Editorial | A disciplined, growth-oriented budget
The budget encapsulated Narendra Modi’s formula - part reformist, part socialist, part nation-buildingUpdated: Jul 06, 2019 06:10 IST
The fact that the Union Budget for 2019-20 doesn’t immediately lend itself to broad thematic descriptions doesn’t mean it is bereft of big or radical ideas. Given its success in the elections, the Bharatiya Janata Party-led (BJP) National Democratic Alliance (NDA) government might have been tempted to continue with the populist policies evident in Union Budget 2018-19 and the interim budget presented in February this year. And given the need of the hour, it might have been equally tempted to ignore the fiscal deficit for a year or two and get growth back on track; after all, growth rates have dipped appreciably, the investment cycle is down, and even consumption demand seems shaky. It has chosen to do neither, presenting instead a budget that is fitting for the first budget of the second term of a returning government, and equally, one that pretty much encapsulates the formula that has worked for the BJP and Narendra Modi – part reformist, part nation-building, and part socialist.
The first big message in the budget presented by finance minister Nirmala Sitharaman is that the government has decided that it will not compromise on fiscal discipline in its efforts to revive growth. The target for this year is 3.3%. To be sure, the math behind this number is ambitious – a 25% increase in total revenue as compared to the provisional 2018-19 revenue, with a similar rise in tax revenue and a higher, 27% increase in non-tax revenue (including a substantial increase in dividend from the Reserve Bank of India). Key to the math is also a target of ₹105000 crore from proceeds of disinvestment (the budget saw the government reaffirm its commitment to selling Air India). It will be interesting to see whether these targets are met.
The second message – and this is not just significant but also reformist – is that the government will try to fund its ambitious infrastructure building campaign with external sovereign debt, thereby avoiding criticism that its borrowing will crowd the private sector out of the market. This move frees up local money for investment. The finance secretary told TV channel CNBC-TV18 that 10-15% of the government’s fund requirements could some from such external borrowings. The government has also sought to create more head-room for investment by recapitalizing banks to the extent of Rs 70,000 crore, and by announcing some moves to fix the crisis in non-banking finance companies (NBFCs).
The third message is that the government will attempt to boost investment by attracting foreign investment – not a bad idea, especially because most large Indian companies are still struggling with problems related to over-capacity and high debt and are at least two years away from returning to investment mode. It has done this by relaxing foreign direct investment (FDI) rules in certain sectors and broadening equity and deepening debt markets. It has also made life easier for start-ups, and venture capital funds, by protecting more of the latter from the so-called Angel Tax.
The fourth message is that the government believes the infrastructure and construction sectors hold the key to not just growth, but also job creation. It has sought to complement its own infrastructure-building initiatives with efforts to revive the housing sector through a model tenancy law and tax sops buyers of affordable homes.
Finally, the fifth message is that the Modi government believes the super-rich should be paying more taxes. The surcharge on taxes for people earning between Rs 2 crore and Rs 5 crore a year has gone up from 15% to 25%, and for those earning over Rs 5 crore from 15% to 37%. That works out to an increase of 3 percentage points in the first case, and 6.6 percentage points in the second, taking the peak income tax rate to 42.74%, higher than the 40% in the US. The number of people likely to be affected by this is not high – only around 14,0000 taxpayers had an income in excess of Rs 1 crore in 2017-18, and the number earning more than Rs 2 crore will be even smaller. This move, however, does fit in with the government’s political positioning as does the 2.5 percentage point increase in the import duty on gold and other precious metals to 12.5% -- although it isn’t exclusively the rich that buy the yellow metal in India.
There are subsidiary messages as well, such as the effort to push towards a less-cash economy by taxing cash withdrawals in excess of Rs 1 crore in a year and incentivising digital payments; the aspiration of becoming a global manufacturing hub in emerging businesses such as Electric Vehicles and new-age batteries by providing tax incentives for global tech majors to set these up in the country; and the extension of the lower 25% corporate tax rate to companies with revenue less than Rs 400 crore (the previous threshold was Rs 250 crore). These, though are minor strands in a budget that will be remembered by history as the one that made the Indian Sovereign Dollar Bond a reality (if this does happen), and taxed the super-rich.