Budget 2019 has been prepared in the shadow of a stranded economy, under siege and in shackles of its own creation. That calls for a growth budget - even better - an expansionary budget. But the Centre has so little elbow room in fiscal and monetary policy that it will require a lot of give and take for new finance minister Nirmala Sitharaman to make that happen.
It would be folly to believe that the Centre could gloss over two-thirds of the reason why Indian economy is in a deep slowdown-declining consumption. Private and public consumption together accounts for about 70 per cent of GDP. No wonder, alarm bells started ringing and India quickly slumped into a slowdown ever since the consumption economy tanked starting 3 quarters ago. With the economy still decelerating, we're yet to see the bottom of this round of slowdown.
Budget 2019 has to take the bull by the horns and address the issue of consumption in order to trigger the chain reaction of an uptick in economic activity, higher GDP growth, more private investments and finally higher job creation, the ultimate goal. But how? Here's what to expect:Union Budget 2019
- Widespread push to boost consumption
- Income tax exemption for individuals up to Rs 5 lakh
- Rs 1 lakh zero-interest loans to farmers
- Rs 50 lakh collateral-free loans to SMEs
- Local defence manufacturing with private sector
- Lower corporate tax rate for large companies
- Infra push in roads, rail, housing and social infrastructure
- Push in rural agri infrastructure
- Income tax exemption up to 5 years for start-ups
PUBLIC EXPENDITURE SPREE
Individuals and corporates are not going on a buying spree on hope and fresh air. It's the government and public sector which will have to take the lead in public spending in the hope that orders placed with the private sector will help spread the contagion.
BJP's election manifesto committed Rs 100 lakh crore infrastructure spending over 5 years. This will be the time to deliver on that promise by undertaking new road, railway & bullet trains, ports and airport projects. And a push to affordable housing sector by higher allocations or interest subvention as in the past. Not to forget higher social infrastructure spending in healthcare and education. All of which will go into creating demand in allied industries, including steel, cement, concrete, tiles, logistics, even commercial vehicles and construction equipment, and hundreds of suppliers to these sectors.
There's an enormous opportunity in domestic defence manufacturing. India-the world's largest arms buyer--has spent a colossal $100 billion in the past decades in arms purchase with a voracious appetite for more in the coming years. If even a fraction of that can be substituted by domestic arms manufacturing it would undoubtedly trigger rare greenfield investment from the private sector.
Infra push also requires restarting the Rs 6.69 lakh crore of stranded projects, at least 3.5 lakh crore of that is in the public sector and well within the government's domain.
AGRI INFRASTRUCTURE SPREE
The second biggest pool of resources in BJP's election manifesto is devoted to the agri sector with a commitment to spend Rs 25 lakh crore in 5 years-a whopping Rs 5 lakh crore annually. Government's promise of doubling farmers' income cannot be achieved unless the farmer gets the most remunerative price for his produce. This requires not just robust irrigation infrastructure but also storage, processing and sales infrastructure closer to the farm. With an overwhelming mandate in this Lok Sabha, the government would be emboldened to dive into such infrastructure creation for the farming community. This remains one of Modi government's Achilles Heels. It has to shed that reputation.
Expect zero interest agri loans up to Rs 1 lakh for a maximum of 5 years, as per the BJP Sankalp Patra while the Rs 6,000 yearly income support to farmers will be extended to all farmers, not just land owners, and pension will be offered to small and marginal farmers above 60 years of age.
HIGHER DISPOSABLE INCOMES
One of the ways to trigger consumption is to leave more money in the hands of individuals and corporates. Individuals spend on FMCG, durables and automobiles and corporates gain confidence for capacity expansion or greenfield investments. That is just what the doctor ordered.
Piyush Goyal's Interim Budget caused enormous excitement among the salaried class, in particular with the announcement of exempting income up to Rs 5 lakh from income tax. But fineprint doused the excitement with the realisation that the relief was only meant for those earning up to Rs 5 lakh per annum. Tax payers expect this relief will be extended to every individual.
Modi I failed to meet its promise of reducing corporate tax rate to 25 per cent across the board. While it was reduced for a vast majority of companies, the then FM Arun Jaitley did not reduce corporate tax on large corporates (with revenue in excess of Rs 250 crore) for fear of widening his fiscal deficit. There is widespread expectation the Centre will extend this to large corporates as well.
A survey of 15 sectors by KPMG has concluded that the weighted deduction for research expenses in recognised in-house R&D facilities may be extended beyond March 31, 2020. And to encourage 'Make in India', tax holiday for exports to SEZ units may be extended beyond March 3, 2020.
THE SME FIX
The other big thrust is likely to be in the SME sector which is 30 per cent of India's GDP, 45 per cent of manufacturing and 40 per cent of exports, but was badly hurt by the twin shocks of DeMo and GST. It remains the most vulnerable sector in the economy. Expect collateral-free loans of up to Rs 50 lakh for SMEs. Women entrepreneurs will get a guaranteed 50 per cent of the loan amount, men at least 25 per cent.
Centre is also likely to assure the SMEs an additional support of over Rs 80,000 crore in loans under the Credit Guarantee Scheme. Loans up to Rs 2 crore can be extended under the scheme currently with priority to women entrepreneurs.
For start-ups, increase in income tax exemption limit from 3 to 5 years could bring significant relief. Since 90 per cent of startups fail in the first 5 years, this could be a saviour.
THE TWIST IN THE TALE
But there's a twist in the tale. Brace up for more taxes because that is how the Centre will fill the void. Make no mistake! Modi government will take its pound of flesh. After all, it has managed to raise India's tax-to-GDP ratio by 3.05 per cent in just the first 4 years of its tenure. Partly through better compliance as well. Manmohan II could raise the rate by just 1.86 per cent, Manmohan I by 2.18 per cent. The entire 10 year tenure by just 4.04 per cent.
Finance ministry officials will privately tell you that's hopelessly inadequate. At 14.08 per cent India's tax to GDP is among the lowest in the world. They point to Denmark, Sweden and France where it nudges 45 per cent. Or, even US, South Korea and Australia where it's in excess of 25 per cent.
In line with its crackdown on fake and defunct companies, one of the proposals under consideration is a MAT (minimum alternate tax) on loss-making companies. Modi government believes companies declare losses to avoid taxes. The MAT would be of the nature of a flat 2-4 per cent cess rather than a full-fledged corporate tax. Another option is to raise the 10 per cent long term capital gains tax charged on gains in excess of Rs 1 lakh.
High income individuals are likely to face introduction of a new tax slab of 40 per cent on income above Rs 10 crore per annum. And then there is the possibility of re-introduction of the Inheritance Tax, last eliminated by the Rajiv Gandhi regime in 1985. Or, the wealth tax abolished in 2015.