GST council meeting. Another reason for excluding these sectors could be the belief of the government that millennials & Gen Z have a different thought process & purchase pattern-(Remember the Ola/Uber statement by FM). Last few months has seen so much negativity that perhaps most people were having a misplaced faith that Budget would be a panacea for most of it. To be fair, the budget is too weak an instrument to revive the economy, and radical changes are needed from both Government & Industry across several sectors to improve productivity and competitiveness.

However, if the government really wants to deliver on the promise to make India a $5-trillion economy, and double farmer income by 2022, then it will take much more effort. In normal circumstances this budget would have been appreciated but in dire times like these it does fall short of expectations- Ordinary Budget for Extraordinary times.