Finance Minister Nirmala Sitharaman married big data with focussed policy mediation to raise farmers' income, offered tax cuts to corporates, struck the super-rich with more taxes and set aside more funds for infrastructure in her first Budget on July 5, as she looked to spur an economy rocked by agrarian distress, falling household spending and wilting corporate investment.
Presenting her first Budget, the 59-year-old Sitharaman dug deep into government coffers to lay down an ambitious socio-economic plan that promised, among others, piped water to every household by 2024.
She pressed the accelerator on fiscal consolidation, lowering the fiscal deficit target to 3.3 percent of gross domestic product (GDP), from an already upwardly revised 3.4 percent pegged in the Interim Budget on February 1.
"Mega programmes and services which we initiated and delivered during those 5 years will now be further accelerated. We shall further simplify procedures, incentivise performance, reduce red-tape and make the best use of technology just as we did earlier," Sitharaman said.
Basking in the afterglow of the landslide win that returned it to power in May, the Narendra Modi government chose a big-bang approach over fiscal gradualism in its first budget of the second term to make good on some of its election promises.
More money for roads and new social and farm welfare schemes coupled with a drop in revenues on account of tax incentives for corporates to push investment and job creation will still not force the government to borrow more.
Sitharaman retained the fiscal deficit at 3.4 percent of GDP, through a raft of taxes on petrol and diesel by imposing a Rs 1 cess, as also raising taxes for those who earn more than Rs 2 crore.
The government also expects to earn more by way of selling stake in state-owned enterprises with the disinvestment target for 2019-20 set at Rs 1.05 lakh crore, up 16 percent from the Interim Budget's Rs 90,000 crore projections.
A status quo on fiscal deficit means that banks will not have to set aside a larger slice of the available lendable resource cake for government loans, lowering the risk of "crowding out" the private sector from the loan market.
But, there was enough on offer to turn India into a preferred business destination as well as create jobs for millions of youth who join the queue of hopefuls every year. Tax breaks and concessions for startups, the retail trading community, infrastructure and small and medium enterprises are all aimed at giving a fillip to the economy and job market.
The Finance Minister singled out micro, small and medium enterprises (MSME), the lifeblood of India’s industry, for special focus with Rs 350 crore set aside for 2019-20 for giving out loans to small firms, where the government will subsiside 2 percent of the interest.
About three crore retail traders and small shopkeepers with an annual turnover of less than Rs 1.5 crore will be eligible for a recently launched pension scheme.
In keeping with the government’s intent to create world-class infrastructure, roads, ports and railways came in for special attention led by an ambitious plan to enable investment of Rs 100 lakh crore in infrastructure projects over the next five years.
The Finance Minister also raised customs duties on several products including gold from 10 percent to 12.5 percent also on imports such as marble and split air-conditioners.
Higher customs duties, besides raising extra revenues, are also aimed to prevent cheaper imports flooding Indian markets and encouraging local manufacturing to go with the spirit of Modi's signature 'Make in India' intiative.
Sitharaman launched a train-station modernisation programme and announced plans to double India's port and airport capacity by 2024.
The Budget pencilled in a 7.4 percent increase in indirect tax for 2019-20 at Rs 1126194 crore from Rs 1042833 crore in 2018-19. This is predicated on growing goods and services tax (GST) collections amid hopes that the teething return-filing problems and other procedural irritants would be ironed out over the next few months.
Sitharaman, however, lowered direct tax collection targets from those estimated in the Interim Budget. The government now expects to collect Rs 13.35 lakh crore in 2019-20 from individuals and corporates, a growth of 11.25 percent over the previous year, but still lower by 3 percent compared to the Rs 13.8 lakh crore target set in the Interim Budget.
WATERING FOR EQUITY
Sitharaman echoed Prime Minister Narendra Modi's vow to make clean water accessible to hundreds of millions by bringing piped water to all homes over the next five years.
In his second term, Modi has merged various water ministries into one to deal with related issues, including polluted rivers and the shortage of clean drinking water.
She announced the launch of Jal Jivan Mission, an all-inclusive plan to quickly create last-mile piped water facilities in villages, replenish India’s plunging ground water levels and restore rapidly disappearing natural water bodies such as ponds, lakes and rivers.
India is facing its worst water crisis, putting millions of lives at risk.
According to a Niti Aayog report, 600 million Indians face high to extreme water stress and about 200,000 people die every year for want of safe water.
The crisis is only going to get worse. By 2030, India's water demand is projected to be twice the available supply, leaving hundreds of millions of people facing scarcity and an eventual loss in the GDP.
