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Budget 2020: FM Nirmala Sitharaman needs to address shaky growth environment, tight fiscal situation

Shajikumar Devakar     February 1, 2020

Budget 2020: India is currently in the midst of a temporary slowdown perpetuated by a host of global, as well as, domestic factors. Recognising the need to address the domestic triggers at the earliest and give a boost to economic activity, the government has announced a number of reforms/measures since mid-2019. These range from announcing strategic disinvestments and the immediate release of pre-announced Rs 70,000 crore for SOE Banks recapitalisation to reducing corporate tax from the earlier 34% to 25%. However, these measures are yet to have their full impact. In the interim, the government needs to address a flailing growth environment coupled with a tight fiscal situation. One is to make it more conducive for new wealth generators i.e. start-ups and MSMSE to do business, revive the real-estate sector and create a thriving and deeper investment market.

FULL COVERAGE: Union Budget 2020

Tax sops for MSMEs

The FM can use tax policy to incentivise and promote MSMEs in the country. Earlier, the government had announced an across the board rate cut for companies that intended to set up new manufacturing facilities and for companies that were planning to opt-out of the incentive regime. While this is a positive step, it is important to note that there are many MSMEs consisting of partnership firms and limited liability partnerships (LLPs) who are currently taxed at 30% (excluding surcharge and education cess). Considering that most of these companies are probably still at the beginning or in the mid-phase of their growth, they can definitely benefit from tax cuts or incentives.

The FM can consider:

  • Tax cuts along the lines of those given to corporates in September 2019, the FM announced a cut in the corporate tax rates from 30% to 25.17% (inclusive of surcharge and cess).
  • Deductions for plant and machinery - MSMEs investing in plant and machinery could be incentivised through a deduction under section 32AC. The section was introduced in the 2013 union budget with an aim to encourage investment in new plant and machinery by companies. The deduction was allowed in addition to depreciation allowance and had a minimum investment threshold of Rs 25 crore. The government can consider extending this benefit to MSMEs with a lower investment threshold and for a time horizon of 1-2 years.

These steps could potentially enhance cash flows and investment opportunities for MSMEs.

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Boost to real estate sector

The real estate sector is like the spine of the economy. It provides a key essential to the population in terms of housing is a great employment generator and can be a compelling investment avenue. In September 2019, the government had announced the launch of a Rs 20,000 crore stressed real fund to be floated under the alternative investment fund (AIF) platform.

The scope of the project was further enhanced to Rs 25,000 crore in November 2019. The AIF will provide funds to bail out stalled real estate projects with a unit size of less than Rs 2 crore a unit in metros and Rs 1 crore in other places. The compelling part about this scheme is that it will also apply to projects that have been declared as non-performing assets by banks and to those lined up before the insolvency court.

Currently, the government and other private investors including cash-rich financial institutions, sovereign wealth funds, public and private banks, domestic pension and provident funds, global pension funds and other institutional investors can invest in this AIF. The FM can consider opening up this investment opportunity for UHNIs as well.

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More bond issuances

The government can consider issuing corporate bonds through top-rated PSUs and can also incentivise investments in bonds for income-tax benefits. This will address the current liquidity crisis in the fixed-income markets, give HNI investors more choice in terms of fixed-income investment options and help individual investors mitigate their overall tax liability.

Make it easier for foreign companies with a domestic presence to list in India

Foreign direct investment (FDI) continues to be a key element in India's future economic growth. While the government is focused on attracting FDI, it can also consider incentivising foreign companies that have a presence in India to get listed domestically. This will not only deepen domestic equity markets but also give investors an opportunity to participate in stories that are playing an integral role in the country's economic growth trajectory.

The measures discussed above can potentially have a two-fold impact on HNI investors. Firstly, they can directly impact their business growth and fortunes and secondly, they can create some compelling investment opportunities from a portfolio perspective.

(The author is Senior Managing Partner, IIFL Wealth)

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