Union Budget 2019 India: Modi-nomics has chosen a prudent path to realize the dream of making India a superpower. It took India 55 years to become a $1Tn economy and Modi 1.0 has added another $1Tn in a span of 5 years.
By Rajiv Singh
Union Budget 2019 India: Modi-nomics has chosen a prudent path to realize the dream of making India a superpower. It took India 55 years to become a $1Tn economy and Modi 1.0 has added another $1Tn in a span of 5 years. In a feat that was never heard of, Modi 2.0, now, aims to add another $2.3 Tn in next 5 years making a place for India in the $5 Tn elite club. The journey is definitely not easy and the path looks rough. However, our FM has pragmatically chosen a way to achieve it. FM’s citation of chanakyaneeti, “with determined human efforts, task will surely be completed” is apt.
The FM has shed the role of accountant by adopting the role of a nation builder. This budget is remarkable in setting the direction as well as destination and is aimed at creating building blocks for a New India with futuristic plans and development strategy.
Considering the worrisome global economic environment and slowdown in the domestic economy, it’s reassuring to see the budget expansionary and pro-growth while ensuring that fiscal deficit remains within limits, much needed to prevent any downgrade of sovereign bond by rating agencies. FM has managed to achieve this trade off with such a finesse in her budget. By acknowledging and addressing every class of people, budget has been inclusive and an utmost focus has been given on improving the core areas of economy. The government’s attempt to improve the rural economy, restoring the confidence in financial sector, visionary allocations towards digital India, railways & infrastructure and fiscal discipline indicates that the government is preparing a more flexible economy for future generations.
In view of the importance of rural contribution to the GDP, sops were given to strengthen it. Modi-mark allocations were given towards PMAY and PMGSY in keeping the broader vision in view. Acknowledging the Naari shakti, and encourage the women entrepreneurship a Rs. 1 lakh under MUDRA scheme is proposed for SHG. This along with impetus on investment related to agri- infrastructure (Rs. 1.5 Tn) should benefit rural India.
A number of core industries derive their demand from housing sector. To encourage affordable housing, government has announced a tax holiday on profits made by affordable housing developers. To provide further impetus, government has allowed an additional interest deduction of Rs. 1.5 lakh on loans taken for a house valued up to Rs. 45 lakh. In a major move, the government plans to use large land parcels held by central ministries and CPSEs to develop public infrastructure and affordable housing projects.
MSMEs play a crucial role in the overall growth of the economy. Acknowledging the same, government has taken necessary steps to enhance the availability of liquidity for the sector. An interest subvention of 2% on fresh/ incremental loans taken and increase in turnover limit for applicability of lower tax rate of 25% are in right direction. Further to facilitate the receivable financing of MSMEs, government plans to bring in more participants, specifically NBFCs not registered as NBFC-Factor on the TReDS (Trade Receivables Discounting System) platform.
A $5 Tn economy can be achieved only with a 8% GDP growth for next 5 years. To achieve this growth, infra allocation of around 7-8% of GDP per annum is a necessity. An allocation of Rs. 100 Tn towards the infra to provide the necessary impetus to fuel growth will have a positive effect on much needed job creation. Also, the continued focus on flagship programs like Bharathmala, Sagarmala, Railway modernization and UDAN along with a call for Public Private Partnership will provide the cascading benefit to the sector players.
To beef up banks’ balance sheets and to boost credit growth, government will infuse Rs. 70000 cr of capital into PSBs, much higher than anticipated. This apart, to address liquidity concerns in NBFC sector, government has set up a credit guarantee scheme for NBFCs. To encourage MSMEs to access formal credit, government has announced 2% interest subvention for all incremental/fresh loans providing further boost to MSME sector.
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Increase in minimum public shareholding threshold in listed companies is a long term positive. Increased free float leads to more weightage for India in MSCI indices. One near term challenge would be to absorb a deluge of Rs. 4.5 Tn worth of shares in to the markets but it will definitely deepen the depth of Indian equity market.
Government has set an ambitious target of Rs. 1.05 Lakh Cr of disinvestment receipts for the current year and also assured of consolidating its holding in PSUs directly or indirectly to 51%. It has also indicated that it would in future tap external borrowings in foreign currencies to fund government expenditure which we believe is a major positive for bringing down domestic cost capital since it would free up trillions of rupees which would otherwise be sitting as SLR in banks. However, in the near term, government has indicated that it would limit fiscal deficit at 3.3% for the current year which they could have easily breached to fund infra investment and boost growth as the market was prepared for a higher fiscal breach. We believe the government has struck the right balance between fiscal prudence and growth.
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However, there were a few misses like levy of Special Additional Excise duty and Road and Infrastructure Cess. This apart, custom duty has been increased on import of gold and precious metals will have a negative impact to certain extent on common man. In addition, for listed companies, buybacks will now be taxed at 20% in line with dividend distribution tax. We believe this will be a major negative for cash rich companies which have resorted to buybacks in lieu of dividends to avoid taxes. Overall, despite these few misses, focus is on strengthening the core of the economy as the key initiatives are skewed towards supporting rural economy, MSMEs, infra, digital push, EVs, and affordable housing. And this coupled with a focus on credit growth and liquidity improvement should set the road map for a stronger economy for future generations.
The author is CEO – Stock Broking, Karvy. The views expressed are the author’s own.