The Hindu Editorial Analysis | 6th July 19

Table of Contents

Bucks for the banks

The Union Budget is hoping to spur the economy by revitalising the financial sector

The maiden budget of Nirmala Sitharaman has many interesting features, but it does not have a defining central theme. There were expectations of a big growth push through either tax cuts or large expenditure programmes even if it meant a rise in the fiscal deficit. But the Finance Minister has chosen to be fiscally conservative, opting to play the long-term game, though it could lead to pain in the short term. The only indulgence she has permitted herself is a big ₹70,000 crore capital infusion in banks that will, it is hoped, spur lending to growth sectors in the economy. Also, quite notably, the budget has sought to address the problems that have plagued the non-banking finance companies space over the last few months and the consequent credit freeze and loss of confidence in the market.
Ms. Sitharaman has comprehensively addressed the important issues of liquidity, solvency and poor governance in the NBFC sector. She has made available a liquidity window of ₹1 lakh crore to public sector banks through the Reserve Bank of India to buy pooled assets of NBFCs and offered a one-time credit guarantee for first loss of up to 10%.
To enable better supervision of the sector, housing finance companies, which have been the main villains of the piece, will come under the RBI’s regulatory ambit.
A long-standing demand of NBFCs for equitable treatment with banks in the matter of taxing interest receivable on bad loans has been conceded. They will not need to maintain a Debenture Redemption Reserve on public placements that was leading to locking-up of funds, which is their raw material for business. These are important reform measures for NBFCs. More interesting is the move towards reviving development financial institutions. The big problem faced by NBFC financing infrastructure is the lack of long-term funding sources to match their lending tenure. This pushed them into borrowing short-term funds to lend to long-term projects, leading to asset-liability mismatches. The proposal to set up a committee to study the issue, including the experience with development finance institutions, is welcome.
There are several reform measures that have been announced, but the most interesting is the reiteration of the government’s commitment to strategic disinvestment and the declaration that it is willing to allow its stake to fall below 51% in non-financial PSUs. Start-ups can heave a sigh of relief as the angel tax is practically off the table. The government seems to be moving towards a single identity card for citizens in the form of Aadhaar, which will now be interchangeable with the PAN card. Taxpayers who do not have a PAN card can file returns quoting their Aadhaar number, which effectively can be a substitute for PAN in all transactions. Another reform measure is the introduction of faceless e-assessment of tax returns taken up for scrutiny. This will eliminate the scope for rent-seeking by officers as there will be no interface between assessee and official. In fact, the assessee will not even know the identity of the officer scrutinising the return. This is an absolutely welcome measure but needs to be closely watched for implementation. The corporate sector has got a minor sop with the turnover limit for the 25% tax bracket being raised to ₹400 crore per annum from ₹250 crore. The expectation was that this would be extended to all companies irrespective of size. It appears that the government wants to wait for the finalisation of the Direct Taxes Code, which is being examined by a committee. Real estate companies may have reason to cheer as the generous tax concession for affordable housing may create demand, especially in the smaller metros.
The ‘nudge theory’ of economist Richard Thaler, mentioned extensively in the Economic Survey 2018-19 presented in Parliament on Thursday, has been put to use by the Finance Minister to push forward two of this government’s pet themes — increasing digitalisation of money and promoting electric mobility. On the first, there will now be a 2% tax deducted at source when withdrawals from bank accounts exceed ₹1 crore in a year. This is a commendable measure, but it could lead to genuine problems for businesses such as construction and real estate that are forced to deal in cash for wage payments. Of course, the TDS can be set off against their overall tax liability. The second, and more interesting ‘nudge’, is towards electric vehicles where those taking loans to buy one will get a tax deduction of up to ₹1.5 lakh on the interest paid by them. But the fact is that there are not too many electric vehicles in the market now. And even for those that are there, the waiting period to deliver one is long. Besides, there is no ecosystem, such as charging points, even in the major cities. The government’s hope seems to be that this incentive will create a market for e-vehicles that will then lead to the development of the ecosystem.
The budget documents show that the government has stuck to the glide path for fiscal deficit, which will be at 3.3% this fiscal. This is, however, based on exaggerated growth projections in tax revenues.
The estimated total revenue receipts this fiscal is ₹19.62 lakh crore, which implies a 25.56% growth compared to the actual receipts of ₹15.63 lakh crore (as presented in the Economic Survey) in 2018-19. This is an extremely ambitious projection, especially given the ongoing slowdown in the economy. Of course, the Finance Minister could get a comfortable buffer if the Bimal Jalan committee that is going into the sharing of RBI’s reserves with the government comes up with favourable recommendations. The government also appears to be sliding into a protectionist mode, going by the increase in customs duty on everything from cashew kernels to PVC, newsprint and even auto parts. While some of it may be wellintentioned to promote domestic manufacturing, this sends out a retrograde signal on the reforms front.
The general election is over and a new government has been formed. But the campaign does not seem to end. More than an hour of Finance Minister Nirmala Sitharaman’s maiden Budget speech was largely devoted to underlining what she claimed were the remarkable economic achievements of the previous government. Given that legacy, she presented her role as one of expanding and strengthening the many achievements of Prime Minister Narendra Modi’s first government. To underline that, she flagged the 10 points earlier presented as a vision for the decade in the interim Budget speech.
This raises two questions. First, how far has Ms. Sitharaman gone in actually extending and strengthening the initiatives that make it possible to realise the goals deriving from that vision? And, second, how does she intend to finance that effort to build on and take forward a legacy she claimed has laid out the agenda?
Ambition is not lacking. India, which was an approximately $1.85 trillion economy when the previous government took over (2014), and has grown to become a $2.7 trillion economy today will, the Prime Minister promises, grow to be a $5 trillion economy by 2024. Allowing for an inflation rate of 5%, that requires a real growth rate of 8% or more per annum.
If GDP has to grow at that rate, investment must rise sharply. The Budget is clear on the government’s role in this process. It cannot invest too much, but it must ensure huge investments in infrastructure and elsewhere by attracting and incentivising private investors. Optimistically leaving this to the private sector, the government focusses on taking the benefits of growth to the rural areas, the Micro, Small and Medium Enterprises and the marginalised.

