[Budget 2020] Tax Cuts Offer Silver Lining Amidst Middling Budget
Building on India's vision to be a $5 trillion economy by 2025, Nirmala Sitharaman announced a series of measures aimed at bolstering the flagging economy. The end result was a mixed bag of plans and policies eliciting a lukewarm response from the markets.
Building on India’s vision to be a $5 trillion economy by 2025, Finance Minister Nirmala Sitharaman, during the longest budget speech ever, announced a series of measures aimed at bolstering the flagging Indian economy. The end result was a mixed bag of plans and policies eliciting a lukewarm response from the markets.
The finance minister opened her speech by setting the foundation of the budget under the themes of aspirational India and rise of advanced technology. Below are some of the key measures and implications announced.
Infrastructure and Manufacturing
India will need to grow at more than 11-12 per cent to reach a $5 Trillion economy in the next five years and infrastructure spending and development will form a critical cog of this objective. The government announced an INR 103 lakh crore infrastructure spending plan to fund critical national projects over the next 5 years. However, with the fiscal deficit creeping up to 3.8 per cent of GDP in 2020, it remains to be seen how the government will balance the books when it comes to spending on projects while dealing with potential reduced collections from new tax slabs and other measures announced.
Sitharaman set out a policy to position India as a regional leader in electronics manufacturing which can create a lot of high wage jobs. Manufacturing of cell phones, semi-conductor packaging, and electronic components. Details about the policy were scant but it is expected that companies will receive tax holidays and other sweeteners. India seeks to compete with countries like Malaysia and Vietnam which have made strong gains in the electronics manufacturing sector.
The government signalled its commitment to deep tech by announcing a National Mission for Quantum Technology with an allocated budget of INR 8000 crores over the next five years. A commitment to increasingly use AI and Machine Learning in the Ayushman Bharat scheme to better identify diseases also found a mention.
In a welcome move, the Govt proposed a 100 per cent tax concession to sovereign wealth funds on investment in infra projects. This move may lead to higher investment in the much needed infra sector which is a necessary catalyst for economic growth.
Logistics and Transportation
Publicly traded Indian logistics firms received a fillip via the announcement of creation of a national cold chain logistics infrastructure via a PPP mechanism. “Kisan rail” will be set up to support transport of perishable goods cross country. Government will also provide loans for warehouse set up and the National Bank for Agriculture and Rural Development (Nabard) will map and geotag the warehouses and cold storages. India’s spend for logistics hovers around 15 per cent of GDP which is very high compared to 7-10 per cent for more developed nations. It is imperative then to set up more efficient transportation systems and both these schemes help in this regard.
In addition, a single window e-logistics market via national logistics policy is to be started soon. Overall, INR 1.7 lakh crore has been allocated to logistics sector in 2021.
India’s tech capital Bengaluru received some positive news as well with a INR 18,000 crore sub-urban transportation project planned with the centre set to provide 20 per cent of equity.
By 2030 India will have the highest work force globally and its imperative continued investments are made in education and upskilling. A budget of INR 99,000 cr for the education sector is being allocated for 2021.
However, this figure which is about 3 per cent of its total budget pales in comparison to developed economies and even to Southeast Asian countries like Indonesia.
India is a factory of engineers many of whom graduate every year without a job in hand. In order to alleviate some of the unemployment issues with fresh graduates, a programme to offer internship opportunities for fresh engineers with state governments was announced.
Entrepreneurs cheered on some much-needed reforms especially around ESOPs. Previously ESOPs were subject to double taxation at time of vesting and at time of liquidation. In a welcome move, ESOP holders will now need to pay tax at the time they finally monetise these shares or when they leave the company, whichever is later.
There was however no mention of changes to long-term capital gains tax which was another topic of interest to the startup and investor community.
The FM also announced creation of an investment clearance cell for end to end facilitation at state level. There would also be fee investment advisory for startups and a digital platform for seamless lodging of intellectual property rights.
In a widely expected move, the FM announced income tax cuts in varying brackets. A simplified IT regime is being put forth where IT rates will be significantly reduced for tax payers who forego certain deductions. Dividend distribution tax was also abolished which may also spur investments locally.
The reduction in tax rates will certainly lower the government’s coffers to the tune of INR 40,000 crore. However, the bet here is that the increased savings will spur spending which remains a bane of a flagging economy.
At the time of writing, the Sensex was down by over 2.5 per cent signalling a lukewarm response to the budget. While some of the plans announced may spur growth, investors remain concerned about spurring demand and encouragement of FDI and local entrepreneurship.