As Nirmala Sitharaman presented her maiden budget as the first fulltime women Union Finance Minister, public expectation towards the Union Budget 2019-20 have been extraordinary given the massive victory of the Modi government and the state of the economy. GDP growth has slowed down, global outlook turning gloomy amid heightened trade tensions and fear of prolonged slowdown in the euro zone.
Against this backdrop, the Finance Minister presented a budget that focuses on growth touching every aspect of the economy, especially job creation. The most reassuring aspect was the fiscal deficit target of 3.3% for FY20, although a large segment of intellectuals would have been comfortable even with 3.5 % in lieu of a growth budget. The government’s focus on international borrowings will prevent crowding out the private sector borrowing in the domestic market as well as help establish sovereign yield curve.
Lower borrowing in the domestic market should be positive for currency, interest rate, and therefore interest cost will come down. Housing has been and continues to be a priority for the government.
Growth-focussed
The Finance Minister said that the government had already built 1.5 crore houses and will build 1.95 crore houses under the Pradhan Mantari Awas Yojna (PMAY) - Gramin over the next two years. Also time taken to complete construction of houses under PMAY had collapsed from 314 days in 2015-16 to 114 days in 2017-18 thus reassuring that the target of Housing for All by 2022 will be met.
Under PMAY (Urban) nearly 24 Lakh houses have been delivered to the beneficiaries. The Finance Minister has incentivised the people buying affordable houses by increasing fiscal incentives on a home loan. The budget has provided for an increase of up to ₹1,50,000 deduction p.a. on the interest component of a home loan borrowed before March 31, 2020, provided the property value is under ₹45 lakh. With this, the total fiscal incentives on a home loan by way of interest deductions are ₹3.5 lakh p.a. This additional fiscal benefit also will lead to increase in the loan eligibility of the borrower.
Apart from this there is already a tax benefit on repayment of principal of up to ₹1.5 lakh. Having said all this, if the borrower buying such a property also fulfills all the requirements of the PMAY scheme, then the effective overall interest rate on his home loan can be below 4 % p.a. even though the nominal home loan interest rate being 8.7% p.a. This should provide a huge boost to affordable housing. There has been a massive clean-up of the NPAs of the banking sector in the past few years and the ₹70,000 crore recapitalization plan will adequately bolster the PSU Banks’ capital base and improve credit uptake.
The Finance Minister has acknowledged the role played by the NBFCs in the growth of the economy and said that the government will provide one-time six-month partial credit guarantee to PSU banks for first loss up to 10% for the purchase of high-rated pooled assets of financially-sound NBFCs. This will incentivise banks to lend to NBFCs. Ms. Sitharaman has cut the tax rate to 25% for all the corporates with an annual turnover of up to ₹400 crore from the earlier ₹250 crore, thus covering 99.30% of all corporates in India. This is a step in the right direction to support the smaller companies as they have the ability to provide more jobs with the same amount of capital as compared to large corporates. Mrs. Sitharaman has made a great start and one looks forward for bold measures going forward.
(The author is the Managing Director of HDFC Ltd.)