A shortfall

However, one striking feature of the figures that make up the Budget is that the allocations to match this ambition are significantly short of requirement. Going by the nominal GDP figures implicit in the fiscal deficit ratios provided, total expenditure of the Central government which rose from 12.7% of GDP in 2017-18 to 13.2% of GDP in 2018-19, would remain at 13.1% of GDP in 2019-20. Spending to “kickstart” growth is absent.
Math for welfare programmes
This is true of allocations for the government’s social welfare schemes as well. If we take the six major schemes labelled “core of the core schemes” (including the National Social Assistance Programme and the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), nominal allocations, which amounted to ₹84,361 crore in 2018-19 as per the revised estimates are projected to fall to ₹81,863 crore in 2019-20. Allow for inflation and that 3% fall would imply a significant real cut. In the case of the MGNREGA, the budgetary allocation for 2019-20 at ₹60,000 crore is lower than even the inadequate ₹61,084 crore spent in 2018-19. Elsewhere, in the case of some flagship schemes extolled in the Budget speech, budgetary allocations for the Pradhan Mantri Gram Sadak Yojana is the same in 2019-20 as it was in 2018-19 and that for the Pradhan Mantri Awas Yojana are lower for 2018-19 than it was in the Budget for the previous year. It is principally the farmer income support scheme of ₹6,000 per identified household that receives a significantly large and enhanced allocation of ₹75,000 crore. But even this has to an extent been financed by cutting allocations for other schemes. In effect, the rhetoric of accelerated, inclusive and sustainable development receives only limited financial backing.
The difficulty is that to finance even this curtailed thrust, the Finance Minister is hard put to find the resources, especially because the government wants to show it is committed to fiscal deficit reduction, with the deficit projected at 3.3% in 2019-20. It does make one effort at squeezing surpluses out of the system with increased taxes on the super-rich. Surcharges on those with taxable incomes in the ₹2-5 crore and above ₹5 crore ranges are to be increased so as to raise the effective tax rate applicable by 3 and 7 percentage points respectively.
Though in 2017-18 almost 99% of returns filed were of those with taxable incomes less than ₹2 crore, the tax makes a small difference, in asmuch as the 0.05% of returns filed that fell in the above ₹5 crore taxable income group accounted for close to 32% of taxable income declared. But this gain has been partly neutralised by reducing tax rates for corporations with a turnover in the ₹250 crore to ₹400 crore range from 30% to 25%. The government has also resorted to some regressive taxation.
At a time when oil prices are on the rise because of American sanctions on Iran, the Finance Minister has decided to raise the duty on petrol and diesel by ₹1 per litre each.

