Union Budget Analysis: A personal take

It’s been around a week since the honourable Finance Minister Smt. Nirmala Sitharaman presented her 2^nd full Union Budget of India. The Union Budget comes at a time when the nation is under the grip of a severe economic slowdown with the GDP growth rates at 4.5% for Q2 2019-20. With the growth rate lowest in over 6 years and falling continuously for 7 quarters now on the back of declining demand, expectations were definitely high for some much needed corrective measures to bring the economy back on track.

Below is a personal analysis of the budget from my limited viewpoint. Only key proposals from the budget have been discussed with respect to farmers, youth, investors, start-ups in addition to its impact on economic development and the new tax system.

For farmers

Agriculture along with its allied sector still form the largest source of livelihood in India. Around 70 percent of our rural households still depend primarily on agriculture for their livelihood, with 82 percent of farmers being small and marginal. A key section of budget is dominated by policies and initiatives for the farmers.

Key Initiatives:

• Establishing new and efficient warehousing centers at the block/taluk level by providing Viability Gap Funding (VGF) on a PPP mode.
• Kisan Rail: Establishing a seamless national cold supply chain for perishables such as milk, vegetables, meat and fish through the Indian Railways via PPP arrangements.
• Krishi Udaan: Similar to Kisan Rail, this scheme will be launched by Ministry of Civil Aviation. The scheme will provide much needed access to domestic and international markets and will prove especially useful to farmers belonging to northeast and tribal areas.

Statistics show that around 25-30% of fruits and vegetables produced in the country are wasted because of the lack of cold storage facilities. With India having an estimated capacity of 162 million tonnes of agri-warehousing, cold storage, reefer van facilities etc. NABARD is expected to undertake an exercise to map and geo-tag them to bring much needed efficiencies in agricultural supply chain.

Though the idea of transporting goods by rail had been proposed before, by the then Railway Minister in 2009, the project had failed to take off. Such a move to explore air and rail modes for transportation of perishables is a good initiative and would definitely help in the current gaps in last mile connectivity to ensure end to end supply chain.

The above 3 proposals are much needed and ambitious initiatives and if executed properly would ease a lot of burden on the farming sector

Budget Estimate for Agriculture, Irrigation & allied activities – Rs 1.60 lakh crore

For youth

We have been hearing about demographic dividend and the advantage we pose in terms of working population for some by time now. It is estimated that by 2030, India will have the largest working population in the world. Having an educated and employed youth would be the backbone for the country going forward.

Key Initiatives:

• The New Education Policy to be announced soon.
• External Commercial Borrowings and FDI in education system to attract talented teachers, innovate and build better labs.
• About 150 higher educational institutions will start apprenticeship embedded degree/diploma courses by March 2021.
• Urban local bodies across the country would provide internship opportunities to fresh engineers for a period up to one year.

With unemployment rates above normal and unemployability of engineers rising, initiatives such as embedded apprenticeships and mandatory internships would do wonders to provide a practical outlook for students and also improve the quality of education. I hope internships are given more importance and even considered mandatory like house surgency for medical students.

Budget Estimate for Education Sector – Rs 99,300 crore and Rs. 3,000 crores for skill development.

For economic development

Infrastructure

National Infrastructure Pipeline was already unveiled on 31st December 2019 of Rs. 103 lakh crore. It consisted of more than 6500 projects across sectors and are classified as per their size and stage of development.

Key Initiatives:

• National Infrastructure Pipeline: Already unveiled.
• Project Preparation Facility for infrastructure projects: The programme would actively involve young engineers, management graduates and economists from our universities.
• National Logistics Policy: To be unveiled soon. It will create a single window e-logistics market and focus on generation of employment, skills and making MSMEs competitive.
• Accelerated development of highways.

I have already written a detailed article on “Why the National Infrastructure Pipeline matters” and its implications, you can read the article here.

Logistics sector is a major accelerator for trade. The need for such a policy is evident from the fact that logistics costs around 13-14% of GDP. This figure is comparatively higher than global counterparts. The proposed single window system is expected to cut this to about 10%

The proposed highway development will include development of 2500 Km access control highways, 9000 km of economic corridors, 2000 Km of coastal and land port roads and 2000 km of strategic highways. The much delayed and anticipated Chennai-Bengaluru Expressway is also expected to started soon.

A huge employment opportunity exists for India’s youth in construction, operation and maintenance of infrastructure. The National Skill Development Agency is poised to give special thrust to infrastructure-focused skill development opportunities.

Railways

After the practice of a separate Railway Budget was scrapped in 2016, the railways now find a mention in the union budget.

Key Initiatives:

• Setting up a large solar power capacity alongside the rail tracks, on the land owned by the railways.
• Station redevelopment projects (4) and the operation of 150 passenger trains through PPP mode.
• 148 km long Bengaluru Suburban Transport Project at a cost of Rs. 18600 crore.

