Union Budget 2019: No big bang ideas but Nirmala Sitharaman delivers solid and ambitious policy document

Nirmala Sitharaman’s maiden Budget is a reflection her personality. There was nothing spectacular in the 2019 Union Budget presented by the finance minister on Friday. If anyone was looking for a ‘big bang’ idea from the Narendra Modi 2.0 government’s first budget, then she was likely to be disappointed. Which is probably a good thing.

‘Big bang’ ideas in finances usually have a destabilising effect on the economy. A better idea is to stay on the beaten track of fiscal prudence and spur the economy through increased public spending and policy mediations to boost domestic demand and create enabling atmosphere for more corporate investments. On that metric, Sitharaman deserves good marks.

At the end of a nearly two-hour speech where she quoted from Chanakya, Vivekananada, Manzoor Hashmi and Tamil poet Pisiranthaiyaar’s work Purananooru, the Union finance minister came out with a document that is low-key, not flashy yet confident, professional, ambitious and visionary.

As a policy document the Budget hit all the right notes. It laid emphasis on the sectors that needed a boost (such as start-ups and sunrise industries), did not increase the tax burden for middle class, encouraged home buyers by announcing tax sops for home loans up to Rs 45 lakh, rationalised corporate taxes by extending the 25 percent ceiling for firms with an annual turnover up to Rs 400 crore (up from Rs 250 crore) that will now cover 99.3 percent of companies, proclaimed commitment to strategic disinvestment in CPSEs and manufacturing, and promised to expand the benefits of rise in direct tax revenue to the poor beyond the middle class and envisioned a $3 trillion economy by the end of this year and a $5 trillion economy by 2024.

En route, Sitharaman also announced a fundamental shift in government’s borrowing policy that may have a far-reaching impact and, according to analysts, must count among the biggest reform measures undertaken by the Modi government. In the middle of her speech, the finance minister said the government will start raising a part of its “ gross borrowing programme in external markets in external currencies.”  According to Sitharaman, India has the leeway to do so since the country’s sovereign debt-to-GDP ratio at less than 5 percent, which is among the lowest globally.

Shorn of jargon, it means a part of Indian government’s borrowing requirements will now be sourced via markets abroad in foreign currency. While the ratio of external borrowings — such as through dollar bonds — are yet to be notified, experts say this is a “very big deal.”

Bloomberg Quint quoted Abheek Barua , chief economist at HDFC Bank, as saying, “This is a… fundamental shift in the budgeting process and in the budgeting philosophy, in that we are seeking external funds for sovereign needs. This is a big deal and recognises for the first time that domestic household savings are simply not enough to finance the enormous needs of the government and the related entities and leave anything substantial behind for the private sector. That’s a big reform measure.”

Some economists such as Ananth Narayan of SP Jain Institute, quoted in the article above, are of the opinion that if the government starts borrowing from external markets for its needs, the domestic savings could be better utilised in private investments. This has also revved up the bond market which approved of Sitharaman’s measures to continue on the path of fiscal prudence and inflation-targeting.

In terms of boosting private investments, a focus area for the government the constraints of which are said to have restricted the release of ‘animal spirits’ in Indian economy, Sitharaman’s Budget nudges private players towards partnering with the government in the rail sector through the public-private partnership model.

Given that “railway infrastructure would need an investment of 50 lakh crore between 2018-2030” and “capital expenditure outlays of railways are around 1.5 to 1.6 lakh crores per annum, completing even all sanctioned projects would take decades.” Sitharaman envisages a role for private investment here “to unleash faster development and completion of tracks, rolling stock manufacturing and delivery of passenger freight services.”

The stress on private investment to achieve greater GDP growth and generate well-paid jobs is evident in the way Sitharaman promised businesses access to “low-cost capital” to enhance infrastructure financing. Measures include setting up of a Credit Guarantee Enhancement Corporation in 2019-20 and an “action plan to deepen the market for long term bonds including for deepening markets for corporate bond repos, credit default swaps etc., with specific focus on infrastructure sector.”

The finance minister also promised to open up aviation, media, insurance sectors further for foreign direct investment “in consultation with all stakeholders” and plans to permit 100 percent FDI in insurance intermediaries.

This focus on infrastructure is evident in the way Sitharaman announced the government’s intention to invest “Rs 100 lakh crore in infrastructure over the next five years.” The vigorous thumping of the table by Prime Minister Narendra Modi — who later called the Budget “citizen friendly, development friendly and future oriented” in a televised address — made it clear that the boost in public spending through increased outlay in infrastructure sector has Modi’s express sanction.

Sitharaman proposed setting up an “expert committee to study the current situation relating to long-term finance” and India’s “past experience with development finance institutions and recommend the structure and required flow of funds through development finance institutions.”

In terms of taxation, the budget stayed clear of tinkering with the slabs, which is a good thing, and announced increased taxation on the super rich who will now have to shell out three percent more tax on earnings between Rs 2 crore and Rs 5 crore, and seven percent for Rs 5 crore and above. This measure, which essentially seeks to redistribute wealth by taking from the rich and giving it to the poor, is a tried and tested formula that doesn’t necessarily bear fruit. The super rich have enough mobility to vote with their feet by moving abroad. The gains from this move are questionable, while the optics are that of a government going after wealth creators.

Among the more imaginative measures, Sitharaman’s announcement to push India towards a less-cash economy by levying a TDS of two percent withdrawal exceeding Rs 1 crore per year from one bank account is a commendable move. This is aimed at giving a shot in the arm for digital payments and enable digital footprints for transactions so that the space for black money is further constricted.

Overall, though Sitharaman’s Budget doesn’t give one big, original idea that may set the markets on fire and pulses racing, there are no bad ideas. What we have is a solid policy document that seeks to build upon Modi government’s priority areas and create an enabling atmosphere for India to take off.