Budget Focused on Fiscal Prudence

By: Pradeep Kumar Panda
For the first Budget 2019-20 of Modi 2.0 Government, the silver lining was it’s overseas borrowings plan, reduction in fiscal deficit target and recapitalization of PSU banks. Fiscal prudence was taken well by the bond market. The equity markets however, were unimpressed on buybacks (untaxed before, being now taxable) and lack of sops for the hurting sectors.
Economy Bytes

Recently first full time Women Union Finance Minister Ms. Nirmala Sitharaman presented first Budget of Financial year 2019-20 of Modi 2.0 Government. Fiscal stability was focus of the budget.

Most of the allocations have come down or the growth rates have come off, which suggest that the government has taken specific approach towards spending. We expect the earnings recovery to be led by banking sector, while lower crude prices and favourable monetary policy should kick start the capex cycle.

Government has revised its fiscal deficit target for the financial year to 3.3% against 3.4% in the interim Budget presented earlier this year. The government is hopeful of meeting the revenue target aided by (a) higher tax revenue, (b)Rs. 90,000cr dividend from RBI and PSBs in 2019-20, and (c) divestment target of Rs. 1.05 lakh crore.

The Budget 2019 pegged the disinvestment target for the year at Rs. 1.05 lakh crore as against target of Rs. 90,000 crore in the interim Budget (February 2019). It is proposed that government will launch Central Public Sector Enterprises Exchange Traded Funds (CPSE ETF) in a tax saving mutual fund scheme format.

Government of India plans to raise US $10 billion from first overseas sovereign bond as there is huge appetite for its debt in the foreign market. The idea of a sovereign bond has been discussed by previous governments in the past, but was never pursued. It is a welcome measure for fund raising in current fiscal crunch situation.

Government has been following the policy of disinvestment in non-financial public sector undertakings maintaining Government stake not to go below 51%. It is considering to go below 51% to an appropriate level on case to case basis where the undertaking is still to be retained in Government control.

Considering holding of companies such as LIC in overall limits of minimum holding in PSU, it will help create space for reducing stake in some of the Public Sector Undertakings.

In the Budget, government has proposed to consider an increase in minimum public shareholding in listed companies from current 25% to 35%. Based on the latest shareholding data, out of the total listed companies (including government companies), there are 1,250 companies where promoters’ shareholding is more than 65%.

In the current budget, government has proposed a TDS of 2% on cash withdrawal on amount exceeding Rs. 1 crore in a year from a bank account. This move is expected to discourage the practice of making business payments in cash.

Business establishments with annual turnover more than Rs. 50 crore shall offer low cost digital modes of payment (like Aadhaar Pay, NEFT, RTGS, BHIM, UPI, etc.) to their customers and no charges or Merchant Discount Rate shall be imposed on customers as well as merchants.

It is proposed to start implementation of faceless scrutiny assessments (i.e. without human interface and not disclosing specifics of assessing officer). This will help in reducing time and increasing fair trail.

In order to make NPS tax benefit in-line with Employee Provident Fund (EPF) and Public Provident Fund (PPF), government has proposed to increase the income tax exemption limit on withdrawal from NPS to 60% from 40%. Both EPF and PPF presently fall under “EEE” regime, i.e. nil tax on contribution, accrual and withdrawal.

Prior to the proposal, 40% of the total accumulated corpus utilized for purchase of annuity was already tax exempted. Moreover, of the rest 60% of the accumulated corpus withdrawn by the NPS subscriber at the time of retirement, 40% was tax exempt and balance 20% was taxable.

To push PMAY scheme, government has proposed to allow an additional deduction of up to Rs. 1.5 lakhs for interest paid under ‘Housing for All’ scheme, provided loan amount is maximum Rs. 45 lakhs and it is borrowed up to March 31, 2020.

It is noted that the deduction will be over and above the deduction of Rs. 2 lakh allowed on a home loan interest payment under section 24(b) of the Income Tax Act, 1962. The new additional deduction will benefit home buyers in tier 2 and 3 cities more compared to metro cities as the real estate prices are higher in metros.

Government has proposed 25% corporate tax rate on all companies with an annual turnover of up to Rs. 400crore (earlier Rs. 250crore). As per finance ministry, this move may cost the government Rs. 4,000cr loss.

The current budget didn’t alter income tax slabs but increased surcharge on super rich. It is increased from current rate of 15% to 25% on the income slab falling under Rs. 2-5 crore, and from current 15% to 37% on income falling above Rs. 5 crore. Effectively, there will be an increase in the current tax rates for such individuals from 35.9% to 39% and 42.7% respectively.

India’s FDI inflows remained strong at US$ 64.4billion, a 6% growth over the previous year. In order to further consolidate the gains and make India a more attractive FDI destination, the government has proposed: a) Examining suggestions of further opening up of FDI in aviation, media and insurance sectors in consultation with all stakeholders. b) 100% Foreign Direct Investment (FDI) permitted for insurance intermediaries. c) Ease in local sourcing norms for FDI in Single Brand Retail sector.

From the beginning, when doubling of farmers’ income agenda is being rigorously pursued by the Modi government, a fresh slew of measures through this Budget will only firm up the prospects of the agriculture and rural development sectors. The crux of the Budget is ‘sustainability’ in every aspect, be it agriculture practices or economic viability.

An announcement of formation of 10,000 new Farmer Producer Organisations over the next 5years is a step towards the same. With this, the economies of scale can be harnessed to achieve the goal of doubling farmer’s income by reduction in input costs and assuring better price realisations by the farmers for their output.

As the government wants to extend the parameters of ease-of-doing business and ease-of-living to the rural areas too, the special emphasis of ‘Gaon, Garib and Kisan’ will see the uplift of rural lives of farmers and the poor, equally across length and breadth of the nation.

To expand the income sources of our farmers, there is a proposal to enable them to take up power generation activities on their field to transform the “Annadata” to an “Urjadata”. In the dairy sector, cooperatives will be encouraged to create infrastructure for cattle field management, milk production, processing and marketing.

The concept of zero-budget farming, which some farmers have exemplarily proved to be viable, will boost the confidence of farmers. Under this concept, the farmers will be able to enhance their income levels by keeping the input costs under controlwith conventional means.

The ambition of “HarGharJal” by 2024 shows the sensitivity to the issue of water availability and its scarcity, equally. Integration of funds from various Ministries to fund the Jal Shakti Abhiyan may see critical water blocks being regained.

The budget saw increased allocation for Environment Ministry from last fiscal by 10.4% to Rs 2,954.72 crore for 2019-20 in what was termed as a “green budget” by PM Modi with several initiatives for promoting electric vehicles, reducing air pollution and encouraging afforestation. 

The budget allocated Rs 460 crore for pollution control schemes including National Clean Air Programme (NCAP) with a vision for “pollution-free India with green Mother Earth and blue skies”. 

The opinion of activist, academician and researchers are mixed on focus of budget in several sectors.

However, adding Cess on Petrol and Diesel will have cascading effect on economy. Some specific amount allocation for announced schemes and projects should have been done. It is a vision budget for US$ 5 trillion economy by 2025 following Blue Sky Policy.

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