Union Budget 2019

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Economy

Union Budget 2019

The much-awaited Budget of the first year of NDA-II. Anish Tripathi and Sushant Hede decode. 

Tough Road ahead for the Government

NDA II Government has a tough job to introduce a balanced financial plan for the year. Anish Tripathi, Vice President – Strategy, NRB Bearings Ltd., shares his suggestions as to what the first Union Budget for the newly elected government could include in order to achieve this. Views expressed here are personal.

RECENT controversy around the GDP calculation methodology notwithstanding, the Indian economy really does not seem to be doing as well as some of the supporters of the present government believe, but neither is it doing as badly as its critics seem to be suggesting. The truth as usual is somewhere in the middle. The current global macro-economic environment is tricky and hence the government cannot afford to do anything overly aggressive. However, given that private investment remains stubbornly anemic, there is no option but for public investment to continue to drive economic growth. Additionally, with the massive mandate received by the present government, expectations are at an all-time high. Hence, irrespective of what the government does, it will leave people dissatisfied, and criticism will come thick and fast. Having said all of this, here are some suggestions that the government can consider, without really going for broke:

Corporate Tax

• Increase the 25% corporate tax rate to all companies with a turnover of up to 1000 Crs, up from 250 Crs. Opening this up for all companies could be considered next year.

• Start eliminating exemptions and announce a timeline for when they would be completely eliminated.

• Remove the differential tax treatment given to Indian and Foreign companies – all rates should be uniformly applied.

Personal Income Tax

Remove all exemptions from personal income tax except housing and education loans. Do not increase exemption threshold from 2.5 Lacs. Revise tax rates as follows:

  • 2.5 to 10.0 Lacs - 5%
  • 10.0 to 20.0 Lacs - 10%
  • 20.0 to 50.0 Lacs - 20%
  • 50.0 to 100.0 Lacs - 25%
  • Above 100 Lacs - 30%

The above tax rates will give increase disposable income significantly, and give a phenomenal boost to consumption.

Disinvestment

Increase the disinvestment target to an aggressive 1.5 Lac Crs

Bands for Expenditure heads

• Create guidance bands for all major expenditure heads, e.g. Education, Defence, Agriculture, Subsidies, etc.

• These bands will guide all future Finance Ministers for how much of the budget should be allocated for which expenditure head, e.g. Education should be between 4% - 6% of the total budget allocation.

• FMs can vary within these bands depending upon contingencies, but a broad thrust will be maintained overall in the preferred direction.

Tax Administration

• Combine the Direct Tax and Indirect Tax departments at the central and state level into one common ‘National Tax Administration’.

• Given the convergence between GST and Direct Tax, and the contradictory stands being taken by the Direct & Indirect Tax departments, a combined tax administration will be able to provide much better and coherent service to the taxpayers and do a more efficient job of tax collection for the government.

• This will require massive changes, but at least, a dialogue must start in this direction.

Infrastructure & Logistics

• There is already an expectation of missive budget allocations for the infrastructure sector, which is most welcome.

• Combine all budgetary allocations for transport-related sectors under one mega-Transport Ministry, which should include all Rail-, Road-, Air-and Water-based transportation. This will allow for synergistic multi-modal projects like a Bullet Train type network (for both passenger and freight movement) to be built over the NSEW and Golden Quadrilateral Highways under the same Ministry, instead of the separate freight corridors being done today.

• Although not linked to the Union Budget, differentiated and graduated GST rates for ICE, Hybrid and Electric vehicles need to be pursued in the GST Council if the recently announced EV targets are to be met.

Building a Roadmap for the next 5 years - The much-awaited Budget of the first year of NDA 2.0

The much-awaited Budget of the first year of NDA-II could indicate the prospective course of action for the next 5 years as the government has a strong and clear mandate, stresses Sushant Hede, Associate Economist, CARE Ratings. Views expressed here are personal.

The first inning of the incumbent government had a mixture of repair and reform strategy with key reforms like Goods and Services Tax (GST) and Insolvency and Bankruptcy Code (IBC) showing a glimpse of positives amidst teething challenges. The NDA Government, in its second innings, has a clear lead on the political front, which would ensure continuity of policies but the trailing behind in the performance of key macroeconomic indicators is the challenge, which needs immediate resolution. With the government pursuing a path of fiscal consolidation and continuing to be at the edge of it, a fiscal stimulus to boost a slowdown in the economy remains restrained. Thus, only a marginal flexibility in the path of fiscal consolidation for the short run push and highlighting the need to tackle key challenges grappling the economy for better medium and long term growth could be the theme of the Budget.

With revenues from GST still remaining below budgeted and higher expenditure on various welfare schemes restraining the fiscal space, the Budget 2019 could estimate fiscal deficit (as a % of GDP) to be marginally higher at 3.5% of GDP in FY20. As this is the first budget of the second inning, a few steps in the direction of improvement in the overall economic prospects looks likely.

3-pronged approach

Firstly, the agriculture sector continues to face challenges with adverse terms of trade. Despite the announcement of MSP, the prices of agriculture produce have been low, not reaping benefits for the farmers. Moving towards an income support scheme, the interim Budget announced PM-Kisan scheme for small and marginal farmers, which has now been extended to all farmers. Along with the income support scheme, policies to focus on agriculture marketing reforms, agriculture exports and irrigation to reinvigorate the sector could be expected. However, the focus on these three objectives should not be limited to short term adjustment in allocations but have a long term policy objective with a seed of the same sown in this Budget.

Secondly, the continuing slowdown in consumption not only translates into subdued growth in investment activity but also lowers the indirect tax collection of the government leaving less space for expenditure. High unemployment, meagre pick-up in wages and higher GST rates on key items of consumption like automobiles and consumer durables have weighed on consumption growth. Therefore, addressing the issue of unemployment and clues of moving towards a more revenue neutral GST rate as against the current 5-tier GST structure is imperative in the Budget.

Thirdly, there would certainly be a continuing thrust on spending on roads, highway development and construction. With the private sector investment being limited, higher capital expenditure by the government (excluding the off-budget borrowings) infrastructure-based sectors is expected. In addition to these sectors which are also labour intensive, a boost to the textile sector with export driven policies would not only aid in employment generation but also provide higher disposable income for improving consumption. Further policy implementation of the government’s flagship program of ‘Make in India’ will also bode well in revival of the private sector manufacturing activities. Along with these sectors, higher allocation should be towards healthcare and education sector.

A ray of hope

Moving on to the fourth pointer of direct taxation, it is unlikely to see any changes in the tax slabs for individuals and corporates. A roadmap of reducing the corporate tax rate to 25% for all corporates also looks unlikely and would see likely postponement until the mobilisation of indirect tax collection is more streamlined.

Last is the financial sector which at the moment is marred in news of defaults. Though the NPA challenge has improved to some extent in the banking system, the issues of the housing finance companies (HFCs) and non-banking finance companies are concerns. As this problem is non-systemic and concentrated among a few entities, it will be interesting to see the stance in the budget for the HFCs and NBFCs. However, a roadmap to reducing the government stake in public sector banks to below majority looks possible in this Budget.

This Budget should accept the current slowdown in the domestic economy and address the structural challenges of the economy for long term growth.

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