Nirmala Sitharaman: Over the week of chaos and analytic report that showcased two options for tax savings under section 80C surprised us to take a bow!
The lacklustre budget will further delay the goal of becoming a $5 trillion economy. Here is something that you might have to be aware of:
1) The plan in a scoop
According to the 1991 budget, the proposal for the budget should have been intact and in line with it. Especially, when the Indian economic growth in nominal terms is at a two-decade.
The reality took a different turn and misguided the economy. The basic budgetary that came out should and is feasible for any other year too. It was a usual budget, which could have been presented in any other year.
Read More: Nirmala Sitharaman – Millennial’s mind set?
2) Will this budget make the citizen poorer or richer?
Maybe! Maybe not! According to the new income tax system, the finance minister said, “In the new tax regime, the substantial tax benefit will accrue to a taxpayer depending upon exemptions and deductions claimed by him.”
However, each taxpayer will have to do his own calculations to figure out under which system he or she will be better off. But on the whole, if you are the kind who uses more deductions while filing taxes, you will probably be better off in the old system.
3) Old or New – How does it help me?
As usual, the taxes on cigarettes will go up, with the budget raising excise duty by way of National Calamity Contingent Duty on cigarettes and other tobacco products.
However, duty rates on bidis remain the same. At the same time, customs duty on imported footwear, furniture, wall fans, tableware/kitchenware made of porcelain etc., has been raised.
This will make these imported products more expensive. Customs duty on imported newsprint has been cut to 5%.
4) Why did the stocks just crash?
The BSE Sensex fell a whopping 988 points or 2.4% to 39,735.5 points. Markets did expect an abolition of the long-term capital gains tax on selling shares. There was no such move, and the stock market fell. Having said that, the budget did not totally ignore market expectations.
The dividend distribution tax of 15% plus applicable surcharge and cess, on the dividend that companies pay their shareholders, has been done away with. But dividends remain taxable in the hands of the recipients at the applicable rate.
5) Will this budget cover the fiscal deficit?
Any budget is a balancing exercise. Hence, it is the key to make reasonable assumptions in the process of drafting the budget. One of the things the government has spent a lot of money on in the last few years is the recapitalization of public sector banks.
Primarily, the public sector banks ended up with a huge amount of bad loans on their books. In this scenario, the government has to constantly keep investing fresh money (that is, recapitalizing) to keep them going. With accumulated bad loans of ₹7,79,347 crore, it is a given that the government will have to keep investing money in public sector banks.
The thing is that the government seems to be assuming that all is well on the banking front. In 2020-21 it has allocated just ₹2 lakh (yes, just ₹2 lakh) towards recapitalizing these banks. This is bizarre. The government will continue to have to recapitalize public sector banks even in 2020-21. When the government does this, it’s expenditure will go up and this will push up the fiscal deficit unless the government decides to cut down on some other expenditure.
There is no and never was any free lunch in economics.
6) Who is gaining from the budget?
The bank deposits since 1993 have been at ₹1 lakh for deposit insurance. This basically means that if any bank were to go bust, deposits of up to ₹1 lakh are insured, irrespective of the total amount of money that any depositor has in the bank.
This is a good move given that it has been 27 years since the last increase and should help remove any fear in the minds of depositors. In last year’s budget, the finance minister had allowed an additional deduction of up to ₹1.5 lakh on interest paid on a home loan for an affordable home.
The former deduction has been made available for 2020-21 as well. Anybody buying a house by taking on a home loan can benefit from it.
7) Who is losing in the process?
It was widely expected that the government will increase the allocation towards Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), putting more money in the hands of the poorest of the poor. The poor have a higher marginal propensity to consume than the middle class and the rich, and their spending would have helped revive parts of the rural economy.
The allocation to MGNREGS in 2020-21 stands at ₹61,500 crores. This is significantly lower than ₹71,002 crore that is to be spent on MGNREGS this year. Ironically, the Pradhan Mantri Kisan Samman Nidhi (PM-Kisan) scheme gets an allocation of ₹75,000 crores in 2020-21, against the ₹54,370 crores to be spent in 2019-20. Clearly, the government seems to favour land-owning farmers than the poorest of the poor seeking work under MGNREGS.
8) Is the government really transparent with the 2020 budget plan?
In fact, it is hiding something here. Take the case of Food Corporation of India (FCI). FCI buys rice and wheat from farmers at a minimum support price, and sells them through the public distribution system at a price not disclosed. The government needs to compensate FCI for the difference in prices.
It does so through the food subsidy in the budget. The allocation for food subsidy in 2019-20 was ₹1,84,220 crore. It has been revised to ₹1,08,688 crore. This is a cut of over ₹75,000 crore. FCI’s food subsidy claim in 2019-20 stands at ₹3,17,905 crore. Even if the entire food subsidy amount of ₹1,08,688 crore were to go to FCI, there would be a gap of ₹2,10,000 crore. In order to continue to operate, FCI needs to borrow this money from the financial system.
By not paying FCI on time, the government reduces its expenditure and fiscal deficit. The same formula has been adopted for 2020-21. The total allocation towards food subsidy is ₹1,15,569 crore. The total food subsidy that FCI needs to claim is ₹3,08,860 crore, a gap of close to ₹2 trillion.