Union Budget 2019-20: New India drive amidst legacy pains

• The Union Budget 2019-20 endeavours to balance the objectives of short term economic stimulus with long term structural transformation of the economy.
• Liquidity of Rs 70,000 crore is being provided to banks, and the government has resolved to support NBFCs with sound macroeconomic fundamentals.
• MSME sector has been given a strong impetus with the threshold for 25% tax being increased from Rs 250 crore to Rs 400 crore, thereby covering 99.3% of all enterprises.
• Focus has been given on sunrise sectors under Make in India including electric vehicles (EVs), semi-conductor fabrication (FAB), solar photo voltaic cells, solar electric charging infrastructure, etc.

The Finance Minister Smt Nirmala Sitharaman read out the Union Budget 2019-20 on July 5, 2019, amidst concerns of a slowing economy, weak investment cycle and uncertain external environment. GDP growth fell to 5.8% in the quarter ending March 2019. Data by the Centre for Monitoring Indian Economy indicates that investments in new projects has fallen to a 15-year low for the quarter ending June 2019. Indian companies from both the public and private sectors invested Rs 43,400 crore in new projects in this quarter, a decline of 81% QoQ and 87% YoY. 

The IHS Markit India Composite PMI Output Index for the services sector dropped from 51.7 in May to 50.8 in June 2019, contracting for the first time since May 2018. In April 2019, sales of passenger vehicles plummeted 17% YoY to reach 247,541 units, the worst fall in the last 8 years. This sentiment is not just related to discretionary consumption. Even FMCG companies’ results show that volume growth has fallen substantially, and managements of these companies are concerned that this is not a short term aberration.

Amidst this environment, the Union Budget 2019-20 has attempted to balance the short-term urgency of reviving growth with the long-term vision of structural transformation of the Indian economy. There is an emphasis on the poor, promoting entrepreneurship and livelihoods in the rural sector and boosting the digital economy.

Exports have not been given the desired emphasis in the budget. In fact, the push towards external borrowings may lead to rupee appreciation and impact exports negatively in the short run. But the government has announced protection to sensitive sectors like cashew kernels, PVC, vinyl flooring, tiles, metal fittings, mountings for furniture, auto parts, certain kinds of synthetic rubbers, marble slabs, optical fibre cable, CCTV camera, IP camera, digital and network video recorders.

The support provided to MSMEs and infrastructure would also have an impact on business competitiveness and consequently on exports. Following are some of the key initiatives announced in the Union Budget to boost investment and take forward the vision of New India.

Encouragement to P-P-P investments

Infrastructure is key to ease of doing business and ease of living for Indians, and the government is planning a holistic approach towards the development of multi-modal infrastructure in India including road, railways, waterways, metro connectivity, etc.

The FM recognised the role of private sector investments to ensure successful and timely completion of priority projects in the infrastructure sector. She cited the instance of Railways, where the infrastructure investment would require Rs 50 lakh crore between 2018-2030. However, sanctioned budgets of Railways are only around Rs 1.5-1.6 lakh crores per annum. Therefore, the budget has proposed to leverage private investment to fasten the completion of tracks, rolling stock manufacturing and delivery of passenger freight services.

The Government also plans to set up a Credit Guarantee Enhancement Corporation in 2019-20 and deepen the long term bonds market. It will also allow sale of FII/FPI investment in debt securities issued by Infrastructure Debt Fund (IDF)-NBFCs to domestic investors. The government will look at ways to increase retail participation in CPSEs, and open up more CPSEs for private sector investment with a target of Rs 105,000 crore by 2019-20. Furthermore, the government has shown its willingness to bring stake in public sector enterprises below 51%.

Given that India’s sovereign debt-GDP ratio is among the lowest globally at 5%, the government is also looking at raising money in external markets and currencies. India will now look at being a part of the global financial system and leverage global savings in pension, insurance and sovereign wealth funds.  

