Budget 2019: Fiscally responsible with a reforms thrust, but protectionist

The finance minister's revenue efforts represent a mix of progressive taxation, dipping into the petroleum sector for collecting more taxes and growing protectionism

Finance Minister Nirmala Sitharaman on Friday presented a Budget that kept the Narendra Modi government’s fiscal consolidation track record intact and used a variety of measures to bolster the government’s revenue efforts.
 
The Union Budget, the first by the Modi government in its second term, also outlined new reform initiatives like a big drive towards privatisation, relaxation in the foreign direct investment (FDI) policy, including norms for foreign portfolio investors, a new policy on rental housing, an incentive package for faster adoption of electric vehicles, freeing up of land held with public sector undertakings for housing projects and a trouble-free payments policy for small and medium enterprises.
 
The finance minister’s revenue efforts, however, represented a mix of progressive taxation, dipping into the petroleum sector for collecting more taxes and growing protectionism. Thus, she proposed to increase the income-tax on the rich, levied additional excise and cess on petrol as well as diesel, and raised Customs duty on more than three dozen goods, in an apparent bid to provide a level playing field to domestic industry.
 
On the non-tax revenue front, she proposed a 31 per cent increase in disinvestment receipts and banked on a 43 per cent increase in dividend and surplus from the Reserve Bank of India (RBI) as well as other financial institutions, in the expectation that the Jalan committee will recommend a higher transfer of surplus from the central bank.
 
With the help of these revenue-raising measures, Sitharaman projected a fiscal deficit of 3.3 per cent of gross domestic product (GDP) for 2019-20, compared to 3.4 per cent in 2018-19, which was achieved after strenuous efforts at showing lower revenue expenditure to compensate for a sharp fall of over Rs 1.67 trillion in net tax revenue compared to the revised estimate for last year. Significantly, Sitharaman did not present in her Budget the provisional accounts for the revenue and expenditure numbers for 2018-19, already finalised by the Controller General of Accounts. Instead, she stuck to the same revised estimates numbers that were presented in the Interim Budget in February 2019.
 
The marginal reduction in the fiscal deficit, proposed for 2019-20, is sought to be achieved through a variety of tax efforts — a 15 per cent increase in excise collections (mainly on account of an additional special excise and cess on petrol and diesel), a 20 per cent increase in Customs duty collections through higher duties on 37 items, including plastics, automobile parts, electronic goods, steel products,  newsprint and printed books and a 21 per cent increase in income-tax collections (largely due to a 3-7 per cent increase in the effective tax rate by increasing the surcharge for those with an annual taxable income of over Rs 2 crore).
 
The gain from these tax levies will be more for the Centre, as many of these measures have been imposed through surcharges and cesses, which are not shared with states. Thus, the increase in revenue collections for the Centre from these measures will be in double digits, but the states’ share of the increased central tax collection would grow by only 6 per cent from Rs 7.6 trillion in 2018-19 to Rs 8.1 trillion in 2019-20.
 
Sitharaman, however, did not completely disappoint India Inc. She announced that the corporation tax rate for companies with a turnover of up to Rs 400 crore would be reduced from 30 per cent to 25 per cent. Earlier, the 25 per cent tax rate was levied on companies with an annual turnover of up to Rs 250 crore. With the expanded coverage of the lower tax rate, 99.3 per cent of the companies would now enjoy the 25 per cent tax rate, she said. Almost five years ago, the Modi government had proposed the idea of reducing the corporation tax rate to 25 per cent for all companies.
 
Similarly, she cracked down on the use of cash by companies and individuals beyond a specified limit in a year. “To discourage the practice of making business payments in cash I propose to levy tax deduction at source of 2 per cent on cash withdrawal exceeding Rs 1 crore in a year from a bank account,” she said.
 

Finance Minister Nirmala Sitharaman before presenting Union Budget 2019 in Parliament in New Delhi. Photo: Reuters

The finance minister also was not found wanting on the reforms thrust in her Budget. She outlined the contours of a privatisation policy, in which the government would be prepared to go below 51 per cent in public sector undertakings (PSU) on a case-to-case basis. While strategic disinvestment of government equity in PSUs would continue to remain a priority, necessary steps would be taken to help listed PSUs meet the 25 per cent public shareholding norms. The Budget also hinted at the possibility of a greater role for the private sector in the running of railway services through a public-private partnership model.
 
In a move replete with many possibilities, the finance minister also announced the government’s intention to raise a part of its gross borrowing programme in external markets in foreign currencies, which “will have beneficial impact on the demand situation for the government securities in the domestic market.” She also proposed measures to encourage greater retail investment in treasury bills and securities issued by the government.
 
For the financial sector, Sitharaman announced that Rs 70,000 crore would be pumped into PSU banks by way of recapitalisation, entrusted with the Reserve Bank of India the responsibility of regulating the housing finance sector and unveiled a government package of a partial credit guarantee to PSU banks against their purchase of up to Rs 1 trillion worth of assets of financially sound non-banking financial companies.
 
On the FDI policy front, the finance minister announced the government’s plan to consider further relaxing FDI in aviation, media (animation, visual effects, gaming and comics, or AVGC) and insurance. She also announced that up to 100 per cent FDI would be allowed in insurance intermediaries and local sourcing norms will be eased for FDI in the single-brand retail sector.
 
In a bid to encourage the flow of foreign portfolio capital into the country, the government proposed to increase the statutory limit for foreign portfolio investment in a company from the current 24 per cent to the sectoral FDI limit. FPIs will also be allowed to subscribe to listed debt securities issued by real estate and investment funds.