Prelude to the Union Budget for FY20
Tomorrow, the new finance minister will present her maiden Union
Budget. This will also be the first budget of the current five term of Lok
Sabha.
Since, a detailed interim budget for FY20 had already been
presented earlier this year, the final budget may only be small increment to
earlier pronouncements. It may not be reasonable to expect any major departure
from the pronouncements and promises already made in the interim budget.
Developments since interim budget
However, the finance minister may give due consideration to the
following developments that have taken place in the interim:
(a) BJP led NDA
government has received an overwhelming mandate for another term of five years.
This would put pressure on the finance minister to provide for fulfillment of
promises made in the interim budget and election manifesto. Extending the scope
of basic income scheme for small farmers; housing for all by 2024; 24x7
electricity for all by 2022; raising of basic income tax exemption limit are
some of these promises.
(b) The growth
environment has taken a turn for the worst in past 6 months. Despite RBI easing
policy rates and improving liquidity conditions, manufacturing growth has failed
to pick up. Poor progress of monsoon so far may further affect the already
struggling farm sector. Services, especially financial services, construction
and trade have suffered due to a variety of reasons, e.g., domestic NBFC
crisis, global trade slow down, model code of conduct during prolonged
elections, etc.
(c) GST rates have
been further rationalized. Consequently, the GST collections have remained
below the budget estimates. In fact June GST collection again came below Rs1trn
mark, after sustaining above this mark for 3months. The trends so far indicate
that GST revenue collection for FY20 may fall well short of budgeted estimates.
We may therefore see material thrust on raising revenue from non
tax sources like disinvestment, spectrum sales etc. This will of course be a
challenging task given the commitment of government to infuse fresh capital in
ailing telecom service providers BSNL and MTNL, little visibility on Air India
sales and urgent need for fresh capital infusion in public sector banks.
The report of Bimal Jalan committee on the transfer of excess
reserves of RBI has not yet been finalized. The delay is reportedly on account
of dissent by finance secretary Garg on the matter of methodology and timeline
of transfer. This further clouds the probability of material gains in non tax
revenue. For records, in FY19, RBI has transferred Rs 680bn as dividend to the
centre. In interim budget for FY20, government had estimated Rs 548bn as
dividend from RBI.
Besides, ministry of petroleum and natural gas has requested for
additional Rs 330bn in the budget to meet FY19 subsidy dues, over Rs 248bn
allocated in FY19RE.
Aggressive disinvestment, liberal dividend from PSUs and an
attractive gold monetization scheme could be some of the additional sources of funds
for the government.
(d) BJP manifesto
promised infrastructure investments of Rs100trn by 2024. Out of this, the
majority of spending is expected on Transport (Roads, Railways, River linking
& Ports), Energy (including Renewal Energy), Urban Infrastructure &
Housing, and modernization of Defence.
Even a partial fulfillment of this promise would need a strong
beginning from the current year itself. Budget may provide a guide path how the
resources for these investment plans shall be mobilized.
Tight fiscal conditions may not be a material constraint for
this ambitious program as the government has already been meeting capital
expenditure for infrastructure building through Internal External Budgetary
Resources (IEBR) i.e. resources raised by PSU through debt, equity and internal
accruals. Consequently, IEBR’s share in the overall capex has increased from
55% in FY16 to 67% in FY19R while share of Gross Budgetary Support (GBS) has
come down from 45% to 33% during the same period.
(e) The government
in a recent notification has extended the benefit of Pradhan Mantri Kisan
Samman Nidhi Yojana (Rs6000/yr) to all farmers in India vs. the initial
announcement of only small and margins famers. It will require additional
allocation of Rs120bn.
(f) Inflation has remained
benign and RBI has changed its policy stance to accommodative from neutral. The
finance minister may like to keep the headline fiscal deficit number at the
interim budget level to maintain the status quo on rates, yields and liquidity.
