Union Budget 2019-20: Not big bang but some signals stand out

This is not a big bang budget. Nor is it particularly bold though the government says it is walking towards the vision for a decade in which the five- year stop is a five trillion dollar economy with 8 per cent GDP growth. It is not immediately clear how this will be achieved, particularly when savings are down, banks are saddled with bad debt and the corporate sector is weak, the last two mostly because of their own excesses though a variety of reasons get cited. Even in the best of times and in the most mundane of targets, going from zero to 90 is one thing; from 90 to 100 is quite another ball game.

In the very lack of the big bang probably lies some of the strength of the budget. Some interesting signals stand out. First among them is a tax on the super-rich. Individuals having taxable income from Rs. 2 crore to Rs. 5 crore and Rs. 5 crore and above will now see their effective tax rates go up by around 3 per cent and 7 per cent respectively. This sends out a clear message that the rich must pay more, or in the words of Ms. Nirmala Sitharaman, “those in the highest income brackets need to contribute more to the nation’s development.”

GDP similarly is not a linear graph that keeps growing. It’s a dynamic story with many moving parts, not all of which are under the control of the FM. In the current times, pushing growth is already a challenging task when so many parts remain stalled. So when no big idea stands out to get out of the current rut, the reactions can be very negative. We saw that all over. The BSE Sensex shed 400 points (the proposed increase in minimum public holding in listed entities from 25 per cent to 35 per cent being one reason), economists are asking what’s new in this and sectoral leaders looking for their sector-specific relief in the short term will be disappointed.

Yet, in the very lack of the big bang probably lies some of the strength of the budget. Some interesting signals stand out. First among them is a tax on the super-rich. Individuals having taxable income from Rs. 2 crore to Rs. 5 crore and Rs. 5 crore and above will now see their effective tax rates go up by around 3 per cent and 7 per cent respectively. This sends out a clear message that the rich must pay more, or in the words of Ms. Nirmala Sitharaman, “those in the highest income brackets need to contribute more to the nation’s development.” If this is a political philosophy, then we should see some interesting directions emerge in the coming years of a government that sits on so strong a mandate. This is not likely to be appreciated either by the super-rich (which include many BJP supporters) or by the free market thinkers who probably expected a very different recipe from a government not cut in the socialist mould.

It was good so see the FM argue that the environment is a critical consideration (she even used the term “suspended particulate matter” and concerns arising from it in her post budget press conference) to insist that we must push towards a greener economy and the incentives for electric vehicles were a step in that direction. As the FM said, “Considering our large consumer base, we aim to leapfrog and envision India as a global hub of manufacturing of EVs.”

The proposal to levy a 2 per cent TDS on cash withdrawal exceeding Rs. 1 crore from a bank account is another positive. It would be interesting to know how many such withdrawals take place already. The TDS though can be easily circumvented by withdrawal from multiple accounts. The measure reinforces the government’s resolve to move toward a less-cash economy, but with a focus on making it difficult to do high value transactions in cash. The proposal to increase duties on petrol and diesel by a steep Rs. 1 per litre (Prices in Mumbai jumped up Rs. 2/litre) and to increase custom duty on gold and other precious metals from 10 per cent to 12.5 per cent tells us that the government will tap the upper segments.

Another surprising move for many will be the push for electric vehicles (EVs), which really aren’t on the market, at a time the auto sector with its conventional vehicles is said to be saddled with inventory and is crying out for relief.  It was good so see the FM argue that the environment is a critical consideration (she even used the term “suspended particulate matter” and concerns arising from it in her post budget press conference) to insist that we must push towards a greener economy and the incentives for electric vehicles were a step in that direction.

The RBI will have to gear up to handle its responsibilities and call out the NBFCs that stand in violation of norms. They must be separated from those that are sound and need support. This will have to be done quickly, transparently and with due diligence. One is not sure if the RBI can ramp up, given that its record in bank supervision itself is not always the best.

As the FM said, “Considering our large consumer base, we aim to leapfrog and envision India as a global hub of manufacturing of EVs.” The GST rate on EVs will fall drastically from 12 per cent to 5 per cent, among other benefits like tax benefits that will lower the cost of buying these vehicles. Here is a big disruption coming in the auto market.  As the Society of Indian Automobile Manufacturers said after the budget, the boost for EVs is good but it will not help the auto sector mired right now in a deep slowdown. Which actually is a good thing, and the only way to boost EVs and give India a chance at becoming a hub for EV manufacturing.

One big step is the handing over the regulation of NBFCs to the RBI. There are almost 10,000 NBFCs registered with the RBI. Their combined balance sheet is of the order of Rs. 30 trillion. About 30 per cent of their borrowings come from banks. A crisis in this sector is a time bomb that can explode. Some would argue that it has already exploded. All kinds of fears have been expressed about the practices in the sector. Some of the stories emerging are nothing short of shocking.  The RBI will have to gear up to handle its responsibilities and call out the NBFCs that stand in violation of norms. They must be separated from those that are sound and need support. This will have to be done quickly, transparently and with due diligence. One is not sure if the RBI can ramp up, given that its record in bank supervision itself is not always the best. While incentives to the sectors in trouble are good, it is important to call out those who have looted the system and contributed to the mess that the sector is in now. In that sense, the long-term vision of a USD 5 trillion must include a war on those who play with the money of the people, but will the government take this on as a full-blown agenda?

(The author is a journalist and a faculty member at SPJIMR. Views are personal)