Some path-breaking budgets in the pastIn the last 29 years since liberalization, the first Manmohan Singh budget of 1991 was drastic, to say the least. It did away with most quotas and brought down customs and excise to globally competitive levels. It also allowed FDI and FII flows in a big way. Budget 1997 was the next dream budget which rationalized MAT and set the tone for professionalization of stock markets. Budget 2003 gave the big infrastructure push with the Golden Quadrilateral and set the tone for the structural bull market. The most recent big budget was in 2017, which announced the assured MSP for farmers.
There were also budgets that spooked markets. Budget 1996 spooked markets with the introduction of MAT. Budget 2004 introduced the STT. Budget 2018 brought back the LTCG tax and the dividend tax on mutual funds while the last Budget 2019 was controversial for its buyback tax and super rich tax. It is with this legacy that Budget 2020 will be announced.
Macro build-up to Union Budget 2020Budget 2020 will be presented in the midst of difficult macro conditions. The GDP growth has slowed to 4.5% in September quarter and IMF estimates full year GDP growth at 4.8%. Food prices have driven up retail inflation to 7.35%. Clearly it calls for immediate and palpable relief to the vast middle class. Weak consumption is an outcome of uncertainty and a clear unwillingness to spend money. That needs to change. This is hitting demand for a number of products ranging from automobiles, two-wheelers, FMCG products and consumer durables.
Reviving growth and spending is one side of the story. Budget 2020 needs to address the twin issues of enhancing revenues and checking the rise in fiscal deficit. Indian ratings are just above speculative and that does not inspire confidence to adopt pump priming. At the same time, inflows are likely to fall short on direct taxes, GST and divestments.
How can Budget 2020 address these diverse triggers?Budget 2020 is likely to be one of the most challenging in recent times with huge demand for funds and a shortfall in inflows. Here is what can be expected.
- With the FM cutting corporate taxes sharply in Sep-19, there are expectations that basic tax-free income will be raised to Rs5 lakh. Minimum tax rate of 5% may be extended up to Rs10 lakh incomes. FM may also look at a one-time cut in tax rates by 5%.
- Some tax exemptions hit two birds with one stone. They save tax and also enhance long term investing. That needs more encouragement! Budget 2020 could hike Section 80C limits to Rs3 lakhs and the NPS limit from Rs50,000 to Rs1 lakh. Section 24 benefits on interest on home loans may be enhanced from Rs2 lakhs to Rs3.50 lakh. FM may also look at some relief for the super rich on their income and tax wealth, instead.
- Corporate tax benefits given to domestic companies in Sep-19 may be extended to foreign companies too. In addition, the 15% concessional tax for new manufacturing units could be extended to all companies.
- Now comes managing the finances! While the NK Singh Committee has permitted a leeway of 50 bps in fiscal deficit, FM will try to keep the fiscal deficit level around 3.5%. This will avoid spike in bond yields and defend sovereign ratings. The budget could explore a drastically liberal FDI policy to encourage disinvestments.
- At the root of most of India’s macro challenge is the perpetual trade deficit and the overdependence on imported oil. Budget 2020 could be big on export sops with clear mandate to push growth in select sectors like textiles, gems & jewellery, pharmaceuticals and software. On the other hand, expect selective imposition of customs and countervailing duties where there is risk of cheaper global imports.
- Stressed NBFCs and realty players need urgent help as they provide the last mile for most PSU banks. The budget could use a combination of realty sops, tax breaks and easy funding options to assuage NBFCs and real estate players.
- Finally, it could be the appropriate time for aggressive rural spending and better price for farmers as well as the expansion of the employment guarantee program. The real kicker will be if the budget focuses on post-harvest infrastructure.
In a difficult year, the government may find it politically and socially convenient to launch Universal Basic Income (UBI). That could be the Big News of Budget 2020!