Finance Minister Nirmala Sitharaman presented her second budget for the financial year 2020-21 on Saturday and it was expected to propose measures to address the current slowdown in the economy.
However, the various proposals in the budget failed to enthuse the stock markets and the Bombay Stock Exchange Sensex fell nearly 1,000 points. It is the biggest single-day decline in more than three years and investors suffered paper losses of 3.54 trillion rupees (US$ 49 billion) in a special trading session on Saturday.
The budget didn’t include specific sops for sectors such as autos and real estate, contrary to widespread expectations. Investors didn’t see it as creating demand in the economy to lift it out of the current slowdown.
When the government reduced the corporate tax last September it was expected that it would provide relief in the personal income-tax in this budget. However, taxpayers’ hopes were disappointed.
While presenting the budget, the finance minister brought in a new tax format with lower tax rates, but with a catch – there is no provision for tax exemptions. The new format is voluntary, and taxpayers have the option to continue with the old format.
But if a taxpayer chooses to be part of the new income tax regime, he or she may pay less income tax but won’t be able to claim around 70 of the exemptions that had been available. Market observers said this option to choose between old and new income-tax formats will make things more confusing for the taxpayers and complicate the tax filing process.
It was expected that the government might tweak the long-term capital gains tax for stock market investors, which was reintroduced in 2018 after a gap of 14 years. But there was no such announcement. Investors were expecting the government to either abolish the tax for equities or lower it.
One of the major announcements made during the budget was that the country’s largest insurance company – Life Insurance Company, which is currently owned by the government – will be listed on the stock exchange as part of the government disinvestment initiative. The minister further said that the listing will bring in more financial discipline among the entities.
The government proposes to sell a part of its holding in Life Insurance Corporation through an initial public offering. Currently, the government owns the entire 100 per cent stake in the company. LIC dominates the life insurance segment with a market share of 76.28% in the number of policies and 71% in first-year premiums. The move has evoked sharp reaction from the employees and they are planning to go on strike next week.
Life Insurance Corporation is also saddled with a chronic bad debt problem. In the last five years its non-performing assets have doubled to 300 billion rupees (US$4.22 billion). Apart from selling insurance and buying safe-haven government securities, LIC has been used by governments to bail out struggling state-owned enterprises and this has strained its finances.
The government has trebled the target for disinvestment proceeds from 650 billion rupees in 2019/20 to 2.1 trillion rupees in 2020/21. But the government has miserably failed to meet its disinvestment target in 2019, when it was able to sell only 180 billion rupees worth of disinvestment proceeds. The market analysts feel the 2.1 trillion for FY 21 is a bit too high, even if one includes the Life Insurance Corporation’s stake sale.
Although the government renewed its commitment to affordable housing by extending the tax holiday by a year, it offered little to resolve the liquidity crunch facing the housing sector. Nor did it make loans attractive, which could have boosted homebuyers’ sentiment. Real estate developers expressed disappointment with the budget, saying it failed to address liquidity concerns of the sector and did not provide any major incentives to boost sluggish housing sales.
The government has, however, announced a slew of infrastructure projects, which are expect to improve road, rail, water and air connectivity. It has proposed to allocate 1.7 trillion rupees over five years. The minister also proposed to set up 9,000 km of economic corridor and 2,000 km of coastal corridor and strategic highways.
To enhance air connectivity, Sitharaman proposed to build 100 more airports by 2024. The government’s focus on infrastructure indicates its commitment to revive the investment cycle and create jobs to spur growth.
According to the latest estimates, the Indian economy will grow at 5% in the current fiscal ending March. The growth projected is lower than the 6.1% recorded in 2018-19. In the quarter ended September 2019, economic growth had hit a six-year-low of 4.5%.