Nirmala Sitharaman’s mini-budget fixes most problematic issues

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Updated: August 23, 2019 11:00:52 PM

FM does well to fix FPI- and angel-tax, very good steps to boost banking; other ministries now need to pitch in to boost investment.

nirmala sitharman, fm nirmala sitharamanThe FM has done well to ensure CSR violations are no longer a criminal offence, but needed to do more, indeed scrapping CSR was the best solution

Finance minister Nirmala Sitharaman has done well to respond to the economic crisis in the manner she has, by not just correcting policy faux pas that should never have crept into her maiden budget – some like the surcharge on rich still remain! – but by also coming out with innovative solutions to other problems like slow decision-making in banks due to fears of CBI investigations later on. If a lot of this should have been dealt with in her maiden budget itself, as the FM said in response to a question, she would have taken some of these measures earlier had she known the economy would slide so much; perhaps the time before the budget was too short for detailed discussions or perhaps a crisis just focuses the mind better.

More than the measures itself, Thursday’s press conference makes it clear that despite the government’s seeming pre-occupation with abolishing Article 370 – and more recently, the arrest of former finance minister P Chidambaram – the economy very much remains on its radar; indeed, the FM said that there would be two more sets of measures that she is finalizing and hopes to discuss in similar press conferences over the next 2-3 weeks. If something is done to stimulate the housing sector – this is the next on the FM’s agenda – the boost to the economy can be significant.

Given the precarious tax situation, few really expected a cut in tax rates to Asean levels – a promise Arun Jaitley made several years ago – but, given India’s tax rates are around twice those in competing countries, and are a big reason for India’s being uncompetitive, the FM could perhaps have given a timeline of 1-2 years to achieve this; in any case, the Direct Tax Code report has also made the same suggestions of lowering tax rates. It is also not clear why the FM is so bullish on meeting her FY20 tax targets since, as the first four months data shows, the government is already falling short, and in a big way.

While Sitharaman did well to remove the FPI-surcharge that resulted in FPIs pulling out billions of dollars from the equity market, she needs to review the decision-making that allowed such a decision to be taken in the first place. Indeed, it was this very process that saw a MAT being levied on FPIs – Jaitley even bragged about how he could use the Rs 40,000 crore this would generate to fix India’s irrigation system – before it too was removed after FPIs started pulling out money. Sitharaman has been, similarly, misled into hiking surcharges on the rich; it is a pity she didn’t seem fit to remove these as well. She has done well to remove the angel tax but it is a good idea to wait for the actual notification; in the past, when the angel tax issue was said to have been fixed, enough caveats were inserted to ensure that start-ups still paid the tax and, in many cases, they are being sent tax notices without mentioning the Section 56(2)(viib) that the FM said would no longer apply to start-ups!

The FM has done well to ensure CSR violations are no longer a criminal offence, but needed to do more, indeed scrapping CSR was the best solution. For one, CSR has to be voluntary, it became a tax once the UPA made it mandatory; and nothing has been done to curb the taxman’s power to decide what activities are to be considered CSR and which are not.

Though the CSR and FPI surcharge got the most attention – along with the limited moves to help the auto sector – the most significant moves were really those in the banking sector. Apart from measures to boost credit to NBFCs, giving PSU banks the promised Rs 70,000 crore of recap funds in one shot will boost their ability to lend in a big way. Even more important was the method to ensure banks take decisions without fear of being pulled up by the CBI/CVC/CAG later. If the banks’ Internal Advisory Committee and the CVO back the move, this is taken as final, something for which bank executives cannot be questioned later.

Deft behind-the-scenes work with banks and the RBI has ensured banks will pass on all repo cuts to the MCLR and, through that, to borrowers; how much will pass on is not clear since banks can always raise their spreads. The key is how soon the government lowers rates on small savings which force banks to keep deposit rates high, whether the government allows banks to link deposit rates to the repo, etc; else, banks will have an asset-liability mismatch.

Also read: Big relief for stock market, equity mutual fund investors; Enhanced surcharge withdrawn

The moves on deepening bond markets – like an institution for credit enhancement – were announced as part of the budget and the sooner they are implemented the better. Industry will be pleased about the FM’s assurance on timely GST refunds, but also a bit cautious – the decision to pay industry 75% of their dues after an arbitration award was taken by Jaitley several years ago; but, with NHAI asking for bank guarantees before releasing this 75% amount, the move never took off.

While Sitharaman has promised to be vigilant to ensure her promises are delivered upon – the Cabinet Secretariat will also monitor some – the ball is now in the court of other ministers. If investment levels are to pick up in a meaningful manner, the particular problems of each sector also need to be addressed. In the case of telecom, for instance, spectrum prices and annual levies need to be slashed by far more than what is being contemplated right now; in the petroleum sector, producers have to get market prices; apart from levies needing to be slashed for mining, issues like commercial mining of coal remain unaddressed; it is the health of state electricity boards and below-cost electricity pricing in the power sector; FTAs need to be signed with the US and the EU; global giants need to be wooed to set up manufacturing in the case of mobile phones; … the list is a long one.

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