The government will overhauling the work plan of the rural job plan MGNREGA focusing it heavily towards water conservation, with 75 percent of Rs 60,000 crore allotted for scheme to be set aside for water conservation projects in 2019-20, primarily focussed on building community assets such as farm ponds, dug wells, check dams and trenches.
She also proposed an increase in social spending, including Rs 6,400 crore for Ayushman Bharat, the Modi government’s flagship health insurance programme, billed as the world’s largest.
TAXING THE RICH, EASING THE CORPORATES
Sitharaman, the first woman finance minister after Indira Gandhi, was expected to take measures to buoy demand through tax breaks, giving individuals and households more money to spend and save.
However, a hike in the annual tax exemption from Rs 2.5 lakh did not come along, which can leave a majority of India’s nearly 70 million taxpayers trifle disappointed.
The super-rich, however, have to bear the burden of the government’s extra welfare push. She raised the surcharge on with those earning between Rs 2 crore to 5 crore and Rs 5 crore. Effective tax rates for these two categories will increase by around 3 percent and 7 percent respectively.
Sitharaman, however, lowered the corporate income tax rate from 30 percent to 25 percent for almost India’s entire industrial class. In 2018, the government had lowered the corporate income tax rates to 25 percent for all companies with a turnover of up to Rs 250 crore. Sitharaman today raised that threshold to Rs 400 crore, expanding the eligibility of lower taxes to 99.3 percent of companies.
Business leaders have been asking for lower tax payouts to ensure that Indian companies do not lose their competitive edge over global peers.
"Now only 0.7 percent of companies will remain outside this rate," she said.
The lower corporate income tax rate is a carry-over from the Modi-government’s previous to-do list, when it said in 2015 that the headline tax rate would be progressively cut to 25 percent in four years but would come bundled with fewer deductions.
The Interim Budget had offered a full rebate to those with an annual income of up to Rs 5 lakh from Rs 2.5 lakh, implying those with an annual income of less than Rs 5 lakh will not have to pay tax. For those with income exceeding Rs 5 lakhs, the existing rates and slabs had applied. This remains unchanged.
Tax breaks on money invested in savings instruments, including bank fixed deposits, insurance premium and mutual funds, has also been retained at Rs 1,50,000 year under the popular “Section 80C” scheme.
Sitharaman, however, announced plans to tax cash withdrawals from banks above Rs one crore a year from a single bank account to keep a trail on people’s attempt to hoard cash through repeated high-value cash withdrawals, and make it less rewarding for people to transact in cash.
Changes in these may have to wait longer. A comprehensive set of direct-tax reforms are expected next year, with the government likely to overhaul India’s nearly six-decade old Income Tax Act, with a modern contemporary Direct Taxes Code.
A six-member panel is drafting a legislation that would draw from other countries, international best practices and also keep in mind India’s economic needs. The report is expected by July-end.
Accelerating household spending, which accounts for more than half of India’s GDP, is critical to reviving the broader economy.
India's GDP grew 5.8 percent in January-March, while "real" or inflation-adjusted GDP grew 6.8 percent in 2018-19, lower than previous year's 7.2 percent. The growth in GDP was slowest since 2014-15.
Slowdown signs have been visible since 2018, with the GDP growing 6.6 percent in October-December 2018. The national income data has reinforced deceleration signs that were emanating from a slew of shop-end data, such as car and consumer goods sales, often seen as indicators of trends in household spending.
MAKING FARMING REWARDING
Sitharaman announced a grand plan to deal with India's chronic agrarian distress. It includes incentives for home-delivery startups to aggregate products from farmers, creating 10,000 farmer produce organisations and a national warehousing network along highways.
The blueprint also includes creating a mobile app-based system for direct marketing by farmers, a separate fund for fish and aquatic farming, a village storage scheme of agri-produce and a special plan for using uncultivated rural land for solar farming.
These are part of the Centre's policy interventions to enable investment worth Rs 25 lakh crore, both by the government and the private sector, in India’s rural economy spread over a five year period, as promised by the BJP in the run-up to the election.
Big data, artificial intelligence (AI) and blockchain technology are major vehicles in the plan to make agriculture a rewarding vocation by giving farmers a higher price for their produce and bring them closer to the markets.
The new set of policies will also look at extensive use of big data, artificial intelligence (AI) and block chain technology as vehicles to enable farmers to get swifter and accurate information about weather, prices and other aspects.
Over the last two years, farmers have been protesting in several states, demanding better prices and debt write-offs. Cheap food may be good for consumers, but lower prices have meant that farmer income has remained flat.
India's long slowdown in food prices – “disinflation” as economists call it– may well be symptomatic of a problem of abundance.
The current price crash is partly due to bumper winter-sown crops that have flooded mandis. With few buyers, the glut had forced farmers to dump products at throwaway prices to clear up a piling mount of vegetables.