Key highlights of interim budget
Beta version of Universal Basic Income
The minister announced annual grant of Rs6000 to all farmers
owning less than 2 hectare land in the country. Under the “Pradhan Mantri Kisan
Samman Nidhi (PM-KISAN)”, every year 3 installments of Rs2000 each would be
transferred to bank accounts of farmers owning less than 2hectare (appx 5acre)
of land. The government expects around 12crore small and marginal farmer
families (appx 50% of the country's population) to benefit from the scheme. It
is not clear whether this scheme would be applicable to landless famers also.
The scheme comes into effect from December 2018, and Rs20000cr
have been provided in FY19 revised estimates for the scheme.
Rs75,000cr have been provided for the scheme in the FY20 budget.
Pension Scheme for Urban Poor
The minister announced a mega pension yojana namely 'Pradhan
Mantri Shram-Yogi Maandhan' for the unorganized sector workers with monthly
income upto Rs15,000. This scheme shall provide them an assured monthly pension
of Rs3,000 from the age of 60 years. An eligible worker joining the scheme at
the age of 29 years will have to contribute only Rs100 per month till the age
of 60 years. Similarly, a worker joining the scheme at 18 years, will have to
contribute as little as Rs55 per month only. The Government will deposit equal
matching share in the pension account of the worker every month. The government
expects at least 100mn workers to avail the benefit of this scheme.
Tax proposals
1. The tax rebate
under section 87A increased from Rs2500 to Rs12500. With this the effective tax
liability of tax payers with a total taxable income less than Rs5,00,000 would
be NIL.
2. Standard
deduction for salaried tax payers increased to Rs50,000 from Rs.40,000 earlier.
3. Second self occupied
house exempted from payment of tax on notional rent.
4. TDS threshold for
interest on saving accounts raised from Rs10,000 to Rs40,000.
5. TDS threshold for
rent on commercial properties raised from Rs1,80,000 to Rs2,40,000.
6. For taxpayers
having a long term capital gain of upto Rs2cr, the exemption under section 54
could be availed for two house properties, instead of one earlier.
7. For affordable
housing developers benefits under section 80-IBA extended for one more year,
i.e., for the project approved till 31 March 2020.
8. Period of
exemption on tax on notional rent on unsold inventory for real estate
developers increased to 2yrs from one year earlier.
10 point development program for next decade
1. To build physical
as well as social infrastructure for a $10trn economy and to provide ease of
living through next generation infrastructure of roads, railways, ports, urban
transport, gas & electric transmission, inland waterways, quality
educational system.
2. To create a
Digital India reaching every sector of the economy, every corner of the country
and impacting the life of all Indians.
3. To make India a
pollution free nation with green Mother Earth and blue skies. India to drive on
Electric Vehicles, and Renewable becoming a major source of energy supply.
4. To expand rural
industrialization using modern digital technologies to generate massive
employment. This will be built upon the Make in India approach to develop
grass-roots level clusters, structures and mechanisms encompassing the MSMEs,
village industries and start-ups spread in every nook and corner of the
country.
5. To clean rivers,
with safe drinking water to all Indians, sustaining and nourishing life and
efficient use of water in irrigation using micro-irrigation techniques.
6. Besides,
Sagarmala, to develop inland waterways faster.
7. To become the
launch-pad of satellites for the World and placing an Indian astronaut into
space by 2022.
8. To make India
self-sufficient in food, exporting to the world to meet their food needs and
producing food in the most organic way.
9. To make India
healthy, by providing a distress free health care and a functional and
comprehensive wellness system for all.
10. To make India
Minimum Government Maximum Governance nation.
In my view, it would be unreasonable to expect additional burden
on tax payers or any material relaxation in tax rates, under the present
circumstances; though some notional tinkering may not be ruled out in order to
make a political statement. Higher cess on super rich is a possibility, but any
changes in LTCG, estate duty and wealth tax may not find place in the present
budget proposals.
More on this tomorrow morning after studying the Economic Survey
for FY19 that will be tabled in the Parliament today.
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