The much-awaited budget 2019-20 that will set theroadmap for the Narendra Modi-led government for the next three to five yearsleft many confused. The budget, at best, is work-in-progress where the overallagenda is implemented in stages depending on the fiscal room available tomanoeuvre. EPC&I takes a look.

The Finance Minister presented the maiden Budget ofthe Modi Government 2.0. It commits itself to making India a US$5.0-trillioneconomy by 2024, and lays down the blueprint to catapult the country’s economyaccordingly.

The expectations from the Finance Minister were huge –to propel GDP growth beyond 8.0 per cent year-on-year in real terms, providestimulus to infrastructure and manufacturing, accelerate job creation andprovide much-needed succour to the rural economy – and more importantly,achieving all this while maintaining the fiscal balance. The Budget reflects avision for the next three to five years and lays down the roadmap for makingIndia an investment-driven economy.

It specially focussed on strengthening the country’sinfrastructure, uplifting the rural economy (with a focus on agriculture),fostering gender inclusiveness by empowering women, creating world classeducation system, supporting MSMEs, and revival of NBFC and the banking sector.It emphasises the importance of partnering with India Inc. to ensure all-rounddevelopment.

In order to boost economic growth and Make in India,there was a clear intent in the Budget for setting-up of mega-manufacturingplants in advanced technology areas, such as fabricating semi-conductors, SolarPhoto Voltaic cells, etc., coupled with investment based tax incentives. Further,the Government has introduced several tax incentives with a view to promote theGIFT City.

NBFCs get alifeline

Realizing the role NBFC & HFC play in sustaining consumptiondemand — 44 per cent of retail housing finance and 30 per cent in vehicularfinance — the Budget has provided a lifeline via PSU banks buying pooled assetsworth INR1.0-tn of highly rated companies, thereby easing liquidity concerns.

Themeasure is credit positive for NBFCs, as it will enable them to liquidate someloans and generate liquidity, amid continued tight financing conditions. Thisassumes that the six-month period refers to the window over which NBFCs canavail of this facility.

If,on the other hand, the guarantee only covers losses that materialize in thefirst six months after a pool has been purchased, the measure will be much lesseffective. The budget announcement also does not specify whether the newfacility will be restricted to NBFCs or whether housing finance companies willalso benefit. Since housing finance companies are facing some of the greatestliquidity strains, the efficacy of this measure will be limited if housing financecompanies do not fall under its ambit.

Thegovernment additionally announced regulatory changes for finance companies,which are credit positive as they reduce the scope for arbitrage and strengthensupervision. The Reserve Bank of India (RBI) will now be responsible forsupervising housing finance companies, taking over from National Housing Bank.Furthermore, the RBI will be granted more powers to regulate NBFCs.

Sell off, or sell out?

Thegovernment has announced that it could reconsider its policy of holding aminimum stake of 51 per cent in government-owned nonfinancial companies, adecision that would be made on a case-by-case basis, and that the governmentwould still retain control through other means. While pursuing its currentpolicy of maintaining a minimum 51 per cent stake, the government will alsotake in to account the holdings of other government controlled institutions.

EVs – Looking ahead

Toencourage use of electric vehicles, the government reduced customs duty oncertain automobile parts that are for their exclusive use, to zero. Previously,the government had announced incentives for buyers of electric vehicles in theform of tax deductions of up to INR150,000 on interest paid on loans topurchase electric vehicles.

Infra spending: High on optics

Thegovernment announced an additional deduction of up to INR150,000 for interestpaid on loans borrowed up to 31 March 2020 for purchase of an affordable housevalued up to INR4.5-million. This will be in addition to the deduction ofINR200,000 of interest paid on housing loans on self-occupied property. Therefore,a person purchasing an affordable home will now receive an enhanced interestdeduction of up to INR350,000.

Previously,the government announced a tax holiday on the profits earned by developers ofaffordable housing.

Thegovernment has also announced that it will raise public infrastructure spendingin key areas. Higher public investment will also help to address infrastructureconstraints, which hamper growth and contribute to economic volatility, and tosupport private investment.

Thebudget proposals earmark a relatively modest 5.6 per cent rise in plannedoutlays on highways to INR829-billion, and a 15 per cent increase in capitaloutlay for railways to INR1.6-trillion. The budget outlay for rural roads rosemore sharply by 22.6 per cent to INR190-billion.

Toincrease the sources of capital for funding of infrastructure, the governmentwill unveil an action plan to deepen the corporate bond market with a specialfocus on infrastructure after consultation with the RBI and the Securities andExchange Board of India. As a part of this measure, the government alsoannounced that it would set up a Credit Guarantee Enhancement Corporation. Overall,these steps should reduce funding costs for infrastructure projects.

Thegovernment will also be taking steps to remove administrative barriers to theimplementation of Ujwal DISCOM Assurance Yojana (UDAY), which was launched in2015 to improve the financial health of state-owned electricity distributioncompanies.

Conclusion

Overall,the budget has been pragmatic on allocation of resources. However, it is thegeneration of these resources that will remain a challenge. Agriculture, ruraldevelopment, infrastructure and FDI investments have been the key focus forFY20, laying the roadmap for next three to five years. The government hasstrongly laid emphasis on the need of PPPs for better materialization in theinfrastructure sector. Overall, this is more of a vision document, a statementof intent, rather than a budget proposal.