Union Budget 2019 India: Good NBFC-fix, no tax reform & numbers iffy; just plans on power, labour etc for now
Budget 2019 India: Given the mandate prime minister Narendra Modi just won, and his own interpretation of that as a message from a country that yearned for change, it was natural to expect his government’s first budget—also finance minister Nirmala Sitharaman’s maiden one—to be one with sweeping reforms aimed at tackling India’s big problems of slowing investment and growth. Not surprisingly, Sitharaman has tried, with some success, to get a fix on some of the major pain points. Her bigger success is that she has outlined a roadmap of reforms.
She had an innovative solution to India’s Lehman+ crisis with, not just IL&FS, but other NBFCs like DHFL also in trouble. Taking them over was fraught with moral hazard, so she gave banks a credit guarantee to buy up to Rs 1 lakh crore of NBFC assets—with an assurance the government would absorb the first loss of up to 10% of their value—and has slowly brought them under the ambit of RBI as they should always have been. Similarly, she has promised measures to deepen the bond market—this will also address a systemic flaw in how NBFCs raised money so far—and possibly even set up a dedicated financial institution for infrastructure.
Given how the power sector remains fragile despite the Uday reforms package, the FM promised a slew of deeper reforms over the year, came up with an imaginative solution like asset recycling and joint development to use government/PSU land to build housing … And while such plans will necessarily take a long time to fructify, the proposal to use PPP to complete railway tracks, manufacture of rolling stock and running freight trains should boost investor sentiment fairly quickly since railway minister Piyush Goyal is known for his efficiency in delivery. As in the past, the budget has aggressive targets for infrastructure creation like roads and railways; outlays have risen 15% for railways and 12% for roads.
What is not clear, in this context, is why the budget had so little by way of an agriculture reform roadmap, more so considering how agrarian distress has been such a big issue over the past few years. An ideal road map should have laid out a policy to increase direct cash-transfers such as under PM-KISAN and a reduction in subsidies like those on fertiliser that are mostly consumed by the rich. Indeed, the budget needed to announce a phaseout of MSP-based procurement and a move towards a free market, with PM-KISAN transfers being increased. What this suggests is that the PM’s advisors have convinced him the MSP-based model is working well and just needs some tweaking.
Modi’s immediate post-victory comment on how India just had two castes—the poor and those who wanted to help the poor—should have prepared people for a higher tax on the better off. If it didn’t, it is because, at the same time, there was talk of reducing India’s tax levels to those in competitor countries; India has among the highest level of corporate taxes in the world. What the tax bureaucracy has ensured, however, is a mish-mash. So tax rates on those earning over Rs 2 crore a year have been raised to 39% and to a whopping 42%+ for those earning over `5 crore. While that sounds like what some European nations charge, keep in mind the tax rate for firms with a turnover of less than Rs 400 crore is 28%—in other words, this will encourage tax arbitrage while the sensible thing is to reduce tax differentials.
While the budget has done well to broadly stick to the fiscal roadmap, this could be iffy. FY19 saw a huge slippage in tax revenues on GST and income taxes. For reasons best known to the government, the FY20 budget hasn’t used the lower tax numbers for FY19 that have been reported by the finance ministry’s CGA wing. Once you use those, the required tax growth in FY20 is a challenging 18.3% and not the 9.5% the budget speaks of. In which case, if taxes fall short, the government may have to slash expenditures at the end of the year or increase extra-budgetary borrowings; both will hurt GDP recovery.
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And while the Economic Survey was at pains to explain that India’s tax and other policies were creating ‘dwarves’, or firms that never grew, and that big firms contributed more to jobs and GDP growth, tax rates on large firms remain unchanged. The FM said that 99.3% of firms now pay just a 28% tax, but it is the 0.7% of firms that create the most value. While India’s labour laws are another pain point for investors, the FM has promised to handle this through four labour codes. There is, however, no timeline given as to how soon these will be passed in Parliament; keep in mind the codes have been in the works for several years now.
The finance minister’s dramatic step up in disinvestment is welcome, but what is not clear how much of this will come from privatization since that is what brings about real change in the ways PSUs are run. The FM has said strategic sales continue to remain a priority for the government but if this means, as it did in the past, an ONGC buying an HPCL or an LIC buying an IDBI Bank, that is not going to enthuse investors. As in the past, the PM seems unsure about embracing sweeping market-based reforms; the economy can’t grow at 8% if he doesn’t sometime soon. Despite the FM extolling the virtues of wealth-creation, several of the government’s policies remain fairly anti-industry.