The Union Budget for the year 2020-21 was presented in the backdrop of a gloomy economic scenario where all the important levers of growth namely private investments, private consumptions and exports were spluttering.
Whatever growth witnessed was based on heavy lifting by the government. The Budget posited a slippage of 0.5% percent in the fiscal deficit for the next year vis-a-vis the FRBM target. The clear message that can be discerned from the Budget is that the government is now comfortable with being perceived as pro-business and not inclined to stigmatise capitalism — a phrase coined by Former Chief Economic Adviser, Dr. Arvind Subramanian.
There are a number of policy announcements in the Budget which would boost private investments. These include the abolition of Dividend Distribution Tax, the exemption on interest, dividends and capital gains for investment in infrastructure projects by sovereign wealth funds (that will help to tap into global pools of capital) and the relaxation in the limits of foreign portfolio investment in corporate bonds from 9% to 15% (of the outstanding value of the bonds). This will increase investments in the Indian bond market.
The Budget recognises that it would be difficult to kick-start growth without improvement in the business sentiment.
The Finance Minister has tried to achieve this by providing comfort to businesses in a number of her remarks. A good example of this is the ‘Amnesty Scheme’ for direct taxes on similar lines to the indirect tax. The scheme has been labelled ‘From Litigation to Trust’ scheme (‘Vivad se Vishwas’). The scheme provides for complete waiver of interest, penalty and prosecution proceedings if the disputed tax amount is paid by March 31.
Similarly, the other interesting confidence building measure is the incorporation of a charter of commitments incorporated in the direct tax statute which promises a tax-friendly environment. This is similar to the Tax Charter found in developed countries like Canada.
These are important trust building measures which will help both domestic investment and create a favourable climate for foreign investment.
On the consumption side, the government has given relief for taxpayers whose incomes are up to ₹15 lakh.
These concessions are given in an innovative fashion by predicating them on the taxpayers giving up their tax deductions.
The idea is to simplify tax payments by gradually phasing out exemption and having a flat rate. The focus is also on speeding up investment in the infrastructure which will, in turn, boost private consumption because a lot of the investment would generate jobs especially in industries like construction and retail. The Finance Minister also talks about encouraging ‘Assembling in India’ going away from the earlier position of encouraging only those industries in India where the value addition is high. In fact, the Budget talks about encouraging ‘Network Industries’ like electronics and mobile phones which can generate considerable jobs even while assembling on account of the scale effect.
It is well recognised that the best way to boost consumption is to increase good quality jobs in the formal economy. The complaint is that many companies find students graduating without the necessary jobs skills. ‘Unemployable’ is the common refrain. The Budget also talks about skill upgradation and also moots the concept of having bridge courses for categories like teachers, nurses and other semi-skilled workers who are much in demand in foreign countries.
The allocation for infrastructure industries and the social sector has been considerably enhanced but in spite of this, the Finance Minister has been able to keep the Budget deficit within reasonable limits largely on account of huge expectations from disinvestment and monetisation of assets.
These revenues really hold the key for the government to manage its finances in the coming year. A huge target of ₹2.10 lakh crore has been fixed for disinvestment next year. This is sought to be facilitated through partial disinvestment in LIC and IDBI together with the earlier announcements of Air India, BPCL and CONCOR. What is disappointing in the Budget is a lack of strategy to reduce agricultural subsidies, mainly food and fertilizers. It would be better to give assistance directly to farmers and also switch some expenditure from subsidy to agricultural R&D which is badly neglected. Food subsidies are a huge burden and arise mainly on account of government guarantees to borrowings by the Food Corporation of India which maintains a huge inventory of foodgrains of nearly 75 million tonnes when perhaps only 35 million tonnes would suffice. There is also a case for revision of issue prices from the ration shops which have not been raised for a long time. To sum up, the Finance Minister’s expectations about a boost in the economy largely hinges on factors beyond her control — an uptick in global growth, improvement in investment sentiment facilitating higher disinvestment and a downturn in oil prices.
(V.S. Krishnan is the National Leader, Tax and Eco Policy, EY India. The views expressed are his personal)
