Make-or-break Budget? Neither, says Swaminathan Aiyar

It is said that size matters, but the longest speech in budget history did not guarantee Nirmala Sitharaman success. Her second budget had no big fiscal stimulus, several protectionist duties, and few convincing steps to revive a slowing economy. Disappointed investors sent the Sensex crashing 987 points.To cope with the economic slowdown, Sitharaman let the fiscal deficit slip from 3.3% to 3.8% in 2019-20, aiming for 3.5% next year. In a welcome gesture of transparency, she revealed that extra-budgetary borrowings were 0.7% of GDP in the current year and will rise to 0.8% next year. So, the true fiscal deficits for the two years go up to 4.5% and 4.3%, respectively. Kudos for improved honesty get tempered by the dilution of claims to fiscal prudence. High off-budget spending did not spark fast growth this year, and may not next year either. To be fair, the budget is too weak an instrument to revive the economy, and radical changes are needed across several sectors to improve productivity and competitiveness. If growth does not revive, do not blame Sitharaman alone.She is betting on a revival of the economy not so much by stimulating consumption — her income tax sops to the middle class will release a modest Rs 40,000 crore — as through a 21% rise in government capex, mostly on infrastructure. This will be financed mainly through record disinvestment of Rs 2.1 lakh crore next year, of which Rs 90,000 crore will be strategic sales (privatisation) and the initial public offering of LIC will be the star of the rest.The huge shortfall in disinvestment this year (only Rs 18,000 crore against a targeted Rs 1,05,000 crore) gives a warning that next year’s target may not be easy to achieve. Nor is a fast expansion of infrastructure spending easy, since enormous preliminary work is required first.Telecom spectrum sales and taxes are estimated to bring in Rs 1.33 lakh crore, a huge but optimistic figure given the parlous state of telecom. However, the Sitharaman approach of depending more on non-tax revenue than borrowing to finance capex is a positive move. It will help cut market interest rates.The tax on cigarettes has been raised yet again, but not the tax on beedis. Tobacco kills, whether in cigarettes or beedis. True, the beedi industry employs many people, but if you must employ some people to kill others, maybe better ways can be found.The middle class and MSME industries, both strong BJP supporters, are budget gainers. India’s income tax exemption level of Rs 5 lakh is thrice per capita income, which is thrice as high as in many other countries, a gift to the middle class. This class will have the option to pay lower rates if it forgoes the many tax breaks on offer. The budget rightly rescinds 70 old but obsolete tax breaks. MSMEs will now be excused compulsory audit for turnover up to Rs 5 crore, up from Rs 1 crore.Few Have Such Wide Tax SpreadThe top income tax rate remains over 42%, in stark contrast to the minimum corporate tax rate of 15% for new investors in industry, a privilege extended to new power plants in this budget. Very few countries have such a wide tax spread, which invites tax avoidance. Co-operatives will now join companies in being able to pay tax at 22% instead of 30% if they forego all deductions and exemptions.The dividend distribution tax has been abolished and all dividends will now be taxed fully in the hands of shareholders. This will raise the earnings per share of corporations, and benefit high-dividend companies. The markets hoped for the abolition of long-term capital gains tax but in vain.An overdue yet courageous move is to prune the fertiliser subsidy by moving towards a direct benefit to farmers. Sitharaman says this would induce better utilisation of manure. But the budget gives no details of how much fertiliser prices will go up by, or over what period.To nab rich Indians going abroad to escape high taxes, the definition of resident has been extended from 182 days to 240. NRIs living in zero-tax countries will have to pay Indian tax on global income. This, alas, is more likely to induce rich NRIs to give up Indian citizenship than pay higher taxes.Sitharaman was categorical in her budget speech on going protectionist.She said if items can be made in India there is no need to import them, and that India must reduce import dependence (as distinct from increasing export competitiveness). She said she would not allow Indian jobs to be lost by foreign dumping, ignoring that maxim that dumping should be tackled with anti-dumping duties, not a flat import duty. She continued the budgetary trend since 2017 of hiking import duties on ever-more items. Her targets ranged from electric vehicles and components to footwear, chemicals and appliances like fans. Some tax breaks for imports are also being pruned.One welcome innovation aims to reduce the 4.8 lakh direct tax disputes. If taxpayers pay just the tax demanded, the interest and penalty will be waived.Withholding tax has been cut to 5% for selected foreign investors. Sovereign Wealth Funds will be exempted entirely from tax for investments in infrastructure. This will bring in more dollars, but discriminate against domestic investors.A 100% tax holiday for startups will now apply to firms with up to Rs 100 crore turnover, up from ?25 crore. However, startups require animal spirits more than tax breaks: They are based on enormous optimism rather than rational tax calculations.Headlines earlier claimed this would be a make-or-break budget. It is neither.It avoids a spending spree to try and revive the economy, leaving that wideranging job — quite rightly — to the Prime Minister’s Office.

from Economic Times https://ift.tt/2GLXt8E