FDI inflows have grown by 6% in 2018-19 to reach US$ 64.37 billion. This is a commendable performance considering that global FDI flows fell by 13% to US$ 1.3 trillion in 2018. To further boost investor sentiment, the FM has proposed 100% FDI for insurance intermediaries in the Budget. Opening of FDI in media (animation, AVGC) and insurance is also being explored. The government has promised to liberalise local sourcing norms for FDI in single brand retail.

Boost to MSMEs and entrepreneurs

The greatest impetus to the MSME sector in the Union Budget comes from the announcement to increase the threshold for 25% tax from Rs 250 crore earlier to Rs 400 crore at present. This will now cover 99.3% of all enterprises. The government has already brought in easier access of loans of upto Rs 1 crore to MSMEs in 59 minutes through a dedicated online portal. The allocation under Interest Subvention Scheme (2% subvention) has been increased to Rs 350 crore in 2019-20 for fresh or incremental loans.

A platform is also being proposed to ensure smooth filing and disbursal of government payments to MSMEs, given that they form a major portion of MSME cash flows. Around 3 crore retail traders and shopkeepers with annual turnover < Rs 1.5 crore will be provided a pension benefit under a new scheme – Pradhan Mantri Karam Yogi Maandhan.

Angel tax notices raised quite a furore in the startup community earlier this year. The government has assured that  start-ups and investors who “file requisite declarations and provide information in their returns” will not be subject to scrutiny on the valuations of share premiums. The period of exemption on capital gains from sale of residential house for investment in startups has been extended to March 2021. 

For promotion of startups, the government plans to set up an online channel under the Door Darshan bouquet to promote the sector and discuss issues like VC funding, tax planning, etc.

Liquidity in banking system

The NPA problem is particularly dire in public sector banks, with gross NPA to gross advances rising from 2.3 in 2011 to 14.6 in 2018. To kickstart the investment cycle, the government has proposed to provide capital of Rs 70,000 crore to public sector banks (PSBs). To further improve ease of living for citizens, these banks will leverage technology, offering online personal loans and doorstep banking, and enabling customers of one PSB to access services across all PSBs.

The government is also cognisant of the role of non-banking financial companies (NBFCs). The FM has opined that fundamentally sound NBFCs should continue to receive funding from banks and mutual funds “without being unduly risk averse”. The budget provides a one-time 6-month partial credit guarantee amounting to Rs 1 lakh crore to public sector banks for purchase of high-rated pooled assets of financially sound NBFCs, for the first loss of up to 10%. The regulatory authority of RBI over NBFCs is also sought to be strengthened. The requirement of maintaining a Debenture Redemption Reserve (DRR) for public placement of debt for NBFCs has also been done away with.

Housing sector on radar

The realty sector has been among the most underperforming in the past few years, and is a key lever to accelerate growth in the economy. Around 1.54 crore rural houses have been built over the last five years, and 1.95 crore houses are planned to be completed during 2019-20 to 2021-22. To revive the sector, deduction on interest paid on housing loans has been increased by Rs 1.5 lakh upto March 31, 2020, over the existing deduction of Rs 2 lakh. For middle class house buyers, this means a benefit of around Rs 7 lakh over their loan period of 15 years. Regulation of the sector is sought to be returned from the National Housing Board to the RBI.

Boost to Make in India in sunrise sectors

Electric Vehicles have been given a major emphasis in the Union Budget, with a vision to convert India into a global hub for electric vehicle manufacturing. The GST Council has been asked to reduce GST rate on EVs from 12% to 5%. The government will also give an additional income tax deduction of Rs 1.5 lakh on the interest paid on loans taken to purchase electric vehicles.

The government has announced a planned scheme to invite global companies to invest in mega manufacturing plants in sectors like semi-conductor fabrication (FAB), solar photo voltaic cells, lithium storage batteries, solar electric charging infrastructure, computer servers, laptops, etc. These companies would get investment-linked income tax exemptions under section 35 AD apart from other indirect tax benefits.