India’s first woman FM Ms Nirmala Sitharaman, the 3rd in the series of Finance Ministers of the BJP led NDA government, had unenviable task on hand – presenting a budget amidst a dismal scenario of low growth, unemployment, joblessness, lull in manufacturing sector, the back lash of demonetisation and GST that crushed the cash flow economy.
Obviously it was not a populist budget, but still the BJP felt obligated to give something to the people who returned them to power for another five years terms with a brute majority of 352 seats, even better than the 272plus of 2014. ] Here is how Nirmala Sitharaman sat with the SWAT team of the finance ministry from finance secretary to revenue secretary to expenditure secretary to banking secretary, to give a few lollipops to the salaried class , some butter to the industry and yet rein in the mounting fiscal deficit and control the current account deficit and keep the growth trajectory at an ambitious 7.8 to8% in the new fiscal. GDP growth as per government agencies statistical institutions has slid to 5.8% against the projected 6& plus.
Here are the giveaways in the budget to please : Raising the Income Tax Exemption limit for the salaried class to Rs 5 lakhs from Rs 3 lakhs earlier. Revenue loss on this account has not been stated nor steps outlined in the budget speech to make up for it.Maybe its in the fine print of the financial bill. Widening the tax base to keep corporate sector happy, by extending the 25% tax limit to corporate entities with revenues of up to Rest 400 core from Rest 250 core earlier . Here the FM announced that the revenue loss would be around Rest 4,000 crore but expects this to be made up by through greater incentive for production from the MSMEs and greater consumer off take of goods.
Government has tried to please the foreign investors by making a level playing field for them with domestic players by simplifying the taxation structure and on the parameters for repatriation of funds from profits earned and levies to be paid. Less paper work and no or lesser ops for arbitration proceedings.To kick start growth Ms Normal has provided for Rest 100 lakh core, she repeated the figure twice to make people understand the enormity of funds, over five years – that is Rest 20 lakh core every year for infrastructure projects to take off. How she will raise this money is still the questions? Economists feel that government may float bonds that may get oversubscribed.
Here is the larger picture of the budget : Fiscal deficit for FY 2019 20 3.3% of GDP
The government has estimated the fiscal deficit for the financial year 2019-20 to be 3.3 per cent from 3.4 per cent announced in the Interim Budget in February.
While the lower fiscal deficit target may come as a surprise given it had to resort to fiscal jugglery to arrive at the target of 3.4 per cent in the Interim Budget, there seems to be a twist in new numbers as well, media reports on the budget say.
The diversion in the two numbers is explicable because data used in the Interim Budget was based on revised estimates (mid-year review of the numbers), while the full-year Budget is based on advance estimates, which tend to be closer to real figures. Closer look at the fine print of the budget shows that “GDP for BE 2019-2020 has been projected at Rest 211 lakh core in 2019-20 assuming a 12 per cent growth over the estimated GDP of Rest 188 lakh core for 2018-2019”. Hence, instead of basing figures on advance estimates, the government has collated data according to revised estimates. GDP growth, in fact, has been overestimated, which has created a faulty reference point, while calculating the fiscal deficit, hence indicating a fall in it, some experts claim, which is however debatable.
The points t be noted are that government is taking a Robin Hood principle of take it from the rich and give to the poor, by raising the surcharge on incomes of High Net worth Individuals (HNIs) to 3% on earnings of over Rest 2 core and 7% on earnings of over Rest 5 core per annum. Also, the FM has slapped a levy on individuals withdrawing more than one core in a year from their accounts. This also hopes to bring in revenues to the government, though Ms Sitharaman asked how many people do we know who draw more than one crore in a year (meaning the numbers is going to be limited and so also the impact).
Although the government will generate higher revenues from the surcharge on individuals with taxable income, it will also lose revenues due to changes in the corporate tax structure.
Notably, there was a shortfall of Rs 1.6 lakh crore in revenue receipts in FY 2018-19, yet the government had managed to meet the fiscal deficit target.
“The government was able to do so because they collected more revenues from disinvestment, compressing the expenditure during the year. In a few cases, they rolled over the expenditure from FY19 to FY20.For instance, they did not pay the total amount on fertiliser subsidy that was budgeted; a part of it has been held over to 2021,” claims former Finance Minister Yashwant Sinha.
Ms Nirmala Sitharaman has also enhanced the retail price of petrol and diesel by Rs 2 per litre in an effort to compensate oil marketing companies like IOCL and others who were hit hard by the rising crude prices as they had to suffer a greater financial outgo due to high outflow of foreign exchange combined with the fall in the value of the rupee against the dollar in the money markets. The measure was possible because crude prices have softened and it would not be hard on the fuel consumers in the automobile sector.
The Modi government has targeted the Indian economy to touch $5 trillion by 2025. Now, this is an enormous jump from the current GDP levels of $2.7 trillion.
A day before the budget, the Economic Survey, laid out the road map of a sustained 8 per cent GDP growth in the next 5 years with a moderate 4 per cent inflation rate, according to reports. The survey, which for the first time is more or less in sync with the budget, bases growth rate on a ‘virtuous cycle’ of savings, investment and exports.
The PSU banks , confronted with mounting NPAs (Non-Performing Assets) amounting to roughly a trillion, and HNIs becoming fugitives seeking refuge overseas such as Vijay Mallya, who owes money to a consortium of banks on the Kingfisher collapse, and Neerav Modi, leading jeweller from Mumbai, who has alleged siphoned multi millions from psu banks through the process of round tripping, has got a fresh infusion of Rs 70,000 crore to increase their credit base. Because of the NPAs most banks were wary of lending huge amounts.
Budget 2019/20 also gives a boost to FDI in single brand retail. Currently, a mandatory 30 per cent local sourcing norm applies to players like iPhone maker Apple or furniture maker IKEA. The finance minister hinted at some relaxation, but some economists fear that this could mean shift from the Make in India campaign as allowing global majors to source more from China and other low-cost destinations could be self-defeating.
Budget 2019/20 also talks about setting up mega manufacturing plants for sunrise and advanced technology areas like semi-conductors, solar cells, lithium storage batteries, computer servers and laptops. The finance minister talked about creating a global hub for electric batteries. This measure is also directed at promoting exports or Make in India in the next 5-10 years.
The biggest hindrance to pushing investments in India is the high cost of capital. India has capital requirement of over Rs 20 lakh crore every year as against its annual budget size of less than Rs 30 crore. The budget talks about an action plan to raise long-term bonds or credit default swaps especially focussing on the infrastructure sector. The government has also allowed FIIs and FPIs to invest in debt securities issued by NBFCs. This would provide much needed capital to NBFCs, which have been asking for a special liquidity window from the RBI. The Budget also proposes an electronic fund raising platform under Sebi for listing social and voluntary organisations. The retailinvestor would be encouraged to invest in treasury bills and government securities.
Investments from the government will continue to flow into infrastructure. The government has a plan to invest Rs100 lakh crore in the next 5 years. The finance minister talked about new structures and flow of funds through a development finance institution model. In addition, the government would be divesting stake in PSUs. The target for disinvestment has been kept at Rs1,05,000 crore for 2019/20. Loss making Air India figures high on the agenda and another 137 psus have been shortlisted.
All in all, Ms Nirmala Sitharaman, with her background in PWC of asset management, has tried her best to redress immediate problems of unemployment, low growth, fiscal deficit and CAD, a legacy inherited from the previous finance minister of the first tenure of the Modi government from 2014 to 2019.