Budget 2019: Impact on the economy at a macro level

Date : 14/02/2019
Read: 10 mins

Interim Budget 2019 will have an impact on the macro economy of the country. Let’s see how industries will get affected.

Budget 2019: Impact on the economy at a macro level

The run-up to this year’s Budget was marked by speculation over how far the Narendra Modi government was willing to go with budgetary concessions, this being an election year.

The question everyone was asking was whether the government would breach norms to announce tax sops with an eye on the polls, or would it opt for a vote-on-account to enable normal functioning till the full Budget was passed by the next elected government, which may or may not be headed by PM Modi?

Overview

In the end, interim Finance Minister Piyush Goyal departed from tradition to announce several direct tax concessions, reaching out to the middle class and individual taxpayers. There were goodies for others too: favourable loan terms for small businesses, loan waivers for farmers, direct cash transfers to small farmers, and benefits for the unorganised sector and senior citizens.

The Budget was, by and large, received well. The corporate sector, despite not having received much in terms of largesse, said it “touched the right notes for stimulating demand and growth in the economy”, and that it addressed the “major consuming sections of society such as farmers, the middle class, and unorganised sector workers”.

Goyal’s is an Interim Budget, and will stay relevant for about four months till the new government presents the full Budget around June for the rest of the year; it may or may not accept the proposals in the Interim Budget. However, as seen in the past, a new government is often loath to roll back populist schemes such as tax rebates as no one wants an ‘anti-people’ tag, though it is more likely to scrap unrealistic schemes.

Unlike other years, the government did not release any Economic Survey the day before the Budget fleshing out the situation under various economic issues. However, Goyal’s speech covered this in bits and pieces. Let’s look at a few of the main ones that could probably be retained, if tweaked, in the full Budget later this year, and which will have an impact on the macro economy of the country.

1. Employment generation

The Interim Budget refrained from announcing any direct employment generation programme, instead preferring to highlight the ecosystem that could help create jobs. Goyal’s speech was an indication. “With job seekers becoming job creators, India has become the world’s second largest startup hub,” he said.

The following steps were proposed in a bid to help create ‘job creators’:

The Budget announced a national programme on artificial intelligence;
DIPP to be renamed Department for Promotion of Industries and Internal Trade, with government projects now being required to source 25% of requirements from SMEs;
MSMEs and traders being empowered through one-hour loan sanctions up to Rs 1 crore;
A new department, that of fisheries, to be created to push rural job creation;
10% additional reservation announced for the poor for government jobs and education;
Rs 60,000 crore allocated for MGNREGA (job-creating rural projects), and Rs 19,000 crore for Gram Sadak Yojana (rural roads projects).

Upside: There are not many direct announcements related to employment in the Interim Budget, but it does address the issue via more incentives and concessions to several major sectors of the economy, such as infrastructure, real estate, and agriculture. Take agriculture; India’s agrarian economy is labour-intensive, accounting for millions of jobs. Growing it through direct income support and easy loan schemes and interest subvention measures can generate rural employment, apart from building prosperity.

Downside: One criticism that has been levelled at the Modi government over the past few years relates to job creation; critics of the PM say he has not delivered on his pre-poll promise of creating two crore new jobs every year if his party was voted into power in 2014. There is little clarity on the level of success as no official data on the state of employment or unemployment been released in recent years. This Budget also stayed away from citing data, keeping alive suspicions that the announcements were made keeping in mind the elections.

2. Infrastructure

Amidst taunts by opposition MPs, Goyal outlined a vision statement that he said would guide the government for the next 10 years – till 2030. Called Vision 2030, the list was topped by the infrastructure sector. “The first dimension of this vision will be to build physical as well as social infrastructure for a $10-trillion economy,” he said. Proposals related to infrastructure were not clubbed under one head, but spread out under different heads. A collective list is given below:

Highest Budget allocations for rail, road, and rural infrastructure (including rural roads and rural housing);
Under road infrastructure, plans for completion of 9000 km of National Highway and 3.7 lakh km rural road construction;
Upgrading 600 railway stations;
Dedicated funding for affordable housing; one crore houses to be built under Pradhan Mantri Awas Yojana, divided equally between urban and rural areas;
Target to build 100 Smart Cities with an emphasis on solar facilities, smart roads, and smart infrastructure;
Two crore more toilets to be constructed under Swachh Bharat Mission this fiscal;
Increased investment for education and health infrastructure;
A new scheme launched to revitalise the school system by 2022;
New tunnel in Sera Pass announced to promote tourism, especially in north-east India;
Top 10 tourist sites to be promoted through increased marketing, branding, and private funding.

Upside: Incentives/concessions to the real sector not only create jobs, they are also a step towards housing for all. Incentives include exemption of income tax on notional rent on a second self-occupied home and increase the benefit of rollover of capital gains from investing in one residential house to two for capital gains up to Rs 2 crore, though only once in the lifetime of a taxpayer. A similar benefit has been extended to unsold inventory.