Public sector sale

The other major source of non-debt receipts is disinvestment and privatisation which is to be accelerated. Strategic sales will continue and equity even in public sector enterprises where government shareholding has reached the 51% floor is to be sold. That is expected to yield ₹1,05,000 crore in 2019-20, compared with the ₹80,000 crore last year. But, as noted, all this has not been enough to deliver resources that match the ambition reflected in the rhetoric of the new government.
Which leads naturally to dependence on welfare hype and the strategy of hopelessly depending on private initiative to drive growth.
The first Budget of the new government in the 17th Lok Sabha powerfully recommits to the vision guiding the last term emphasising continuity, individual empowerment and infrastructure for nation building, fiscal consolidation, discipline, and process improvements. The rural sector comes in for special attention, but even there the focus is on value addition and transformation rather than income transfers as the means to double farmer incomes.

Jarring note

But in choosing the long view, there is hardly any discussion of the current growth slowdown, and how the Budget can contribute to alleviating it. This is a pity, because this is expected of the major macroeconomic policy statement of the government. Markets are looking for a big spending boost from the government to revive growth. But there are many aspects of the Budget that will contribute to reviving growth but unfortunately they are not brought out explicitly. The Budget is presented as part of the longer-term creation of a new India.
The standard idea of macroeconomic stimulus is to announce a large increase in government spending without raising taxes. This raises deficits. There has been an active debate in the run-up to the Budget that given the slowdown some rise in deficits is acceptable in order to provide a boost to the economy. But the government is committed to a long-term macroeconomic framework and a path of deficit reduction. A deviation will hurt its credibility. As we see below, there are other ways of stimulating the economy. Moreover forward-looking agents know short-term indulgence comes at the expense of longterm pain. They are likely to become more confident and spend more with a government that is able to keep its word. India has had a long battle to escape from macroeconomic fragility and high inflation due to over spending and over stimulus by past governments.
Macroeconomic stimulus
The Budget gives many examples of this government’s faster speed of delivery in infrastructure, such as road building or construction of low-income housing. Since the same government is back, it will be able to front-load expenditure on ready projects. The spending comes before taxes are raised and, therefore, is stimulatory. Apart from creating incomes it boosts demand for the cement and steel industries.
Moreover, although the fiscal deficit ratio has come down from 3.4 in the interim Budget to 3.3, a larger share of resources are to be raised by privatisation. Since this does not reduce private demand as taxation does, there is a larger net expenditure stimulus which supports demand and growth. Completed schemes are being built upon, as some funds from Swachh Bharat are being re-allocated to piped water and to obtaining energy from solid waste management. The substitution of LED bulbs under the Unnat Jyoti by Affordable LEDs for All (UJALA) Yojana for earlier energy guzzlers led to an estimated cost saving of ₹18,341 crore per year. Now solar stoves and battery chargers will be promoted.
Faster privatisation as well as monetisation of other assets such as brown field projects and government land banks will encourage private activity.
The ₹70,000 crore to be pumped into public sector banks coming after the asset clean-up has started yielding results, together with a series of measures for non banking financial companies (NBFC) will help credit growth.
A climate of pessimism and fear was responsible for falling credit growth, which fed into a slowdown in private investment and consumption. The Government’s role is to bolster confidence. As a confident state steps in, begins to spend, and turns around the financial sector, private spending will also revive. Private investment projects had started in end2017 as some sectors were running into capacity constraints, and then dried up because of the NBFC credit slowdown and election-related political uncertainty. It should revive again, especially since interest rates are coming down. G-Secs rates have fallen after the Budget. Spreads for corporate bonds and NBFC funds should also come down. Many NBFCs continue to have viable business models. The fear of credit risk will fade as costs come down and activity revives. The moribund real estate market that is responsible for much destruction of asset value will get a fillip from tax exemptions and lower interest rates.
