Budget 2020-21 – Reason for Cheer or for Disappointment??

The budget proposals for the year 2020-21 has foxed the markets with Sensex declining by almost 1,000 points. This is so because even though it has taken several measures which would benefit the investors and profitability of domestic companies, it hasn’t made any big bang announcement to boost consumption or even investment. While the budget has certainly not lived up to the expectation, it has taken several structural measures to remove leakages and improve the ease of compliance/ ease of doing business. Here is a look at some of these.

Proposals could be broadly clubbed under measures to reduce export-import imbalance, simplification of rules/ease of living, plugging of leakages etc. Within the first theme, it has proposed several measures to reduce disadvantage to domestic industries vis-à-vis imports. This includes increase in custom duty on variety of goods largely manufactured by MSME sector, greater scrutiny in cases of dumping of goods and review of rules of origin, where goods find their way into the country by re-routing through another country to doge the regulations. Other than increasing custom duties, it also proposes comprehensive review of all custom duty exemptions so that domestic producers do not suffer.

Other than measures to reduce imports, it has also proposed measures to increase exports.  The budget has rightly identified a deficiency in Indian manufacturing eco-system where large number of mid-sized companies are doing very well in the domestic market but have no presence in export market. This is due to reasons such as lack of market awareness, inadequate understanding of regulatory, other requirement, risk aversion etc. These drawbacks also reflect in the fact India has not been able to increase its exports even to markets with which it entered into FTAs. The budget proposes to set up an agency to extend handholding support to these companies.

To further aid exports, the budget has proposed refund of other duties such as electricity duty and VAT on fuel in addition to the existing duty drawback scheme. The proposal has dual benefits as not only would it improve the competitiveness of genuine exporters, it would also help plug the duty drawback being claimed by dummy exporters. This is so because if an exporter is claiming duty drawback under exports promotion scheme, the electricity and fuel consumption would be proportionate to the export claims. So, if an exporter doesn’t consume electricity (which cannot be inflated) and still claims large exports, the agency would be in a position to disallow such claims.

The simplification of processes & plugging of leakages was another important theme of the budget. The budget has mandated compulsory online registration of all charitable organization with a unique registration number (URN). Charity organizations have been an important conduit for funds siphoning and this measure should bring more transparency to their donations as all the donations would be subjected to quoting of URN. To bring about simplification of direct taxes regime, the budget has removed around seventy out of more than hundred exemptions and deductions provided in the Income-tax Act. The budget has further proposed lower tax rates for those tax payers who do not claim any of these exemptions. On the same lines, it calls for fundamental overhaul of Centrally Sponsored Schemes and Central Sector Schemes. This is a much called-for move considering the multiplicity and duplicity of schemes leading to multiple gains for some and inadequate benefit to some others.

The budget notes high unemployment rate in case of graduates particularly in the general stream (vis-à-vis science or technology stream) as they lack employability. To tackle this, it proposes to set up educational institutions which will offer degree/ diploma courses with an integrated apprenticeship course. The apprenticeship courses being offered currently are in isolation and do not generate sufficient interest. The budget also proposes to design special courses to help aspirants for the position of teachers, nurses, para-medical staff and care-givers abroad. While the two proposals are not linked in the budget, there is a definite scope to align the two. In another reform to streamline government examination process for non-gazetted posts, it has proposed to set up National Recruitment Agency (NRA) which would conduct online exams. This would go a long way in streamlining the process, much like the NTA has done with the engineering examination.

While the budget speech focused elaborately on rural economy, the proposals are mostly general in nature. Among the specific and worth mentioning proposal is to establish food grains storage across villages to help farmers keep their produce. It may be noted that absence of such space compels them to sell in the market immediately after harvest when the prices are low. Another specific proposal is to start refrigerated kisan rail and kisan udan for transport of perishable goods. The move is quite innovative and should help producers tap both domestic and global market while minimizing waste during transit.

With regard to measures related to businesses, the budget has removed much debated dividend distribution tax (DDT). It has also proposed certain measures to mobilize funds from global markets. Another important announcement is the decision to list LIC. Other than bringing transparency to the insurance giant, which has assets nearly same as SBI, this would also bring-in much needed revenue for the government.

Note – The analysis largely focuses on measures which are structural in nature. It ignores announcements which are general or routine which may, otherwise, be getting greater media attention.

Tomorrow- Revenue & expenditure analysis. Later – Understanding deficit terminologies.

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