Union Budget 2020: The 5 Things To Watch Out For

On February 1, Finance Minister Nirmala Sitharaman will present the Union Budget before the Lok Sabha. This will be the second budget of the re-elected government of Prime Minister Narendra Modi. Expectations from this budget will be to address concerns amid macroeconomic indicators that point towards a general slowdown in the economy, and more on the government's roadmap to make India a $5 trillion economy by gross domestic product (GDP) by financial year (FY) 2025.

Also Read: Budget FAQ #1: What Is The Union Budget?

BOOM rounds up the top five expectations from media houses in the upcoming budget.

1. Income Tax: Raise In Exemptions?

The Union Budget may use the income tax route to boost consumer demand, and amend the income tax slabs to put more funds into the hands of individual taxpayers. The government may revise the exemption income-tax slab significantly upward - from ₹2.5 lakh a year to ₹7 lakh a year, according to CNBC-TV 18.  Currently the exemption is under ₹2.5 lakh a year, with an income-tax rebate for income under ₹5 lakh, first outlined by then Acting Finance Minister Piyush Goyal in the Interim Budget of FY20. 

The story also outlines the following the tax brackets

2. More Tax "Deductions" - the Dividend Distribution and Long Term Capital Gains Tax

The Dividend Distribution Tax (DDT) is a tax imposed on domestic companies paying dividends to their investors. Including cess and surcharge, the tax is at 20.55%, putting around ₹60,000 crores in the government's pocket. Come February 1, the DDT may be abolished, according to news reports (Read here and here). In November 2019, the finance minister called the DDT 'regressive' in Rajya Sabha. Instead of taxing the companies, the government would tax shareholders who receive the dividend. This step is being portrayed as one to attract investors.

Another tax that may be amended is the Long Term Capital Gains Tax (LTCG), which is imposed on capital appreciation in equity or mutual funds above ₹1 lakh held for over a year. It is reported that the tax may be extended to two years, or may be abolished altogether, making long-term gains in equity and in equity-linked mutual funds tax free. Currently, a short-term capital gains tax is also levied if equity or equity linked mutual funds are sold within a year.

Also Read: Budget 2020: BSE To Remain Open For Trade On Budget Day

3. Rural Spending

Separate reports have mentioned a number of developments towards the rural sector:

1. It has been reported that in the upcoming budget, allocation to MGNREGA will exceed ₹70,000 crore, in an attempt to boost rural demand. This is a good ₹10,000 crore increase over the current allocation of ₹60,000 crores.
2. The upcoming budget is also
   expected to add ₹40,000 crores to two agri-related departments - the Department of Agriculture, Cooperation and Farmer's Welfare (current with an allocation of ₹1.3 lakh crore) and the Department of Agricultural Development ( with ₹1.17 lakh crore).
3. Two new farmer programs too may be unveiled. One, costing around ₹70,000 crores, to inculcate farmer producer organisations (FPOs), and a ₹500 - ₹600 crore allocation to encourage crop diversification.
   

4. Public Sector Banks

July 2019 saw the non-performing assets (NPAs) of the public sector banks (PSBs) report declines of around ₹89,000 crores from a high of nearly ₹9 lakh crore in 2018. However, in a sign that the problem may be creeping back, 11 PSB and private-sector lender YES Bank together reported collective NPA divergences worth more than ₹29,000 crores for FY19 in late December. This mean that their actual NPAs are ₹29,000 crores more than what they had reported in year ending March 31, 2019.

Typically, the budget allocated recapitalsation plans to PSBs in an attempt to dilute the NPAs. Over the past three budgets (FY18, FY19 and FY20), the government had approved of a recapitalisation plan of ₹90,000 crore, ₹1.08 lakh crore and ₹70,000 crore respectively. However, ET Now has reported that the RBI has advised the government against further capital infusion citing the capital post four banking amalgamations in the pipeline, and has instead recommended that public sector banks tap capital markets and carry on with non-core asset sales to heal themselves. It has cited the upcoming initial public offering of 'SBI Cards' as an example of ways to raise funds. The budget is expected to share more on the same.

5. Infrastructure Spending

In his Independence Day speech in 2019, Prime Minister Narendra Modi mentioned an investment of ₹100 lakh crore in infrastructure; a plan, called the National Infrastructure Pipeline, unveiled by the Finance Minister on December 31.

The budget could highlight the fine print of this scheme - as to how various participants in the economy - the central and state government and corporations - would implement this plan. Also, reports state that the government could give an increment of ₹8,000 crore to ₹10,000 crore for the construction of roads. A custom roadbuilder's stock index built by Bloomberg is up 8.1% this month, versus the benchmark Sensex, which has fallen 0.7%.