Keeping the focus on fiscal consolidation

When the finance minister rose to present the Budget for FY20, the challenges before the government were generally known — financial market stress, real estate stress and a general refusal of the investment cycle to look up, compounded by the fact that the government revenue growth to address any of these issues have been stymied by the slow growth of the economy.
 
Within these constraints there is a genuine attempt by the Budget to provide money for bank capitalisation, housing, infrastructure, NBFC stress via a guarantee support, and an emphasis on investment in a number of sectors that are currently a source of forex drain.

 
The Rs 70,000 crore infusion of capital in PSU banks is a positive surprise and so is Rs 1 trillion guarantee support for NBFCs subject to implementation. This should go some way in easing stress in the credit markets. Higher tax breaks for housing should increase demand for affordable housing and increase demand support to this beleaguered sector. This is clearly money well spent and a much needed fillip to the investment cycle.
 

The emphasis on infrastructure continues and we should expect a lot more policy action even outside the Budget as has been the case in the past. In any case, the government has clearly spelt out its priorities in terms of its direction.

 
A major push to increase free float for equity markets by way of increasing minimum public shareholding and also by resetting the foreign shareholding limits to sectoral caps should raise India’s weight in the MSCI index and get more foreign flow into the Indian markets. No doubt, the first reaction of the required minimum free float has been negative due to supply fears; hopefully it will be alleviated when the government spells out the timeframe for the said increase.
 
It is to be noted that the government itself is going to be supplying a lot of paper for meeting its disinvestment targets. Thus there should be enough time given to increase the free float so as not to crowd out demand for genuine capital needed for growth.

 
There is a significant emphasis on startups and to alleviate some of the pains with regards to taxation of startups. The government has also committed to a general ease of tax compliance which should be a long-term positive.
 
There is a hint of a bolder disinvestment process goring forward by including government controlled institutions in the 51 per cent holding. The general wisdom that PSU disinvestment is not good politics is getting slowly debunked in favour of better economic principles. This could eventually turn out to be a big longer-term positive.
 
It is also to be noted that the government seems to be making a few statements about a few longer-term priorities. One of them is about Make in India. Tax concessions seem to be coming back for import intensive industries such as semiconductors, EVs etc. On the other hand, import tariffs/taxes for large import items such as gold, oil and consumer durables are going up. The government seems to be playing a long game to reduce India’s trade deficit with the rest of the word, at least in terms of strategic intent.

 
Finally, it must be said that the Budget is only a statement of government finances. The fact that most of the policy action has happened outside the Budget in the past few years means that one has to look at the Budget more from the strategic intent perspective. There seems to be a lot of that in this Budget. From the emphasis on infrastructure, providing flow of credit, asset creation, Make in India, ease of doing business while maintaining fiscal balance is the general strategic thrust. The action should now shift to the implementation of this strategic intent in terms of concrete actions through various ministries. If the government achieves these objectives, it may turn out to be a Budget that was eventually a growth focused budget.

Higher tax breaks for housing should increase demand for affordable housing and increase demand support to this beleaguered sector. This is clearly money well spent and much needed fillip to the investment cycle.
 
Overall, there is no new major populist move in this budget and it continues to pay heed to fiscal consolidation. While the debate may continue on the fiscal math, especially with regard to revenue assumptions, the fact remains that the government also succeeded in driving the risk free rate down by opening up sovereign external borrowing.
 
The Budget issues that could be debated in terms of approach would be, one, sovereign overseas borrowing and two, the taxation approach. Given that India runs a twin deficit and has in fact seen two episodes of currency wobbliness in the last six years, sovereign overseas borrowing can pose challenges if not handled in a careful manner. Second, rising taxes on equity holders over time reduce the attractiveness of taking risk. It suggests a more socialistic agenda in what should be a right-of-centre government. The steep increase on HNI taxes a similar signal. India has to compare its tax rates not with the more developed economies but with the ones that are closer home.

 
But for a major increase in the tax rate for incomes over Rs 2 crore, this Budget would have gone down as a non-populist, right-of-centre Budget with a firm focus on the investment cycle. Perhaps, as the time passes, the equity market would start seeing it that way.
  The author is head of India, Nomura