On July 5, 2019, Finance Minister Nirmala Sitharaman will present her first, and the re-elected government's first budget in Lok Sabha. This comes one month after the Modi-led BJP won a massive mandate of 303 seats in the election of April-May this year.
Sitharaman's budget will be keenly watched, as it comes at the back of record unemployment, farm distress, a sagging investment ecosystem and contracting service sector. Macroeconomic cues are not encouraging either, with the rise of protectionism trade disputes (specifically the US-China trade war) emanating around the world.
BOOM tells you what you can expect from the new Finance Minister.
1. Raising the exemptions or the deductions?
The interim budget on February 1 left the income tax slabs unchanged, although it provided a tax rebate on income up to ₹5 lakh.
However, it is unclear if the upcoming budget will keep the slabs the same or increase the exemption limits. However, the budget might enhance income tax deductions in the following spheres, according to India Today:
- Income tax deductions under section 80(C) - which is currently at ₹1.5 lakh are likely to be raised to ₹2 lakh. These deductions can be made upon showing investments in schemes like the EPF, PPF, fixed deposits, NSC and the NPS.
- Increasing income tax deduction for healthcare-related expenditure or through heath-related tax saving instruments under section 80(D). The exemption is currently at ₹25,000 for those under 60 years of age and ₹50,000 for those above it
- Higher deductions towards home loans, which currently is at ₹2 lakh under section 24B of the Income Tax Act.
While the first two of these deductions would be to spur investments in healthcare and savings instruments, the third deduction would be to provide stimulus to the real estate sector.
2. Little GST-related change expected
The budget comes just a few days after the second anniversary of the nationwide Goods and Service Tax (GST) came into being, aiming at synchronising the indirect taxation system and integrating India into a single market.
While the GST rate slabs have been retionalised, India still remains one of the most complex GST structures in the world, writes the Financial Express. Also, not all commodities lie under the ambit of the GST, which include petroleum, alcohol and electricity.
The budget may serve as a platform to put some, if not all products under the GST, according to the authors.
3. An inheritance tax may be unveiled
On July 2, Livemint reported the Finance Ministry looking at introducing an inheritance tax, what is also known as an estate tax.
The report states that such a tax may be in the works to enhance the government's welfare outreach; to tax high networth inheritances. However, such a taxation rate would be marginal initially, so as to not alienate the well-off.
Livemint also reports that an inheritance tax had been discussed earlier in the Narendra Modi-led government's first term, but was not implemented along with other big structural changes then such as GST and demonetisation.
4. Public finances and growth related announcements
In the interim budget of this year, then Acting Finance Minister, Piyush Goyal, revised its fiscal deficit target for FY20 to 3.4% of GDP, after announcing a missed target of 3.3% of GDP.
However, in the less than a quarter of the new financial year alone, the deficit has already exceeded 52% of its target, standing at ₹3.66 lakh crore.
Additionally, India lost its tag as the world's fastest growing economy to China; growing at 5.8% in the fourth quarter of FY19 according to government data released on May 31 shows, as reported here.
Prime Minister Modi declared his intention of making India a $5 trillion economy by 2024 from the current $2.8 trillion economy. This would mean a 12% growth annually, as estimated by Bloomberg here. The Budget could include steps to revive growth.
To understand various terms used in the Budget document, refer to BOOM's primer here.
5. A new industrial policy
India may be about to get a new industrial policy, according to a report by Livemint. Such a policy would potentially include steps towards ease of doing business for the manufacturing sector, and new standards for industrial labour.
This will be centered around Make In India and the creation of manufacturing jobs at a time when unemployment is at a 45-year high, exports have gone down from 10.5% to 9.2% of GDP year-on-year and a manufacturing slowdown, according to the index of industrial production (IIP) - falling from 4.4% to 3.7% year-on-year.
President Ram Nath Kovind, in his address to a joint session of Parliament on June 20, said that a new industrial policy would be released shortly. This has been in the works for a while, with the first discussion paper on this paper being unveiled in 2017. The policy was reportedly finalised at the tail end of the first term of the Modi-led government.
6. Recapitalising Public Sector Companies
The interim budget this year had no provisions pertaining to a capital infusion or a recapitalisation of central-government owned public banks.
Come July 5, this may change, according to the Economic Times, who reports a ₹40,000 crore allocation for public sector bank recapitalisation. This report on June 14 cites recent examples of the Union Bank of India and Punjab National Bank reporting last quarter in the current fiscal.
In 2018-2019, the government pumped ₹1.6 lakh crore into public sector banks, the highest ever.
Even other PSUs are facing financial squeezes.
This week, it was reported that Air India would not have the means to pay staff salaries till October, despite a interim budget allocation of ₹3,900 crore to pare debt. The government is looking to privatise it completely.
Law and Communications Minister Ravi Shankar Prasad answered a question in Lok Sabha on July 3, showing MTNL's losses increasing over the last 5 years - from a surplus (the difference between current assets and current liabilities) of ₹2,000 crores in 2014 - 2015 to a deficit of ₹6,300 crores (provisional) in 2018-2019.
BSNL's losses in 2018-2019 are even worse, standing at ₹14,200 crore (provisional) in this reply to Lok Sabha, again on July 3.
7. Little change in defence spending expected
Goyal had announced India's highest ever budget of ₹3 lakh crore in the interim budget. Reuters reports that this figure is unlikely to change, with only a marginal increase if it does.
This is expected to put India's modernisation plans on hold, according to the report. In the Indian army, most of the planned outlay goes towards paying salaries and pensions of the armed forces.
This comes at a time when India desperately needs aircraft and ships to replace its aging Soviet-era fleet.
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