Budget 2019-20 – Highlights..

The budget proposal for the year 2019-20, presented in the parliament today, didn’t enthuse the market as seen by the decline in Senses. It does seem to lack tangible proposals and the ones which it had were largely negative such as increase in tax/cess on fuel & gold, increase in tax rates for high income group etc. More importantly, the market expected some specific stimulus such as rebate on investment, specific direction to banks to lend etc to kick start the economy even if it led to higher fiscal deficit. Some of the specific initiatives related to economic and business issues are listed below.

  • The budget has brought down the fiscal deficit marginally over that projected in interim budget. It does take a more realistic view of revenue mobilization and has reduced the tax revenue target by almost Rs 56,000 crore. Higher mop-up elsewhere helps it keep the deficit in check.
  • In an important policy shift, the government has decided to start raising part of its borrowings from the external market. This would reduce the pressure on domestic banks who would have more resources to lend to private sector. The shift carries significance as governments have reduced their exposure to external debt after the 1991 payment crisis. External debt has come down from over 25% of total debt then to less than 5% now.
  • To help well run NBFCs meet their liquidity needs, government has decided to provide partial credit guarantee to public sector banks for six months on purchase of assets of financially sound NBFCs up to Rs 1 lakh crore.
  • In a boost to ‘make in India’ and gain first mover’s advantage in sunrise sectors, government proposes to invite global companies through a competitive bidding to set up mega-manufacturing plants in areas such as Semi-conductor Fabrication (FAB), Solar Photo Voltaic cells, Lithium storage batteries, Solar electric charging infrastructure, Computer Servers, Laptops etc. The global market size of these technology intensive products is huge and therefore, the investment risk for these plants would be low.
  • In another measure to boost manufacturing and leverage India’s competency in this area, a new commercial arm of Department of Space would be formed. It would tap exports market for various space products including production of launch vehicles developed by ISRO.
  • Government has also tweaked tax rates to reduce cost of domestic manufacturing and make imports costlier. Customs duty has been increased on intermediate and finished products such as auto parts, synthetic rubber and many more, whereas it has been reduced on raw materials and capital goods.
  • In its continued drive against economic offenders, penalty and prosecution has been enhanced for offences related to duty evasion. Further, misuse of exports related exemptions above a limit of Rs 50 lakh has been made non-bailable offence (the offender will not able to get bail from the court in such cases).
  • Budget also proposes to impose levy of 2% on cash withdrawal exceeding Rs 1 crore in a year from a bank account. However, the limit still looks quite high and a business could be having multiple accounts giving them much higher total limit.
  • Budget made certain specific announcement related to capital raising and capital market. Among them, current threshold of public shareholding in listed companies would be increased from 25% to 35%. Other than bringing more liquidity in the market, this would reduce the discretionary power of promoter by greater shareholders’ activism. However, the move may lead to re-rating of the market with change in demand-supply balance of floating stocks.
  • On the same lines, it has also decided to reduce its stake in government owned listed firms. Other than raising resources for the government, it would also help bring foreign investors who have criteria of investing only in companies above a minimum level of floating shareholding.
  • To help social enterprises and voluntary organizations raise funds, budget has proposed creation of a social stock exchange. Other than meeting their funding needs, this would also help socially conscious citizens invest money in companies offering more transparency.
  • In another measures at efficient financial intermediation, the budget proposes to take measures to help retail investors invest in government bonds. While on one hand, this would reduce the cost of borrowing for the government, it would also help retail investors get better returns for their savings by elimination of cost of intermediation.
  • Rural India and agriculture received lot of attention with focus on rural roads, connectivity and marketing other than on social parameters such as housing etc. 10,000 new Farmer Producer Organizations would be formed to achieve economies of scale over the next five years and receive better realization for their produce. An important figure revealed by the minister was the reduction in time taken to build a house in rural India from 314 days in 2015-16 to 114 days in 2017-18.
  • MSMEs also received attention in the budget speech. In terms of specific proposal, an online platform will be created for them to file bills and receive payment related to government contracts. This would reduce discretionary power of the concerned officials and expedite the payment process.
  • Among other measures, initiation of ‘Study in India’ to bring foreign students to study in higher educational institutions and a new tenancy law deserve mention. The education initiative certainly has huge potential especially considering India’s strength in education space. The existing law dates back to the time of independence and sought to help the displaced find a home, thus favoring the tenants. The new law seeks to bring about balance in the relationship between the lessor and the lessee.
  • While personal income tax rates had been modified in the interim budget proposals, the budget this time has made changes in higher income category. Tax rate has been increased by around 3% for taxable income between Rs 2-5 crore and around 7% for above Rs 5 crore categories. However, wealth tax is another area which needs to be deliberated upon and even a nominal tax would not only raise resources but also update records of all such assets.

Budget analysis would be carried forward in other posts later..

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