Indian Budget 2019-20: Nirmala Sitharaman’s Maiden touch

Nirmala Sitharaman -India’s first female full time finance minister - presented her maiden budget, on 5^th July – faced with headwinds on the economic growth & job fronts impressed  with some new thoughts despite taking over the Ministry only 5 weeks ago. Some of them follow:

Zero Emission Mobility: The auto sector slowdown courtesy the NBFC (Non-Banking Financial Companies) crisis & trickling of credit to buyers thereof was addressed vide:

(a) a one time, six month, partial credit guarantee for PSU (Public Sector Undertakings) banks of first loss of up to 10% of Rs. 1 lakh crore for buying highly rated pooled assets of financially sound NBFCs, this financial year. The IL&FS crisis has triggered a crisis in the “shadow banking” sector & the RBI did not open any special window to handle the liquidity concerns of NBFCs; the govt. vide this announcement  has  “signalled” its intent to help financially sound NBFCs by nudging the “risk averse” PSU bankers & allowing the rest to be subsumed by market forces. An Asset Quality Review (AQR), of NBFCs, if announced will accelerate the inevitable.

Proposal for strengthening the regulatory authority of the RBI over NBFCs has been introduced in the finance bill.

(b)a Rs. 1.5 lakh tax deduction for buyers of EVs (Electrical vehicles) to spur this sunrise non-polluting segment to achieve economies of scale & perhaps, to make India into the EV factory of the world, by 2030; this is over & above the announcement of no custom duties, on some parts used in EVs, that are imported apart from the proposal before the GST council to reduce Indirect Taxes on EVs from 12% to 5%.

(c)Special Additional Excise duty & Road & Infrastructure cess of Rs. 1/- each per litre on diesel & petrol, perhaps, an attempt at “behavioural nudge” on consumers towards EVs; this also means that the demand for including oil under GST is unlikely to be met, immediately; states too would not complain, gaining as they too are due to the oil tax bonanza. This measure could net the Govt. about Rs. 20,000 crores this year.

Since Indian oil imports were $114 billion, in 2018-19, (~22.5%) of the total merchandise imports of $507 billion & India imports 83.5% of its oil needs there is a need to reduce import dependence by focussing on environmental friendly EVs. However, since the no. of moving parts in an EV are less than an IC (Internal combustion) engine vehicles, a shift to the former would induce stress in the auto component industry in the next decade or two & plans need to be initiated to manage the same. .

Stimulus to Housing: To manage the job crisis, a stimulus to the housing segment – the 2^nd largest absorber of labour after agriculture - vide:

(1)Allowing for an additional deduction of Rs. 1.5 lakhs, over & above the Rs. 2 lakhs already available, for availing of housing loans, upto 45 lakhs, till 31/3/2020

There are a lot of stressed assets in realty & buyers had petitioned the govt. for some intervention in the form of interest holiday & creation of a stressed asset fund to complete the projects; the govt. appears to favour market forces to manage the situation. Considering the power differential between the real estate tycoons & the home buyers - many of whom spent their lifetime savings on the home asset - it might be prudent of the govt. to take over the land banks of the recalcitrant tycoons, arrange for sell off - a la Satyam - & use the proceeds thereof to complete & hand over to the consumers. Since realty is one of the sinks of black money, in India, apart from mining, quarrying & Jewellery sectors managed largely vide political patronage, cleaning up this sector augurs well for electoral politics in India.

The govt. had encouraged rental housing & REITs (Real Estate Investment Trusts) formation in its previous term but flows from pension funds, sovereign wealth funds etc. was lacking since REITs expect at least an 8% return while rental yields in India are a meagre 2%. Since the highest component of the housing cost is land & the govt. is the largest hoarder of this scarce asset, Industry has been demanding social capital of free land from the govt. to promote affordable housing which is still unmet; the other suggestion by industry is “Negative Gearing” - where losses on investment by renting out house property is tax deductible & attracts only 50% (say) of capital gains in eventual sale. Real estate players too, instead of making supernormal profits, by keeping prices high, should cut prices to encourage buyers instead of being a cry baby year after year.

Enhance public Float from 25% to 25%: SEBI has been advised to initiate consultations to explore public shareholding increase from 25% to 35% that would enhance free float, allow for better price discovery & allow minority shareholders to own a greater slice of value stocks - the biggest potential wealth shifting announcement. This also takes away the promoters ability to unilaterally pass special resolutions & hence improve governance.  According to Centrum Broking’s research 1174 listed companies (~25%), of the total listed company universe of about 4700 companies, will be affected. These include companies like TCS (Rs. 59500 cr.), Avenue Supermarts (Rs.14000cr.), Wipro (Rs. 15000cr.) & they might have to divest stake or delist. There is a legitimate argument, however, that there is merit in having promoters of small caps & mid-caps have greater skin in the game.

India’s weight in MSCI (Morgan Stanley Capital Index) or other indices, though, could rise leading to benefits over medium term. FPI (Foreign Portfolio Investors) investment upto sectorial limits announced would ensure more inflow of foreign funds. Introduction of tax on dividends, of 10% plus surcharge, for individuals/HUF (Hindu Undivided Family)/partnerships/private trusts, over Rs10 lakhs, in last budget, over & above the DDT (Dividend Distribution Tax), of 20% (including surcharge & cess), charged on the companies, incentivized many promoters to opt for buyback of shares. The loophole is now closed with buybacks on listed companies too, like unlisted ones, attracting a 20% tax.