Anyone from Bengaluru would definitely be hyped hearing about a Bengaluru Suburban Project. The 37 year old wish again finds a mention in a Union Budget, but not for the first time. The project was similarly mentioned a couple of years too. Citing a recent report, Bengaluru is the world’s most traffic congested city and the introduction of the suburban rail network will help in providing the residents an alternative to reach their destinations on time .

Budget Estimate for Transport Infrastructure: Rs. 1.70 lakh crore.

New Economy

Good to see government seeing opportunities of the future and understanding that the new economy is based on innovations that disrupt established business models through Artificial intelligence, Internet-of-Things (IoT), 3D printing, drones, DNA data storage, quantum computing, etc. and are re-writing the world economic order.

An Budget Estimate of Rs 8000 crore over a period five years have been allocated for for the National Mission on Quantum Technologies and Applications.

Affordable Housing

Affordable housing has been one of the important projects by the current government to provide housing for all. In order to boost the supply of affordable houses in the country, a tax holiday is provided on the profits earned by developers of affordable housing project approved by 31st March, 2020. Such a tax holiday has been extended by one more year to incentivise developers in this space.

For investors

Markets have been at all time highs even though there was no solid numbers to back the market run after the government announced the corporate tax cut in september. Expectations were high on the budget, however the markets reacted to the budget in the negative with the benchmark index, Sensex falling nearly 1000 pts.

Key Initiatives:

• The Deposit Insurance and Credit Guarantee Corporation (DICGC) has been permitted to increase Deposit Insurance Coverage for a depositor, which is now Rs 1 lakh to Rs 5 lakh per depositor.
• New Debt-ETF consisting primarily of government securities in light of the success of the Debt-based Exchange Traded Fund (ETF) recently floated by the government.
• The government now proposes to sell a part of its holding in LIC by way of Initial Public Offer (IPO).
• Removal of Dividend Distribution Tax (DDT) and adoption of the classical system of dividend taxation

Criticism:

• Dividends are distributed from profits after tax (PAT). Any kind of tax on on PAT, be it on the hands of the investor or the company is a form of double taxation and could have been avoided.
• Disinvestment target set for the upcoming year seems unattainable. This becomes especially evident given the fact that government seems to be able to attain only around 25% of the current year’s target.
• Markets were expecting a Long Term Capital Gains tax rejig, however nothing of that sort happened, sending the market down, at least for the day.

For start-Ups

With startup ecosystem booming in India, the Finance Minister offered some tax sops to early stage startups including:

• Employee Stock Ownership Plan (ESOP) tax deferred by five years or till they leave the company or when they sell their shares, whichever is earliest.
• Eligible Start-ups having turnover up to 25 crores is allowed deduction of 100% of its the profits for three consecutive assessment years out of 10 years if the total turnover does not exceed 100 crore rupees.

Criticism:

Tax deferral on ESOPs are not applicable to the 20,000 odd startups registered in India, but restricted to about 250 start-ups chosen by the government.

Taxation

Taxation proposals are some of the most sought after and discussed sections of any budget speech. Expectations for direct tax cuts were high given the fact that corporates got their share through a corporate tax cut in september. The Finance Minister delivered on this expectation in form of a tax cut, but with a twist.

A tax collector should collect taxes from a taxpayer just like a bee collects honey from a flower in an expert manner without disturbing its petals.

~Kautilya in Arthashastra

We currently had a 4 slab (effectively 3) tax structure. This was replaced by a 7 slab system with an option to choose between the two given in the table below.

How the new tax system works is explained below:

Option 1: Adopt the existing tax system and current tax slabs (higher) while enjoying tax deductions and exemptions.

Who is it for: Taxpayers who are already in a position to avail deductions such as interest paid on home loans and education loans, tution fees paid for children, insurance etc.

Option 2: Adopt the new tax system with lower tax slabs but forego about 70 deductions and exemptions, in a move to simplify tax filing and administration.

Who is it for: Taxpayers who are relatively new entrants and don’t have tax deductible investments or options will get benefited from a lower rate.

Intent:

• Such a move seems to simplify the tax filing and administration process. In effect, the move may be cumbersome to individuals (compare both options and then choose one) but definitely make the filing process easy with less exemptions and deductions to wrap your head around.
• Another intent of making away with exemptions leads individuals to spend money now rather than park it away for tax benefits (through 80C sub-sections such as ELSS and Insurance) in an attempt to drive up consumption in the short run.

Concluding Remarks:

The Union Budget was full of normal, regular and much needed policy framework and budgetary outlays. This comes only as an incremental update to the previous ones. Though touted as a populist budget, for offering major direct tax cuts for taxpayers, it seems to fall short of the general expectations is due to the lack any major direction to revitalize the falling demand in the economy which was highly expected. Surely the budget is only a proposal, I hope to see more of extra-budgetary policies and announcement in the days to come.

Major Sources:

• Union Budget Speech
• Draft National Logistics Policy
• National Infrastructure Pipeline
• PwC Union Budget Analysis

What do you think of the latest Union Budget? Disagree on some points? Do let me know in the comments below.

E S Krishna Ram

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