Help is promised for industry in many other ways. Land availability, labour law simplification, reduction in legal costs, delays and tax harassment. The focus on publicprivate partnerships and support for entrepreneurship will create many opportunities for industry. Private firms generally do much better in last mile delivery of public services. Cuts in corporate taxes, other sops and tweaks in tariffs are well-thought-out to attract foreign firms to produce at scale in India. This is the right time for such initiatives in the context of foreign direct investment re-locating from China.
One of the strengths of the last government was in process improvements. These continue in this Budget. A new initiative of faceless e-assessment with no human interface, and cases assigned in random manner will reduce tax payer harassment. Integrated information will be used to auto fill tax forms making compliance easier even as tax evasion becomes more difficult. There is more simplification in Goods and Services Tax and other taxes while information will be used more intensively to increase the tax base.
The improvement in processes reflects in better delivery of Budget promises, and the quality of fiscal consolidation. The revenue deficit has fallen as well as the fiscal deficit even as expenditure promises were largely kept, although much more was spent for agriculture. Capital expenditure was supported by market borrowing of public sector enterprises (PSEs) — as they become commercially viable, they must borrow based on future income streams. The growth slowdown would have been worse last year without this borrowing. PSEs do not suffer from credit risk. The food subsidy from the Food Corporation of India — which last year was supported by borrowing from small savings — is now brought back to the Budget as it should be.
Apart from reforms in budget processes there is support for larger reform processes. The emphasis on technology cannot deliver alone without improvement in governance. But there is evidence of complementary action on both. For example, a major handicap for small businesses is an absence of timely payments from government. A payment platform has been announced for cutting time and improving processes. Ministries dealing with water have been merged.
A major constraint India has been facing is the absence of long-term funding for infrastructure. There is evidence of innovative thinking on this with sops announced for alternate investment funds; thinking about setting up a development bank as well for making more foreign savings available. Retail investors are also to be encouraged to buy government securities. Stock exchanges are building platforms, which are to be supported by inter-operability between the Securities and Exchange Board of India and the Reserve Bank of India depositories. To the extent there are large diversified domestic investors in government securities the proposal to also raise funds abroad becomes less risky.
As these reforms improve the supply-side, cost and time delays reduce for business as well as for the average citizen.
Long-term framework
As argued above, some stimulus is possible without raising deficits.
In the long run, however, the macroeconomic framework constraining the Budget needs to be revisited to allow policy to counter growth slowdowns and booms. The present framework gives very little space for this. The Fiscal Responsibility and Budget Management adjustment path should be in terms of a cyclically adjusted fiscal deficit, with incentives to protect the quality of expenditure. A target for revenue deficit is also required since it is easiest to cut public investment, which also hurts growth. The 15th Finance Commission should consider this reset.
Reducing the level of debt and interest payments is a desirable objective, since it would release much more government funds for productive expenditure. But growth raises tax revenues and a rise in GDP increases the denominator reducing deficit ratios. Therefore maintaining growth is one of the best ways to reduce debt and deficit ratios.

