The optimism over domestic and global growth prospects has deteriorated in last few months. Falling optimism and deceleration in Gross Domestic Product (GDP) growth in recent quarters has led to perceptions that India might miss the target of becoming a $5 trillion economy by 2025. While the government has already implemented growth supporting initiatives, its strategic standpoint is expected to be unveiled in the upcoming Union Budget. These growth supporting measures are likely to cause slippage in the fiscal deficit target. Going forward, the government should focus on taking small steps to address the overall supply side hurdles and ensure more stringent governance norms. Let's look at some of the specific expectation for key sectors:
FULL COVERAGE:Union Budget 2020
Agriculture and Rural Sector
Given the upsurge in contract farming, the Union Budget is likely to propose information repository of farmers and contracting firms, which can help them to evaluate each other prior to signing a contract. Farmer producer companies (FPCs) might receive stimulus through tax incentives by expanding the scope of agricultural income to include the limited return and patronage bonus. Further, the Budget is expected to expedite linking of markets for farm produce with eNAM, an online agricultural trading platform. In order to promote investment in farm technologies, incentives might be provided to agri-tech start-ups that use new technologies to help farmers raise their income. Easy credit facility is likely to be proposed for expanding the network of warehouses and cold storages. In order to provide boost to the rural income, the Union Budget is expected to raise MGNREGS wages.
While the measures initiated by the government and the RBI have helped in improving the liquidity situations for non-banking financial companies (NBFCs) to a certain extent, we expect further stress-alleviating measures for this sector in the Union Budget. Amidst rising concerns about the growing level of NPAs in Pradhan Mantri MUDRA Yojana, the scheme is expected to be restructured to some extent. Further clarification might be provided regarding the recent zero Merchant Discount Rates (MDR) announcement as the zero MDR is likely to adversely impact revenues of digital payment companies. In case of insurance industry, the FDI cap for the sector is expected to be increased from the current 49 per cent. In case of Long-Term Capital Gains Tax, there are different long-term holding periods for diverse asset classes. The Budget is expected to realign the long-term holding periods with the asset class attributes.
The government has already unveiled investment plan of Rs 102 lakh crore for infrastructure development in the next five years. Hence, in the upcoming Budget, the outlay for infrastructure sector may be increased substantially to meet infrastructure investment target. In aviation, FDI limit is likely to be revised upwards from 49 per cent to 100 per cent. In railways, the Union Budget is expected to provide major focus on public-private-partnership (PPP) funding model for infrastructure development, mainly in segments like rolling stock, container and high-speed passenger trains and suburban metro. In telecom, a working group might be proposed to devise a line of credit system for telecom companies to finance capital expenditure. In view of the dismal performance of Ujwal Discom Assurance Yojana (UDAY) in 2019, this revival package for electricity distribution companies is expected to get restructured in the Budget. Given the growing demand for affordable housing, especially in urban areas, the Budget is expected to bring proposals to develop rental housing model.
Given the current growth conditions in the MSME sector and overall economy, we expect the Budget to address two important challenges - deteriorating credit environment and slowdown in exports. A strong legal infrastructure is necessary to develop a robust MSME finance ecosystem. While the Indian Bankruptcy Code (IBC) is a step in this direction, Rules only for corporates have been notified. Hence, we expect the government to set up a committee for notifying Rules for proprietorship and partnership firms. We also expect a fast-track establishment of the Public Credit Registry and on-boarding of Account Aggregator Non-Banking Financial Companies. These measures will bring more structure and process in this space and improve confidence among creditors. To provide further financial respite to the MSME sector, we expect a reduction in income tax for unincorporated MSMEs which do not enjoy the benefits of reduced corporate income tax (15 per cent from the earlier 25 per cent). On the exports front, we expect the Budget to provide more funds for marketing assistance schemes since the current level of funds is disproportionate to the number of active exporters. We also expect some measures to improve the competitiveness of MSME exporters through revaluation of the schemes for obtaining foreign licences, international certification etc.
(The author is Chief Economist at Dun and Bradstreet India.)