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Another Year, another Union Budget…A Tweak and a Tune will do for India’s Economy

Written by Suchit Punnose | Feb 4, 2020 12:00:00 AM

Its that time of year again…another Union Budget, and in the wake of seemingly unremitting IMF grumbling and post-Christmas chill, it’s time to find out if India’s economy needs a little tweaking and tuning or something more radical. And given Nirmala Sitharaman has just delivered the longest Budget Speech for more than six years, it would be peevish and cruel to leave you in suspense any longer: for the third fastest growing economy in Asia, a tweak and a tune will do just fine.

The Finance Minister announced a series of groundbreaking reforms, designed to sustain growth and reach out more to the poorer, mostly rural sections of the country: but with a clear message that the economy is still on track and set for further growth in the years ahead, especially in the all-important Affordable Housing sector.

Say what you like but Prime Minister Modi’s Government still has its political antennae finely tuned to the key components of economic growth, and with a rapidly expanding and increasingly prosperous middle class driving retail expansion like never before, Nirmala Sitharaman wasn’t about to forget the importance of consumer spending. With shades of Margaret Thatcher, she announced a series of lower income tax rates in return for individual taxpayers waiving current exemptions and deductions. The resulting fiscal incentive is worth something in the order of $5.6 Billion, which will certainly be enough to give the economy a further boost but for any doubters and sceptics still left the Budget also includes provision for taxpayers to opt-out and keep their existing deductions if they want to. So what’s not to like?

But it’s certainly not all about the middle class either: those earning less than $7,000 a year will now be exempt from taxes altogether, which should significantly improve the condition of the rural poor in particular: a section of the public all too often forgotten by parties of all political complexions in the past.

And then, of course, Affordable Housing had its own special place in the Budget, just as it has for the last ten years: the process of approving loans within the existing (highly tax-efficient) government scheme will be extended by a further year to March 2021, and property developers will get an additional tax holiday on qualifying profits. The impact of that sort of incentive is already being felt in a resurgent residential property market across the subcontinent, and in Mumbai in particular.

So having looked after the roof over the heads and given India’s burgeoning population fresh license to join in another wave of consumer spending, the Finance Minister’s attention then turned to business: dividend distribution tax (a modern form of ACT) has now been abolished, with all its despised apparatus of surcharges, red tape, and bureaucracy. Businessmen and women across India will have heaved a sigh of relief, as will any accountants and bookkeepers anxious to get home from the office before 11.30pm.

The Government will also increase the investment limit from 9% to 15% for foreign investors holding corporate bonds, in addition to which a raft of Government Securities will be open to foreign participation for the first time as part of an ongoing project to open up the subcontinent to the world.

Then the Finance Minister turned to some of the bigger elephants in the Chamber: she invoked the so-called “escape clause” in the Fiscal Responsibility and Budget Management Act:  revising a 3.8% deficit target from 2019/20 to 3.5%. Less than half a point but Nirmala Sitharaman has never allowed fine detail to obscure economic reality, and the revision comes with increased infrastructure commitments too: including $26.3 Billion in support of a new National Infra Pipeline with the ambition “to improve ease of living for every citizen of our country” not to mention creating additional employment across the subcontinent. Again, what’s not to like?

And finally, last year’s PMC Bank failure was never going to be far from the rostrum, prompting the Minister to announce a hike in Bank Deposit Insurance Cover from $1,450 to $2,100, so protecting a much broader constituency of depositors. For those of us who lived through the anguish of BCCI in the 1990s, it will be clear just how much of a boost this kind of initiative that can give to depositor confidence. There will also, in the words of the Minister, be a more “robust mechanism to monitor the health of scheduled commercial banks and assure depositors that their deposits are absolutely safe”.

Quite right too, and this closing statement of intent also underpinned the steady, realistic and well-modulated tone struck by Ms. Sitharaman in her Budget. She is to be congratulated.

 

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Executive Overview

We all waited to see whether India’s Finance Minister would keep to a steady course or start to apply the brakes: and in this year’s Union Budget we got the answer.

It’s full steam ahead, with a further emphasis on consumer-driven growth and additional incentives for overseas investors.

That’s welcome news for Asia’s third-fastest going economy, the essentials of which are still so obviously sound.