Aadhaar can be interchanged with PAN for filing tax returns

Proposal to give unique identity number expeditiously to visiting NRIs
The Union Budget 2019-20 has proposed to make Aadhaar interchangeable with PAN, thereby allowing people without PAN to file income tax returns using only their Aadhaar, Finance Minister Nirmala Sitharaman said on Friday.
Further, the Finance Minister proposed allotting Aadhaar to non-resident Indians, arriving in India, on an expedited basis.
“More than 120 crore Indians now have Aadhaar,” Ms. Sitharaman said in her maiden Budget speech. “Therefore, for ease and convenience of tax payers, I propose to make PAN and Aadhaar interchangeable and allow those who do not have PAN to file income tax returns by simply quoting their Aadhaar number and also use it wherever they are required to quote PAN.”
42 cr. PAN cards issued
According to data with the Central Board of Direct Taxes (CBDT), 42 crore PAN cards have been issued, of which only 23 crore have been linked with Aadhaar.
However, the annexure to the Minister’s speech makes it clear that the intent is not to replace PAN with Aadhaar as the primary identity proof when it comes to income tax.
While it is proposed to make Aadhaar interchangeable with PAN to enable those without PAN to file tax returns, “the Income Tax Department shall allot PAN to such persons on the basis of Aadhaar after obtaining demographic data from the Unique Identification Authority of India (UIDAI).”
In other words, if you do not have a PAN and want to file income tax returns, you can do so, but you will still be allotted a PAN. Those who have already linked their PAN with their Aadhaar can choose which ID they want to use while filing taxes.
“It is also proposed to provide that a person, who has already linked his Aadhaar with his PAN, may, at his option, use Aadhaar in the place of PAN under the [Income Tax] Act,” the Budget document said.
So far, non-resident Indians with an Indian passport had to wait for 180 days after their arrival in India before they can apply for Aadhaar. The Budget proposed to remove this waiting time.

Petrol, diesel levies hiked by ₹2 per litre Duties, cess raised by ₹1 each

In a move that will hit the pockets of the common man, the Union Budget 2019-20 proposes hiking the duty and cess on petrol and diesel by ₹2 per litre each.
“Crude prices have softened from their highs,” Ms. Sitharaman said in her Budget speech. “This gives me a room to review excise duty and cess on petrol and diesel. I propose to increase Special Additional Excise Duty and Road and Infrastructure Cess each by one rupee a litre on petrol and diesel.”
This means that the special additional duty (SAD) will go up to ₹8 per litre for petrol and ₹2 per litre for diesel. The Road and Infrastructure Cess on petrol will increase to ₹9 per litre for both fuels. • However, industry officials say that the effective increase in the price paid by the consumers will likely be more than ₹2 per litre.
“The effective increase in the price will be more than ₹2 per litre because there are calculations to be made regarding VAT and other things,” a senior official in a State-run oil marketing company told The Hindu on the condition of anonymity.
“We are currently doing those calculations and will arrive at our assessment once there is clarity from the Finance Ministry regarding a few issues.”
These issues could possibly be the fact that while Ms. Sitharaman’s Budget speech and its annexure mentioned a ₹1 per litre increase each in the SAD and the cess, the Finance Bill that brings the Budget into law said that these increases would total a much higher ₹5 a litre.
“This seems to be a misprint as the communication we have so far received is that the increase is ₹2 per litre,” the official said. “But more clarification is needed.”
In a bid to spur the ‘Make in India’ goal and to bring domestic manufacturing on a level-playing field, Ms. Sitharaman said that basic customs duty is being increased on items such as cashew kernels, PVC, vinyl flooring, tiles, metal fittings, mountings for furniture, auto parts, marble slabs, optical fibre cable, CCTV camera, IP camera, digital and network video recorders.
Further, she proposed removing exemptions from customs duty for certain electronic items being manufactured in India.
The Budget also proposes customs duty reduction on certain raw materials and capital goods, including certain inputs of CRGO sheets, amorphous alloy ribbon, inputs for manufacture of artificial kidney and disposable sterilised dialyser, and nuclear power plant fuels.
The Finance Minister has also proposed some steps to prevent ‘bogus’ companies from availing undue concessions and export incentives.
“While we have intensified our efforts against such nefarious activities, provisions are being incorporated in the Act for enhanced penalty and prosecution for such offences,” Ms Sitharaman said.
“Further, misuse of duty free scrips and drawback facility involving more than ₹50 lakh will be a cognisable and non-bailable offence.”