Decoding Budget 2020: A reformist Budget that could have been more forward looking
With its GDP having grown steadfastly at an average of 7.4 percent over FY2014-2019, India’s economy was facing a growth hurdle owing to three primary challenges. First, a lack of consumer demand due to inadequate liquidity; second, lack of adequate investments; and third, a rather subdued mood due to burdensome compliances and low economic growth.
To set a positive tone for Prime Minister Narendra Modi’s second term, this was an important Budget and Finance Minister Nirmala Sitharaman has tried to tackle each of these issues and move the needle.
The reduction in rates for personal income tax, despite being optional, will go a long way towards getting money back into people’s hands by forgoing direct taxes of Rs 40,000 crore. This, along with a budgeted outlay of Rs 20,000 crore through the removal of the Dividend Distribution Tax, will bring about Rs 60,000 crore of relief to the masses.
A valiant step to boost investments came from increasing the fiscal deficit by 0.5 percent for FY20 and FY21. Loosening the fiscal deficit upon understanding the gravity of the economic condition is a prudent step.
By increasing the deficit, the Finance Minister chose to opt for the special provisions under the Fiscal Responsibility and Budget Management Act, 2003 Act. This was done to maintain tax buoyancy post the bumper corporate tax reforms from last year, which will take more time to visibly demonstrate revenue growth for companies and, in turn, increase tax collection for the government.
Investments get a leg-up
Policies to increase investments was given much needed attention in this Budget. Granting 100 percent exemption to Sovereign Wealth Funds in infrastructure was a necessary move as getting these large pools of long-term capital to enter India was a process riddled with undue and complicated tax hassles from the taxman, and not the tax rate itself.
The listing of LIC has been long-pending. It is a positive move, and will necessitate much needed efficiency in the management of the publicly run behemoth and generate liquidity for the government. Further, increasing the foreign portfolio investment (FPI) limit in corporate bonds to 15 percent will play a crucial role in deepening the bond market.
Increased allocations for agriculture and in the social sector are in tune with India’s need and are a positive sign for the continued commitment of the government to the growth of these sectors. It was good to see the government starting conversations around the application of technologies like artificial intelligence beyond startups, like in the national policy for statistics and the Ayushman Bharat scheme.
As far as technology and startups are concerned, the Budget has been disappointing. While measures like setting up of the early-stage fund, investment clearance and advisory cell, fiber connectivity project BharatNet, the Rs 8,000 crore outlay for quantum technology, and providing tax rebates and extensions shows the emphasis given to this sector by the government, the wholesome alleviation of more pressing concerns was amiss in the Budget.
The startup sector had three major expectations from this government. One was the resolution of the ESOP issue to create wealth for the builders of high-growth companies. This has been brought to the attention of the Finance Minister but has only been paid hasty attention.
ESOPs still get taxed twice, first, at the point of exercise of the option and, second, at the time of sale. Further, its applicability to only eligible startups (incorporated post April 1, 2016 and recognised by the Inter-Ministerial Board (IMB)) limits the strength of the proposed resolution.
The second concern of the startup ecosystem was bringing tax parity on capital gains between foreign and Indian investors. Capital gains for foreign investors and on public market exits are taxed at 10 percent, whereas high-risk tolerating early-stage Indian investors, who largely find investments exits in the private market, are taxed at an uncompetitive rate of 28 percent.
Disincentivising Indian investors who invest in India’s innovation will lead to the country becoming a digital colony where its best young companies are largely owned by foreign capital.
The third ask from the community was the reduction of TDS for startups. Most of these companies face losses in the first few years, with much needed capital getting blocked with the government through the TDS deductions. With entrepreneurship and startups being a high-growth and high-priority sector, the Finance Minister should have paid closer attention to the requisites of the startup ecosystem. However, none of these asks were met.
Lastly, the startup capital of India, Bengaluru, has been choking in traffic congestion and this is disturbing the momentum of its growth and contribution to India’s innovation. The suburban rail project promised in 2018 has finally been allocated a budget and it is our sincere hope that further delays do not cripple the city from reaching its tremendous potential.
All in all, this Budget was good keeping in mind the pressing economic needs of the country. However, it could have been bolder. Possible growth sops and more streamlined tax slabs coupled with the reduced corporate tax rates from the Budget prior could have led to accelerated investments in the coming years and put India back on track for the projected 10 percent GDP growth.
(Edited by Evelyn Ratnakumar)
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)