The 2019 Budget is in continuation of what the Modi government followed in its last term. 
  • FM Sitharaman’s Budget has eschewed populism, keeping fiscal deficit at 3.3 per cent. 

    It has also ignored the clamour against fiscal rigidity from both the government’s critics as well as its supporters.

The first full Budget of the Narendra Modi government was presented by Finance Minister Nirmala Sitharaman on 5 July. It was a Budget in continuity with how the Modi government has approached the exercise – it eschewed populism, keeping fiscal deficit at 3.3 per cent, ignoring the clamour against fiscal rigidity from both the critics as well as the supporters of the government. It talked ambitious on reforms, infrastructure building and social capital development – all of which will happen outside of the Budget as has been the case in recent years.

The Budget also had specific measures to drive growth in the economy, a lot of which too backseat in the post facto analysis, with disproportionate focus on the tax proposals. These seven themes address immediate extant problems.

1. Liquidity Position For Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs)

The NBFCs and HFCs have seen liquidity issues in the last few months. While systemic liquidity was not a problem, individual firms had specific challenges arising out of operational issues. The Budget seeks to address this problem by allowing Public Sector Banks (PSBs) to buy good quality pools of assets from NBFCs with sound credit standing. The government will provide partial guarantee for any initial losses in the near term. This will help good NBFCs resolve their asset liability mismatch problems – the capital infusion can be used for fresh growth.

The Reserve Bank of India (RBI) will now regulate the HFCs, which is expected to bring more credit and operational discipline to these companies. Improvement of sentiment as well as actual money flow in the real estate sector is critical, as this sector provides not just high- volume jobs but also consumes commodities, which has a positive amplification effect in the economy. The RBI will also have greater control over NBFCs going forward, including powers to effect board- level changes.

2. Public Sector Bank Recapitalisation

This Budget earmarks an additional Rs. 70,000 crore for recapitalising public sector banks. The Non-Performing Assets (NPAs) have finally started to stabilise in the Indian PSB system in the current financial year. In the last financial year, the NPAs came down by about Rs. 1 lakh crore. The Insolvency and Bankruptcy Code (IBC) has also helped PSBs recover some of their bad debts.

While the previous recapitalisation announcements had ensured that most PSBs had the required compliance capital, further capital infusion in the PSBs was required to help these banks fund credit growth. This capital can also be used by larger banks for the next round of PSB consolidation, with the government committed to create a few large banks through mergers.

The credit growth has been between 12 per cent and 14.6 per cent in the recent months, but the non-food credit growth remains muted. The measures for PSBs, NBFCs, and HFCs seek to address the supply side problem of liquidity. As the government also seeks to plug the gaps in IBC, where some cases have seen prolonged litigation, the two-fold approach – resolving more bad loans faster – and capital availability will help meet demand as and when it picks up.

3. Boost For Affordable Housing

The interest deduction for affordable housing for loans availed in this current financial year has been increased to Rs. 3.5 lakh. This cap was Rs. 2 lakh for all housing loans earlier. The loan amount for affordable housing has also been increased to Rs. 45 lakh.

This is an important change for the real estate sector in the near term. Since this exemption applies in the current financial year, buyers may be nudged to bring forward their real estate purchase decision. On the other hand, the builders across the country are being nudged to launch new projects where the house value could be in the Rs. 50-55 lakh segment, such that the loan amount is Rs. 45 lakh and below.

Given that a lot of new project announcements as well as new home purchases also happen in the festival months of October and November and then later in March, this dual nudge can again help revive the real estate sector, especially for smaller builders. The Rs. 45 lakh loan ceiling for affordable housing also broadens the incentive for builders in most cities outside the top few metros.

4. Compliance Cost Rationalisation for Goods and Services Tax (GST)

While the Goods and Services Tax (GST) system has largely stabilised and the collections have been robust despite frequent rate cuts in the last year, small businesses had complaints regarding their cost of compliance. The Budget has addressed this issue.

