Budget 2019: Sitharaman bets on easier credit not fiscal boost for faster growth

It was protectionist and inward-looking, seeking to reduce import dependence rather than increasing exports.

ANI
The FM said the government would consider bringing down its shareholding to below 51% in public sector enterprises.
Finance minister Nirmala Sitharaman’s first budget was unexciting and incremental, rather than radical, providing no fiscal boost to accelerate GDP growth to the 8% target for Modi government 2.0. It was protectionist and inward-looking, seeking to reduce import dependence rather than increasing exports. No wonder the Nifty crashed 135.60 points.

The interim budget already had dramatic features like the PM-KISAN scheme, which provided Rs 6,000 annually to small and marginal farmers. It had also waived income tax for individuals earning up to Rs 5 lakh per annum. So this budget was more a supplementary than a full budget. However, with the help of Rs 90,000 crore of excess capital to be transferred from the Reserve Bank of India, plus higher cesses on petrol and diesel, the fiscal deficit came down marginally to 3.3% of GDP.

The Comptroller and Auditor General (CAG) had revealed last year that the official deficit figure was a fiction, cloaking off-budget borrowing. It remains to be seen whether the fiction will continue this year.


Sitharaman pledged bank recapitalisation of Rs 70,000 crore, which should revive lending in a big way. This can boost growth through booming credit rather than loose fiscal policy. The FM says the recapitalisation may be spread over three years, not in one big bang.

The Economic Survey on Thursday said that ‘dwarfs’ — companies with less than 100 employees even after 10 years of existence should lose their benefits to new startups. But Sitharaman seeks to help MSMEs in every way, including loans of up to Rs 1 crore within 59 minutes through a dedicated online portal, and faster clearance of government dues to suppliers. Remember, Snow White loved the seven dwarfs.

A paradigm shift is the decision to move part of government borrowings to foreign markets. No details are available on the sums for this year or next five years. This could check interest rates in India, so bond markets soared on Friday.
ADVERTISEMENT

Excess liquidity in foreign markets has created negative bond rates in countries such as Germany, so there will never be a better time to borrow abroad cheaply, despite currency risks, to finance domestic investments. But capital spending in the budget goes up only 6%, half the nominal GDP growth rate, so this cannot be called an investment-led strategy.

The budget assumes 12% nominal GDP growth, presumably 8% real growth and 4% inflation. But the Economic Survey had projected real GDP growth of only 7%. How has the rate gone up by 1% in one day? If one reduces nominal growth to 11%, many budgetary ratios will go haywire.

Former FM Arun Jaitley had promised that India would become competitive vis-à-vis Asian peers in direct tax rates. That has not happened. The promised cut in corporate tax rates to 25% will apply only to companies with a turnover of up to Rs 400 crore, stranding the large companies that are the biggest exporters.

Disinvestment Target Ambitious

And while India is struggling to get down to the 25% rate, other Asian countries have reduced their effective corporate tax rates to below 20%, rendering us uncompetitive.
ADVERTISEMENT

Soaking the rich may be good socialism, but worsens India’s competitiveness in tax rates. New surcharges will raise the effective income tax rate by 3% and 7%, respectively, for the highest tax brackets above Rs 2 crore and Rs 5 crore. The expectation of higher tax revenues will be eroded by accelerating the flight of billionaires to low-tax countries such as Singapore and Dubai, a most undesirable but rising trend.

For the second year in a row, import duties have been raised on a wide range of items — from vinyl flooring and tiles to cameras, optical fibre and books. The FM views this as promoting ‘Make in India’. But this is a vision of uncompetitive production behind high tariffs, not world-class competitive production.
ADVERTISEMENT

The Economic Survey said on Thursday that increasing exports were an essential condition for getting into a virtuous high-growth cycle, but the budget seeks import substitution — the very opposite philosophy that was followed in the first three decades after Independence with disastrous results. Nor is import substitution compatible with efforts to enter into free-trade agreements like the Regional Comprehensive Economic Partnership (RCEP), or with the European Union. The US has abolished preferential GSP tariffs for New Delhi in retaliation against India’s rising import barriers, so import substitution has become a tax on exports, a most unfortunate outcome. To attract more foreign portfolio investments, the FM will ask the Securities and Exchange Board of India to consider raising the minimum free float for listed companies from 25% to 35%. Logically, this should extend to public sector companies too. But they have been exempted for no good reason. To attract FII passive investment in exchange traded funds, the statutory limit for FII investment will be raised from 24% to the sectoral FDI investment limit. This will boost share prices but increase volatility risks as portfolio investment can be hot money.

Noting that FDI had risen to $64.4 billion in 2018-19, the FM proposed further opening up of FDI in civil aviation and insurance. FDI of 100% will be allowed in insurance intermediaries. Also, local sourcing norms will be eased for single-brand retail. These are incremental rather than big-bang steps, but nevertheless welcome.

Disinvestment aims to mop up Rs 1,05,000 crore, an exceedingly ambitious target. The FM says the whole list of PSUs cleared by the Cabinet for disinvestment will be sold. This includes the sale of brownfield government infrastructure assets worth Rs 24,000 crore. Management control will shift to private buyers, so this will be a form of privatisation.

The FM said the government would consider bringing down its shareholding to below 51% in public sector enterprises. This is highly desirable, as it will free companies from the travails of the CVC, CBI and CAG. It could materially improve the share prices too. Startups have been given a boost. The angel tax on supposedly excess share valuation is going to be virtually abolished, ending an extraordinary irritant. The identity and source of funds by investors will be resolved by e-verification, to check laundering of black money through this route.

Non banking financial companies (NBFCs) have also been given a lifeline. The government will provide credit guarantee to banks to purchase Rs 1 lakh crore worth of pooled assets of highly rated NBFCs. This will greatly ease the liquidity problems of the sector, and revive their lending to MSMEs. Regulation of NBFCs by the RBI will be strengthened simultaneously to check loose lending practices.

Faceless income tax assessments should reduce corruption in tax offices, and promote compliance. Tax scrutiny will be on a completely random basis to check tax harassment. These are welcome steps.
Download
The Economic Times Business News App
for the Latest News in Business, Sensex, Stock Market Updates & More.
Download
The Economic Times News App
for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
READ MORE
ADVERTISEMENT

READ MORE:

LOGIN & CLAIM

50 TIMESPOINTS

More from our Partners

Loading next story
Text Size:AAA
Success
This article has been saved

*

+