Budget 2019-20: Right Direction, But Where’s The Money?

Did Finance Minister Nirmala Sitharaman deliver on some of the big challenges confronting the economy? The answer is that she did so partially.

The five big challenges were about reviving the animal spirits of business, improving consumer confidence, giving job creation a fillip, recapitalising banks and fending off distress in the non-bank finance sector, and boosting exports.

Of these main challenges, one has been fulfilled (capitalising banks, which get Rs 70,000 crore), and the jobs front gets addressed indirectly by promises of massive investments in job-creating sectors like infrastructure, housing, et al. ‘Make in India’ also gets a fillip with the government promising large dollops of foreign investment with offer of tax incentives, and some minor domestic businesses get added protection by an increase in customs duties, but the export challenge has not been addressed at all.

As for consumer confidence, the Finance Minister has decided that the PM Kisan dole to farmers and higher basic tax exemptions (upto Rs 5 lakh) are good enough to buoy spirits. Consumer mood could not have been lifted by an increase of levies by one rupee a litre on petrol and diesel.

The fact that the markets fell after the Budget speech shows that business spirits are far from lifted, and the imposition of a surcharge on incomes above Rs 2 crore and Rs 5 crore (3 per cent and 5 per cent) will probably make India's super rich even more eager to relocate abroad. In 2018, some 5,000 millionaires are estimated to have left India for greener pastures.

The only bright spot for businessmen was what the Finance Minister chose not to do: impose an inheritance tax on the super rich.

On the reforms side, the minister announced two big ideas; one, that the government will consider reducing its stake in some public sector enterprises below 51 per cent. Another is the promise of a new, more simpler, labour regime. We can applaud these only when we hear the details.

The highlights of the budget are the following:

One, large benefits for buyers of affordable homes, who now get a tax deduction of Rs 3.5 lakh on interest paid. This should prompt a big shift to smaller, suburban homes.

Two, infrastructure spends are to rise to an average of Rs 20 lakh crore annually, but the details are missing. It is not clear where the money is coming from, unless it is to be financed substantially by foreign investors and loans.

Three, the micro and small sector is to be helped with quick loans and faster payment of dues. Loans upto Rs 1 crore may be sanctioned in less than an hour, and a payments platform will be developed for the same.

Four, foreign investment limits for sectors like insurance, aviation and media may be raised.

Five, taxpayers can use either their PAN number or Aadhaar numbers to file returns. This means Aadhaar is now as good as PAN for tax purposes.

Six, water is the big theme of Modi 2.0. The idea is to provide water security to all by 2024, with piped water being the goal. Gas and electricity, already close to achieving universality, will be available to all well before that deadline.

Seven, non-banking finance companies (NBFCs) are being thrown a lifeline, with banks asked to buy upto Rs 1 lakh crore of their assets to improve liquidity. Banks themselves will be covered for losses upto 10 per cent for the first six months after taking over an NBFC loan.

Eight, far from being weakened, the Reserve Bank of India’s (RBI's) powers are being enhanced by giving it regulatory powers over housing, now with the National Housing Bank, and also NBFCs.

Nine, the investment target is being raised from Rs 90,000 crore mentioned in the interim budget to Rs 105,000 crore now. But the question-mark is about its believability.

The budget is big on vision and low on funding details. It takes on board many of the suggestions contained in the Economic Survey presented yesterday, which called for an investment-led growth strategy, but without clarity on where the money will come from, it is good to take it as a statement of intent and not reality. We have to wait and watch for delivery.

We also have to worry about another thing: after the huge fiscal slippage of last year, Sitharaman has chosen to cut the fiscal deficit target further to 3.3 per cent. If the tax revenues pencilled in don't materialise, she will have to massively cut government spending later this year. Not quite what the doctor ordered for a year of economic slowdown.