The Union Budget of 2019-20 will be the last budget for the NDA government in its current tenure. As this is the election year, we look forward to the budget announcements expecting the government to take some strong and directional measures to indicate its reform agenda and present its vision for the next five years. While the government is expected to focus on hand-holding the implementation of the major initiatives taken so far, we expect some populist measures to be announced by the government. Rural and agriculture development, infrastructure, land and labour laws and overall job creation is likely to get more focus in the current budget.
Missing the fiscal deficit target
The most keenly watched figure in the budget will be the revenue realisations from the indirect taxation and the fiscal deficit number. The government exceeded the fiscal deficit target during the first seven months of the fiscal year. Given the reduction in the GST rates over a wide range of commodities, meeting the GST revenue target seems difficult, unless the tax base widens up by a broader margin to offset the fall. We anticipate the government to miss its fiscal deficit number this year which will not be credit positive for India.
Focus on rural and farm sector
Given the fiscal constraints we expect the government to selectively implement the Universal Basic Income (UBI) Scheme this year. The Union Budget might announce a direct income transfer for low income group/weaker sections this year. Doubling the farmer’s income has been a bold target. We expect the government to lay out measures in this budget to outline how this would be achieved in the next few years. The volatility in the prices of agriculture products places considerable burden on the monetary policy decision and the interest rate cycle. We expect the government to create some framework which would align the domestic production with the agriculture import policy to check supply shortage or surplus, which in turn will help to maintain prices in the agriculture sector.
Strengthening the irrigation sector and spending on procurement and supply chain infrastructure to cover more crops and projects for connecting rural habitations to agricultural markets, higher secondary schools and hospitals is expected. We expect the government to make some tangible changes in their labour laws and build up more land banks (some states have already initiated the process) to pull in private investors, domestic and foreign, for investment in the infrastructure sector. We expect the government to articulate the implementation plans of mega projects within defined timelines and supportive policy measures. We expect the budget to announce some measures to expedite the creation of the 1,50,000 Health and Wellness Centres under the Ayushman Bharat Yojana. The Electricity Amendment Act 2018, recommends separation of distribution and generation function of DISCOMS. We expect the creation of an open access mechanism which will enable the end consumers to change their electricity service provider based on efficiency and cost. Given the initiatives for green infrastructure, we expect the government to dedicate a separate fund for such initiatives.
In view of the current slowdown in MSME credit, the Union Budget is expected to increase target for lending under MUDRA Yojana and increase the budget allocation for the same. The Budget is expected to propose some measures to revive and rehabilitate the sick MSME units. There is a need to develop a single window at district/zonal level for all the MSMEs. A single window which supports MSMEs for linkage with government schemes, linking small entrepreneurs with different marketing platforms, GST regulations, loan approval & disbursement and rehabilitation of sick units can act as a driver of growth for this sector. We expect the Government to announce some initiatives in this regard. We also expect the Government to exempt MSMEs from capital gains tax where the sales from the property is used for investment in the firm. As a measure to encourage MSME development in the identified ‘117 Aspirational Districts’, we expect the Government to set up Incubation centers or technology centers in these districts.
The Long-Term Capital Gain (LTCG), Security Transaction Tax (STT) and Dividend Distribution Tax (DDT) result in triple taxation of corporate earnings that are distributed. We expect some measures towards the rationalisation of these taxes so that corporates can move towards equity capital. To address the issues in the NBFC segment, we expect the Government to set up a committee which would suggest an action plan. There is a lack of a single data repository and a systemic risk mapping for the entire segment is absent. A common comprehensive database for sharing of information and joint analysis by relevant authorities covering the entire NBFC segment can help map the risk of contagion and common emerging risks.
To conclude, we expect that the government will stay away from any unpleasant announcements given elections are round the corner. It has now become imperative that initiatives that has not worked are remolded. The Planning, Allocation and Implementation of public investment needs to be assessed in a more comprehensive manner so that resources are diverted to projects that yield the optimum output and reduce the public investment “efficiency gap”