The threshold GST exemption limit has been increased to Rs. 40 lakh from Rs. 20 lakh, going forward. Also, businesses with a turnover of less than Rs. 5 crore will now file quarterly returns. This is a big change which will reduce monthly time and professional costs involved in the current process. Given that these businesses will now claim the input credit once a quarter, the adoption of GST across the full business chain may likely increase so that working capital does not get blocked for long periods of time.

The government is also planning to roll out an electronic invoice system by 2020. This system will take away the need for separate e-way bills, fully automate GST refunds, and pre-fill tax filers’ returns based on the cross-matched invoice data. This step once implemented will further reduce cost of GST compliance.

5. Foreign Direct Investment (FDI) Caps

The Budget speech noted that the FDI in India went up 6 per cent over the previous year despite a generally hostile global economic environment.

To further attract FDI in sectors which can spur economic as well as jobs growth, the government has now allowed 100 per cent FDI in the insurance intermediaries. This will allow top global players to bring in fresh capital to expand their reach as well as breadth of service in India. The FDI cap for all insurance-related businesses is currently 49 per cent. The intermediaries will now be able to invest more in digital technologies to cover new markets.

The Budget also mentioned that the government was looking at opening up Aviation, Insurance, and Media sectors further to foreign players. Very importantly, the government is also looking at easing of local sourcing norms for single brand retail FDI. This is critical because organised Retail can spur both real estate as well as jobs growth, apart from bringing in new technology customised for local needs.

6. Freeing Up Litigated Capital

Before the GST was launched, India had a complex indirect tax regime with several central and state taxes. There used to be frequent litigation on claims made by government agencies and even two years after the GST launch, Rs. 3.75 lakh crore continues to be stuck in such disputes.

The Budget promises a Legacy Dispute Resolution Scheme, where the traders and businesses can settle these disputes on a one-time basis. These settlements will not just free up capital for future use, but also reduce the volume of commercial litigation across the judicial system.

7. Attracting Foreign Portfolio Investments (FPIs)

The Budget has made specific provisions to further increase FPI flows to India. These provisions aim to encourage FPIs to invest in instruments other than stocks – where the fund flow tends to be of a higher frequency, with active investment management.

The statutory limit for FPI investment in any company will now be equal to the limit set for FDI in the sector in which the company operates. The listed entity can, however, set a lower limit based on its need for business control. Additionally, FPIs will now be allowed to invest in listed debt securities issued by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). These investments tend to be relatively more passive with a longer horizon view.

These changes will bring in a higher volume of more predictable foreign capital to Indian players who are looking to monetise existing assets via REITs and InvITs and free up growth capital.

Apart from these measures, the Budget also has several other provisions to spur growth as well as to correct historic anomalies.

The Securities Transaction Tax (STT) in the money options will now be charged for the difference between the current market price and the strike price rather than at the strike price of the option. Earlier, the money options traded at a discount due to a higher STT. This was a concern frequently raised by the financial markets.

The Budget talks about attracting new investment in manufacturing in sunrise industries such as electric vehicles, batteries, and electronics. While the details will emerge over time, this is a welcome statement of intent. The electric ecosystem is on the verge of massive expansion and it is good for India to recognise the associated manufacturing potential early.

The Budget also proposes to take out Merchant Discount Rate (MDR) for electronic payment for businesses with greater than Rs. 50 crore in turnover. The MDR in such cases will be borne by the RBI and the banks involved.

Start-ups have been hit by the Angel Tax provisions in the last few years. The Budget proposes to completely do away with the concept itself for eligible start-ups. This is again a great statement of intent and if followed up on the ground by the tax authorities, it will make attracting investments for start-ups and valuing their securities easier.

The first part of the Budget talked at length about investments in infrastructure and social capital, so the continuity of the existing programmes is ensured. Water management will be the new focus area for the government, which Prime Minister Narendra Modi has already spoken about in multiple fora.

With the twin issues of constrained credit creation and addressing the subdued business sentiment covered in the Budget, it is time for the government to do what it has done well in the first term – get into specific issues, create specific solutions, and then implement rapidly at scale.

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