We view the budget to have delivered on most of the parameters which would enable India gear itself for the journey towards doubling its GDP to $5tn by 2025. Central theme of this year’s budget seem to be enhancing consumer spending & farm incomes, continue impetus on infrastructure, divestments, etc, while ensuring fiscal deficit doesn’t cross the stated threshold.
In longest budget speech ever, the current FM presented the budget while trying to deliver on most set of areas, which currently needs attention. The theme of the budget revolved around ease of living supported by good governance standards and robust financial sector. The three key pillars and sub sectors which were the focus areas were:
- ASPIRATIONAL INDIA– Agriculture, irrigation and rural development
- ECONOMIC DEVELOPMENT– Industry, commerce and investment, infrastructure and new economy
- CARING SOCIETY– Women & child, social welfare, culture & tourism, environment & climate change
Fiscal balance remains undisturbed even as capital expenditure budgets are raised
Budget 2020-21 reflects the Government’s firm commitment to substantially boost investment in the economy. Government proposes to increase the planned expenditure by 12% YoY to Rs. 30.42 lakh crore in FY21, while keeping the fiscal deficit target at 3.8% of the GDP. This is expected to translate in incremental investments of approx. Rs3.5 lakh crore for the year.
What gives us comfort and confidence that the stated targets are realizable are realistic growth assumptions and well calibrated estimation for revenue flows.
- Expenditure target is based on a nominal growth assumption of 10% for FY21, which translates in a real growth rate of 5.5-6.0% and is quite in line with the estimates provided by various reputed domestic as well as global agencies.
- Similarly, to boost revenue flows for the year and to reduce reliance on external debt, divestment targets have been increased from Rs 1.05 lakh crore to Rs 2.1 lakh crore. A large portion of this would come from stake sale in Life Insurance Corporation of India (LIC) and IDBI, reducing the chances for missing this target. There is no denying that listing of LIC would have a bearing on sectoral fund allocations from domestic funds and FIIs and thus on the trading multiples enjoyed by its peers, but this is a long pending move, with no or limited business implication on the competitors.
Overall therefore we see that the Government has been able to maintain the fine balance of fiscal discipline and GDP growth, amidst rising infrastructure expenditure. As stated earlier, all seem to be on track for achieving the $5tn mark in next 5 years.
Taxation anomalies across segments being ironed out
Spurring demand and rectification of anomalies seem to the common thread concerning taxation measures announced across segments in this budget. Some key announcements include:
- Extension of tax holiday for affordable housing segment by one more year (Mar’21). Developers have been incentivized to launch more projects in this space and individuals to purchase under affordable housing scheme.
- Steps initiated for personal taxation reform include rejigging tax slabs along with reduction in tax rates, even as standard deductions are removed. Here Government has given the choice to individual taxpayers to either shift to the new regime or continue under the old method, based on their preference. This has been done to simplify the tax structure and leave higher disposable income in the hands of individual taxpayers.
- Abolishment of Dividend Distribution Tax (DDT)- DDT has been abolished for the corporates and has been made taxable in the hands of recipients. Based on back of the envelop calculations, we expect this step to be beneficial for taxpayers below Rs 10 lakh slab of income.
- Cooperatives brought on same level as corporates– tax for cooperative societies has been reduced to 22% plus surcharge and cess, from 30% at present.
- 100% tax exemption for sovereign wealth funds for investments in priority sectors. This is likely to boost investments in the infrastructure space.
Boost to financial sector, MSME and startups to reinvigorate the slowing economy
With an aim to provide boost to financial system, and other areas of concerns, key proposals in budget are.
- Eligibility limit for NBFCs for debt recovery under SARFESI act reduced from asset size of Rs5 bn to Rs1 bn and loan quantum from Rs1 crore to Rs50 lakh.
- Proposal to ask RBI to extend the time limit for MSME restructuring to Mar’21 from Mar’20 and provide subordinated debt to MSME for working capital which will be treated as quasi equity and will be fully guaranteed
- Limit of FPI in corporate bonds to be increased from 9% to 15%
Raising of turnover target from Rs25 crore to Rs100 crore for startups to claim 100% deduction of profits for three consecutive years out of 7 years which is also enhanced to 10 years.