While the timeline to fulfil the 35% public holding is not spelt out, this has the potential to net the govt. substantial revenues ~20% on about 4 lakh crores or Rs. 0.8 lakh crores. However, Finance secretary, Subhash Chandra Garg, has clarified that a decision has not been taken yet & hence “unfortunate” that the market has prematurely reacted strongly against the “proposal” before SEBI coming out with a “considered recommendation,” on “whether & to what extent & which kind of companies” shall be subjected to the order.

Addressing the Job crisis: Capital adequacy of banks is being addressed vide a promise to infuse Rs. 70,000 crores; the time line of infusion is however unclear – this year or over a 3-5 year tenure. With capacity utilization under 80%, it is unlikely that fresh greenfield investments will be undertaken by industry especially when cheaper assets are available vide IBC (Insolvency & bankruptcy code). Breather on Angel tax, though, is welcome.

Easing of sourcing norms for single brand retail announced could bring in FDI but not help “Make in India”.

Announcement on a TV channel run by start-ups, for start-ups, to discuss on issues affecting their growth, matchmaking with VCs (Venture Capitalists), funding & tax planning, under DD (Doordarshan) bouquet of channels  & willingness to ensure greater dispersion of foreign languages is a signal to job seekers either to make provisions for self-employment or seek avenues abroad; the govt., though, should push for greater labour mobility in WTO (World Trade Organization), FTA (Free Trade agreements)  or in trade block negotiations.

Raising Foreign debt for Sovereign: Indian debt in foreign currency is a low 5% & India’s primary deficit is nearly zero i.e. entire fiscal deficit is used to fund the interest cost on debt. CAE (Chief Economic Advisor) Krishnamurty Subramanian, has argued that since the global interest rates are low there is a case for raising more of sovereign debt abroad in foreign currency. It must however be remembered that the Latin American crisis was caused due to high levels of foreign currency debt & former Governors’ of the RBI, like YV Reddy, resisted the pressure, of the then Govt., on a similar proposal raising the spectre of additional exchange rate risks & the consequent rating downgrade fears.

Zero Budget Farming: A pithy statement was made on zero budget farming which is another name for organic farming – without the use of fertilizers & pesticides & using cow dung, urine, organic waste etc. instead – & using intercrops as a way to supplement income over the main crop as a solution to the farm crisis; obviously, doubling of farmer incomes promised, by 2022, sounds utopian.

Taxing Rich Indians: A surcharge amounting to 3% extra & 7% extra tax was introduced on personal income tax slabs of 2 - 5 cr. & greater than 5 cr. respectively. Despite the Oxfam report, indicating that 1% of Indians hold 51.5% of wealth, no measures on Estate tax were announced.

Criticism on the Budget

Former Finance Minister, P Chidamabaram, called the budget an “unusually opaque exercise” which did not disclose “the total revenue, total expenditure, Revenue deficit, fiscal deficit, the additional revenue mobilizations or financial concessions”. He called the budget “protectionist” for increasing custom duties, “exploitative” for increasing taxes, on petrol & diesel & lamented no “structural reforms” in Part A of the budget speech. He reminded that FPI (Foreign Portfolio Investment) is not FDI (Foreign Direct Investment) & critiqued the increase in FPI limit from 24% to the sectorial cap, perhaps, because the former is more volatile. He found the idea of a Credit Guarantee Enhancement Corporation, National Gas & Water grids interesting but bereft of details.

TT Ram Mohan, Prof IIM (A), lamented the absence of any reference to the fiscal glide path.

Indian exports are stagnating; exports, in 2013-14, were $312 billion which dropped sequentially till 2016-17 & rose to $303 billion in 2017-18 & $328 in 2018-19. One would have expected the broad contours of a revival plan to be laid out with the Commerce Minister spelling out the details later. Indian exporters face structural issues including delayed refunds & high power & logistics costs; decongestion of ports, roads, railways & waterways are solutions apart from removing roadblocks in customs While 50 Lakh crore investment, till 2030, in Railways, was proposed, Rs. 0.64 lakh crores only, in capital budget was allocated for this year in the budget; the budget for roads & highways too is 0.68 lakh crores only. Monetization of railway land & NHAI (National Highway Authority of India) completed road projects & PPP partnerships might be the way ahead.

While the govt. awarded the regulation of HFC (Housing Finance Companies) to RBI from HDB (Housing Development Board), it would have been prudent to announce the institution of a super regulator combining SEBI, PFRDA, IRDA, RBI etc. to avoid both turf wars & prevent regulators from escaping responsibility, post inaction on issues, by claiming them to be beyond their remit.  

Surprisingly, the budget documents, presented, have not been updated with the actual figs of FY 2018-19 but have retained the Revised Estimates (RE) of 2018-19 - the same as presented by Piyush Goel, in Feb 2019; it is obvious that the revenue growth estimates projected by the govt. are more a sleight of hand - an attempt to project a Fiscal deficit of 3.3%.

Conclusion

Nirmala Sitharaman’s maiden budget was a grand statement of Modi 2.0 intent which covered elements of Indian foreign policy too; fresh thoughts like the one of EVs for “Zero Emission Mobility” are welcome while lack of clarity on issues like “Zero Budget Farming” is a concern. Prudent that going forward, hopefully while presenting her first full year budget, for FY 21, in Feb next year, she speaks numbers, for greater clarity, to differentiate between statements of intent & well-crafted fully baked policy. To borrow Arnab Goswami’s famous words: “India wants to know”.