This year’s union budget was announced against the backdrop of slowdown in the domestic market, which is represented in the slowdown in the GDP which has fallen to 4.5%, there has been a rise in the inflation which has crossed more than 7.3% for the month of December, the investments which are usually represented in the form of Gross Fixed Capital Formation which are growing at a lesser pace of 1% of the GDP on year-to-year basis and last but not the least the exports are falling again after witnessing an upward trend for the couple of months. Hence in the context, this particular budget was the budget of high hopes from all across the sectors. So this article would analyze whether the announcements made in this very budget would change the negative outlook of the economy or will prove “all pomp and no substance”.
Beginning with the major achievements as a nation, India is now the fifth largest economy of the world and has been able to lift 271 million people out of poverty from 2006-2016. The FDI elevated to US$ 284 billion during 2014-19 from US$ 190 billion during 2009-14. India’s debt to GDP ratio has also been reduced to 48.7% (as of March 2019) from 52.2 % (as of March 2014). This government has to be given credit for rolling out the much needed tax reform i.e., GST which has removed many bottlenecks in the system such as the Turnaround Time of the trucks has come down to as much as 20%, the number of taxpayers has increased and most importantly GST has brought the formalization in the overall Indirect tax system.
Now, the first major and probably the most important sector of the economy where the Finance Minister has given special emphasis is the agricultural sector. This sector employs the huge number of labour approximately 49% of the working population of India is concentrated in this very sector (NITI Ayog Report). As announced by the minister the government seeks to increase the consumption demand in the economy in order to propel the growth back and what could be better than reforming the agricultural sector where half of the working population concentrated. As a result of this, the sector received a huge number of incentives in this year’s budget. The government, to be precise, announced a 16 step solution for the sector along with the promise of doubling the income of the farmer by 2022. The government has pegged the agriculture credit target at Rs 15 lakh crores for fiscal year 2020-21. This will ensure access to more credit or access to loans to the agriculture sector. Second major reform was making the PM-KISAN beneficiaries by default eligible for Kisan Credit Card (an old scheme yet only 60% farmers have access to the card till now.) Thirdly, the expansion of PM-KUSUM scheme where the government will be giving financial assistance to the farmers to install solar pumps on their land which in turn will help achieve the government the target of generating 25 giga watts of electricity by 2022 through solar pumps only.
Second major reform, though not having impact on masses but eventually help in formalization and more investment in the Indian economy is the abolition of Dividend Distribution Tax. The core issues which have been haunting the corporates with DDT were 1. DDT was akin to double taxation (Dividends are declared by a company after paying the corporate tax and subsequent tax on dividends makes the company pay tax twice), 2. Foreign investors who were paying DDT here failed to get any kind of credit in their home countries. Keeping in mind the issues the government announced the abolition of DDT and now this particular income will be taxed in the hands of the investor or the taxpayer under the Income tax act.
The third major positive step which this budget has brought apart from change in Income tax slab is decriminalization civil offences under the Companies Act, 2013. The FM categorically said that “Tax harassment would not be tolerated”. Adding taxpayers’ charter to the statute will promote confidence in the citizenry to pay their taxes and is also a necessary impetus for the ease of doing business. IT Act will also be amended for allowing faceless appeals leading to reduction of corruption and loss of revenue to the exchequer. Last but not the least, the introduction of a new direct tax dispute settlement scheme under which the taxpayer willing to settle the dispute would be given a complete waiver of interest and penalty if they pay the entire amount of tax in dispute by March 31, 2020.
Other minor stimuluses’ provided in this budget which in the long term could aid in the revival of sluggish demand if implemented properly such as- the extension of additional deductions under the section 80EEA to FY21 to boost the stressed real estate sector, revised tax slabs for personal income, deferring tax on ESOP for start-ups by five years etc.
Now, in between all the gloomy and shiny schemes presented by the finance minister, there were some major misses in this budget too which were reflected with the crash of the Share Market by almost 1000 points in a single day.
Coming to the most apparent miss of this budget could be the non-removal of long-term capital gains tax (LTCG). After the slashing of corporate tax last year the market was expecting yet another impetus from the government in the form of abolition of LTCG. However, the government seems to have rationalized the LTCG tax. There was a need to remove the LTCG keeping the mind all the outside the book transactions it promotes leading to tax evasion. The removal could have led to higher inflow of money into the formal economy. Moreover, a mere reduction of tax rate will lead to more investment into the real estate sector which is already witnessing a downfall in demand.
Another major miss in this budget was not heeding to the demands of the already under pressure Auto Sector. The sector had two demands in particular- first being reduction of GST on vehicles from 28% to 18% to boost demand and secondly the introduction of Scrappage Policy which could revive the lacking auto industry and also help reducing the inefficient, polluting vehicles from the road. Almost all the developed nations have a vehicle scrapping policy in place to incentivize the owners of old vehicles to scrap their vehicle. However, the government has announced after the budget that the policy will be rolled soon.
There were certain sectors where government acknowledged their importance in the economy and announced certain measures or policies to improve their performance yet failed to recognize the other underlying demands of the same. One such sector is the education sector. The FM acknowledged it as being one of the most important sectors given the India will have the largest working population by 2030 and hence to accommodate such huge working force the sector needs to be completely overhauled. The FM announced that the government will soon announce New Education Policy. Degree level online course by the Institutes in top 100 NIRF rankings, 8,000 crore for the quantum technologies, PPP model for medical colleges etc. are some of the major announcements made by the FM. However, there were some major misses in this sector too and the most apparent one is the long standing demand of the students is the subsidization of the education loans which the government has paid no heed to. Further, no plan was announced by the FM to modernize the already existing and crumbling infrastructure of the most of the universities in the country.
In conclusion, it can be fairly assumed that it was a balanced budget where the finance minister encouraged people to spend more than saving. Given the state of economy and tight fiscal space for the government discouraging heavy spending, the finance minister presented a bold budget in terms of overhauling of the tax slabs and disinvestment in Life Insurance Corporation which will set in motion more transparency in the working of LIC. The market reacted negatively to this budget because of two reasons- one being no clear stimulus from the government in terms of no announcement on Long term capital gains tax and secondly the LIC IPO may wipe out some liquidity in the market. However, it must be remembered that the market is not everything and if we read the fine print of the budget 2020 it has the potential to revive the sluggish demand in the economy to some extent if implemented properly.