Union Budget 2019 India: Markets are waiting with much anticipation for the full-fledged budget to be presented by the newly elected government.
By Arun Thukral
Union Budget 2019 India: Markets are waiting with much anticipation for the full-fledged budget to be presented by the newly elected government. We believe that most of the targets set in the interim budget, regarding the fiscal deficit (3.4% of GDP), current account deficit (2.5% of GDP), tax collection, income tax rates and tax slabs would be carried forward. The budget should address concerns regarding the slipping fiscal deficit as this, in turn, would impact investment, the bond market and the rupee. Subsidies are warranted for merit goods like basic education, health and safety nets for the poor and marginal farmers; other like subsidies (for power, water, etc.) for high-end farmers can be done away with. Introducing direct income transfers to set them off against existing non-merit subsidies like subsidized fertilizer, water and power for poor and marginal farmer should also be looked into.
A few key expectations from this budget would include:
Reduction in corporate tax – In order to attract industries to set up their bases in India in the wake of a shift in business away from China, to boost economic growth and accelerate existing corporate earnings, the government should consider a reduction in the corporate tax rate for all companies or at least lay down a credible roadmap. Currently, the corporate tax rate is 30% for domestic companies with a turnover of more than INR 250 crores and 25% for companies with a turnover of less than INR 250 crores; additional cess (for education, environment, etc.) and other taxes cumulatively take the tax rate to a higher number of around 35%.
To make the economy more competitive and increase saving in the hands of corporates, the government should reduce the tax rate to 25% for all the companies irrespective of the size of the company. This move can encourage the industry to invest in capital expenditure as capacity utilization close nearer to 80%.
Ease in regulatory framework – The US sanctions against China have promoted several global companies to move out of China, but hardly any are relocating to India. To make India a preferred destination for investment and to stimulate economic growth, the government should make changes in the regulatory framework and simplify the corporate tax law. This move will encourage foreign investors to invest in India without any technical or procedural restrictions.
Banking reforms – Industry expects a roadmap for banking reforms which includes consolidation of the state-owned lenders followed by recapitalization & reforms. This is an essential step given the crucial role the PSU banks would have to play in energizing the Indian economy as it grows from the current USD 2.7 trillion to USD 5 trillion economy.
Higher allocation for PSU bank recapitalization – The six-member committee on the economic capital framework for RBI is likely to submit its report by the end of June 2019. This committee is expected to identify 0.5-1.5% of the gross domestic product (GDP) as excess RBI capital, depending on the methodology. Using this windfall for specific tasks like bank recapitalization will help the economy by allowing the government to concentrate on other avenues like infra spending. It is likely that the government may increase the allocation to PSU bank recapitalization and would probably look at a few reforms including mergers among the strong and weak PSU banks and making the recapitalized banks accountable for their future.
An upsurge in healthcare expenditure – The government may also increase expenditure on healthcare from the current 1.2% to 1.5% of GDP in the first year and to 2.5% in the next five years.
Incentivizing digital transactions – A reinstatement of a Cash Withdrawal Tax (CWT), albeit with different terms and conditions, is likely. It is expected that this time the CWT would be levied if the total cash withdrawn from the bank is more than INR 10 lakhs in a financial year. The motive behind CWT could be to promote digital transactions and also to curb the circulation of black money which the current government is keen on.
A stimulus for NBFCs – There is a high expectation of special liquidity window for NBFCs. A merger policy for larger systemically important NBFCs with the private sector banks with an objective of giving access to low-cost deposits to NBFCs can partially address their current liquidity issues in a sustained manner rather than a quick fix of a liquidity line of credit from RBI.
Rural stimulus- An increased allocation to rural-focused schemes like MGNREGA, Deen Dayal Upadhyay Grameen Kaushal Yojana, etc. would benefit the consumer staple and discretionary consumption companies. The PM Kisan Yojana has already extended its cover to include all farmers, irrespective of the size of their land. Such higher allocation would help in driving up rural consumption.
Focus on private capital expenditure- In order to check the slowdown in the capex, the government is expected to take necessary steps to encourage investment in private capital assets creation. It is expected that the upcoming budget will have measures to spur the growth of the manufacturing sector with a focus on reviving the capex cycle.
Given the mandate, the government has never before opportunity to contain the non-merit subsidies, take bold steps like privatization or corporatization of Government institutions to limit the drag on the balance sheet and improve receipts to ensure improvement in expenditure which has been under pressure. Overall we expect this budget to have a reform-driven approach with measures to stimulate consumption, investment and ease of doing business.
The author is MD & CEO, Axis Securities. The views expressed are the author’s own.