A new-found confidence about India reflects in a bold Union Budget 2021
Anew-found confidence over the well-handled Covid-19 crisis found its way into Budget 2021. This is reflected in three aspects of the budget. One, the finance minister ignored suggestions to tax the rich with a higher surcharge or a Covid-19 cess. Two, the government has gone for growth with a large push on capital spending. Three, the FM has cleaned up the balance sheet of the government and removed the anomaly of using off-balance sheet items to show lower borrowings.
We all knew that this was going to be a growth-oriented budget, but the challenge before the government was to find the money to spend in a year that needs a big fiscal push, and to do so in the face of a drag on its revenue due to lower tax collections. The money has been found, looking through the fiscal deficit targets, borrowing and through a planned disinvestment of public sector units (PSUS). To fund infrastructure, the government is going to launch tax-free zero-coupon bonds targeted at the middle-income saver and investor.
Finance minister Nirmala Sitharaman has chosen to spend on generating future income using the higher capital spending, which has gone up by 35.4% over the previous year. This is good. The big positive is that the larger government spending will not get frittered away on doles, loan waivers or other subsidies, but is being spent to build infrastructure – roads, railways, ports and waterways. See this in context of your own budget – it matters what you take a loan for: Is it to eat dinner or for an education degree? The dinner gets you instant gratification, but the education allows you to earn more in the next few years. The dinner loan will have to paid back from your current income. The education loan will be paid from a higher income generated by that education. The government has chosen the politically tougher option of infrastructure spending rather than appeasing interest groups like farm intermediaries.
The intention of the government to clean up the books came through when the 9.5% fiscal deficit number was announced for the current financial year. A practice began in the second term of the United Progressive Alliance government when some borrowings used to be put off the balance sheet and has since grown into a huge problem. To show a lower borrowing number to meet the fiscal deficit target, the government got PSUS like the Food Corporation of India (FCI) to borrow to meet the food subsidy. Instead of the government giving the FCI the difference between the lower market price of foodgrains and the higher minimum support price (MSP) and showing it on its balance sheet, it got FCI to borrow. This year the government has bitten the bullet and taken all those loans on its own balance sheet, the correct fiscal deficit number of 9.5% of gross domestic product (GDP).
Other pro-reform and growth announcements were to deal with the raising of the foreign investment limits from 49% to 74% in insurance. This was a needless controversy created by the Left and has no real merit on the ground. Mutual funds have had 100% foreign ownership and we have not seen destruction of household money or seen anybody running away with Indian money. The privatisation announcement on one general insurance company and two banks, and the disinvestment of Life Insurance Corporation will have the unions up in arms very soon. The government is signalling its appetite for reform, whatever may be the fights, even as the one with farmers’ unions is still raging at the Delhi borders.
At the micro level, there isn’t that much in the budget. No significant changes in personal tax rates, slabs or tax breaks. A good step has been to take a step forward to bring parity between the unit linked insurance plan (Ulip) and mutual funds. Any person with an aggregate Ulip premium across all polices worth more than Rs 2.5 lakh in a year will be taxed in sync with what mutual funds are taxed, when the policy matures. If the person dies midway, the money paid to the family will be tax-free. This is a big signal on the start of insurance reform in India because for years life insurance has been given a tax-free status while 99% of the market sells investment-oriented products with just 10% of the premium going towards a life cover.
The well-off with large Employees’ Provident Fund (EPF) corpuses will now pay taxes on the annual interest. The government has quietly made the EPF, an ETE (exempt -axed-exempt) product by introducing a tax on the interest on EPF contributions of more than Rs 2.5 lakh a year starting from the next financial year. A compliance relief for senior citizens who only draw pension or interest income is that they will no longer need to file tax returns.
Stock markets liked the cleaning up of the government balance sheet. They liked the growth push. And loved the fact that the dreaded wealth tax, inheritance tax, rich tax, cess, surcharge did not find their way into the budget documents and ended the day 5% higher. Stock markets look ahead and see growth coming back in a strong way as the government has signaled its intention to continue with reforms.