While pointing in the right direction over a longer horizon, the Union Budget for FY2020-21 presented by finance minister Nirmala Sitharaman on Saturday missed out on the short-term booster shot that was needed to revive growth at a time when India’s GDP growth is at an 11-year low. This was India Inc.’s overarching reaction to the Budget.

More importantly, observers of the Indian economy were disappointed with the absence of any meaningful measures that would help boost consumption in the country, which is staring at a demand-led economic slowdown.

Overall, Sitharaman announced additional (though only marginally higher than in FY20) outlays in FY21 for the rural economy, infrastructure, MSMEs (micro, small, and medium enterprises) and healthcare. Some of the key announcements included the abolishment of the dividend distribution tax or DDT (dividend income will be taxed in the hands of the receiver); and the proposed divestment of a portion of the government’s stake in insurance giant Life Insurance Corporation (LIC).

But the biggest highlight of the Budget was a reduction in personal income tax rates that was expected to leave more money in the hands of the people. But it comes with a rider: to opt for the new tax structure with lower rates, taxpayers have to forego the deductions that they earlier enjoyed on account of expenses such as life insurance premium payment and repayment of housing loan principal and interest.

However, the move is bound to lead to some confusion in the minds of taxpayers vis-à-vis which tax structure would help them save more. Either way, the quantum of tax they would end up saving, if any, in the new regime, would be lesser than what they could have by virtue of a like-to-like reduction of tax rates.

“There were some good points in the Budget like removal of the DDT, but nothing that would help the economy turn around immediately. The conditional reduction of income tax rates was absurd,” said Adi Godrej, chairman of the Godrej Group.

Kiran Mazumdar-Shaw, chairman and managing director of Biocon, also pointed out that it wasn’t too clear as to how the new tax structure would work. “It would have been better if they would have just announced a flat rate of say, 10%-15% for ₹15 lakh. That would have put more money in the hands of the people,” Mazumdar-Shaw said.

Even as the markets reacted negatively to the Budget, the sector that was most impacted was insurance. The finance minister’s move to remove exemptions in the new tax structure has given rise to concerns on whether individual taxpayers would end up buying the quantum of insurance (term insurance and ULIPs) that they did earlier to bring down their taxable salary.

“While listing of LIC is a good move, which will bring focus on the life insurance sector, other expectations of the sector could have been met better. The insurance industry will be watchful of the implication of the direct tax changes in the new tax regime,” said Kamlesh Rao, chief executive officer, Aditya Birla Sun Life Insurance.

“Though the finance minister has painted on a wide and broad canvas, the Budget has fallen short on the real investment needs of the country in sectors like healthcare, education, infrastructure and digital connectivity,” Mazumdar-Shaw said. “Small investments won’t lead to the kind of impact needed to achieve a $5-trillion economy. While digitally connecting gram panchayats is important, what about roads to connect rural areas, or develop irrigation and rural markets?”

Mazumdar-Shaw also pointed out that the Budget didn’t address how the government will incentivise exports, especially at a time when India needed to move quickly with the public health situation in China due to the outbreak of Coronavirus. “Overall, it was a satisfactory Budget but not one that would get people euphoric.”

Some industry leaders pointed out that Sitharaman has tried to strike a balance between the need to revive the economy and fiscal prudence with very little elbow room. Sitharaman presented this Budget at a time when fiscal constraints are weighing down the government. The revised fiscal deficit estimate for FY20 has been pegged at 3.8% of GDP, versus a target of 3.3%. The fiscal deficit target for FY21 has been set at 3.5%, versus the earlier estimate of 3%.

“Given the hard constraints in the economy, the finance minister has done a creditable job at balancing the need for an economy in revival mode and fiscal orthodoxy,” said Gopichand P. Hinduja, co-chairman of the Hinduja Group. “The FM couldn’t have been aggressive on either count. The underlying theme of the slew of initiatives seems to be to reduce the cost of doing business in India. The removal of the dividend distribution tax is welcome. The proposal to list LIC is a bold move and signals the government’s resolve towards market discipline.”

However, Hinduja also pointed out that given the job creation potential of the auto sector, which is currently in the depths of distress, the Budget could have done more. The slippages during implementation of infrastructure projects also have to be eliminated, he added.

Sanjiv Goenka, chairman of the Kolkata-based RP-Sanjiv Goenka Group, said that the Budget presented by Sitharaman was a “confirmation of how complex is the nation’s economic scene and how difficult it is to solve all problems in one year”. Simplification of the Income Tax Act and the finance minister’s resolve to reduce tax litigation were welcome steps, Goenka said. He also pointed out the increase in insurance coverage of bank deposits to ₹5 lakh from ₹1 lakh earlier as a positive move.

Sumant Sinha, chairman and managing director of renewable energy firm ReNew Power, said that the government had eschewed the cause of going for an expansionary Budget and chosen to maintain fiscal prudence. "The Budget can be seen in continuation of what the government has to do vis-à-vis structural reforms, though there were no major reforms in the Budget per se,” Sinha said. “But the abolishment of DDT, simplification of tax structure, and allocation of some money to various sectors were steps in that direction.”

Vivek Gambhir, managing director and chief executive officer of Godrej Consumer Products, said that the Budget had “partially delivered” against the high expectations that people had from it.

“Focussed efforts to improve agricultural productivity, together with better-targeted subsidies, are summed up in a 16-point action plan. This should relieve stress in the agrarian economy and boost rural growth prospects for FMCG (fast-moving consumer goods). Investments to improve transport infrastructure, water security, electrification and digital connectivity, will be beneficial,” Gambhir said.

However, if the government really wants to deliver on the promise to make India a $5-trillion economy, and double farmer income by 2022, then it will take much more, Gambhir added. “The real litmus test will be the introduction of deeper structural reforms and the timely disbursement and effective on-ground translation of a clear road map of change.”

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