There are several other tax-related incentives for the construction industry, which promotes backward and forward linkages between some 248 other economic activities. Growing it creates jobs.

Downside: While Goyal’s Budget speech covered some flagship programmes such as Pradhan Mantri Awas Yojana, it was silent on the Smart Cities initiative. Also, the interim Budget was vague on the direct or indirect increase in allocation or investment in sectors other than housing, where direct and indirect fiscal benefits are likely to lead to real growth; as for others, it is all nebulous.

3. Farm sector

Noting that “there is a need for providing structured income support to poor landholding farmer families”, Goyal’s Budget addressed the account growing discontent over depressed farm income to announce several schemes:

A new direct income support scheme was announced for farmers, called Pradhan Mantri Kisan Samman Nidhi (PM-KISAN), under which Rs 6000 will be deposited in the bank accounts of every farmer family owning cultivable land up to two hectares. The scheme will cost the government Rs 75,000 crore for 2019-20, and is touted to benefit around 12 crore small and marginal farmer families;
Additionally, farmers engaged in animal husbandry and fisheries who have availed of loans through the Kisan Credit Card but have been affected by natural calamities will get a 2% interest subvention, and an additional 3% interest subvention in case of timely repayment;
A new scheme, National Kamdhenu Aayog, has been introduced for “the sustainable genetic upgradation [sic] of cow resources and to enhance production and productivity of cows” (Rs 750 crore has been allocated for the National Gokul Mission for this);
In a new initiative, a separate Department of Fisheries will be created to support the livelihood of about 1.45 crore people engaged in this sector;
MSP increased 1.5 times the production cost for all 22 crops to help farmers double their income.

Upside: The Budget was clearly alert to the need for rural job creation. This is apparent from budgetary support through interest subsidies on Kisan credit card loans, crop insurance schemes, and continuing with existing subsidies on farm inputs (such as fertilisers).

Alongside, the annual grant of Rs 6000, to be paid in three equal instalments to small and marginal farmers (with holdings below five acres), under the newly-launched PMKSY is a welcome move as it provides some security against nature’s fury and crop failures. It may seem a paltry amount, but it is a good beginning as some 12 crore farmers are expected to benefit.

Building rural prosperity, i.e. creation of more disposable rural incomes, will push demand for manufactured goods and services. This will lead to capacity creation/augmentation, as well as new investments, in the manufacturing sector. Higher capital formation in the hinterland will push economic growth.

Downside: Despite Prime Minister Modi’s stated push for startups and tech companies, the interim Budget gave India’s agri-tech sector a complete go-by: it did talk of expanding rural industrialisation using modern industrial technologies, but it was vague; there was no policy announcements like tax relief or fund support for startups in this sector, or even schemes to attract investments in agri-tech.

This is regrettable; India’s agri-tech could do with budgetary support for infrastructure such as innovation labs in states, startup fund, R&D opportunities, and cold chain infrastructure.

During Modi’s visit to Israel in January last year, the two sides signed a five-year cooperation pact to upgrade India’s water use and agricultural practices through Israeli knowhow. There is already a three-year (2018-20) bilateral programme for setting up water- and agri-related research and tech centres in India. But the Interim Budget has not allocated funds for any project – if at all there are any – under either of the two programmes.

4. Social sector

Asserting that his government is aiming to bring about development and bridge the urban-rural divide, even as it takes care to ‘preserve the soul of villages’, Goyal said, “Efforts have been taken to bring full representation for economically weak backward classes by giving them reservation in jobs and education.”

Some of the measures have been mentioned earlier – job/education reservation for the poor, rural road construction, MGNREGA, affordable housing etc. Some of the others are:

Every poor household to get electricity connection by March 2019 under the Saubhagya Yojana;
Two crore free LPG connections under Ujjwala Yojana next year, (six crore connections have already been distributed);
Outlay on SC and ST increased from Rs 62,474 crore in the revised estimate of 2018-19 to Rs 76,800 crore in the Budget estimate of 2019-20;
Proposal to launch a pension scheme for the unorganised sector workers with a monthly income of Rs 15,000; called Pradhan Mantri Shram Yogi Maandhan; the scheme will ensure a monthly pension of Rs 3000 after retirement, in lieu of a minimum monthly payment between Rs 55 and Rs 100 depending on age;
Tax benefit totalling Rs 18,500 crore is proposed for an estimated three crore middle-class and small taxpayers comprising self-employed, small businesses, salary earners, pensioners, and senior citizens;
Income tax exemption up to Rs 5 lakh, and up to Rs 6.5 lakh gross income investments made in provident funds, specified savings and insurance etc.

Upside: A pension scheme for 85% of the country’s workforce – the unorganised sector – is a social security measure for them, which promises to lift emotional well-being and reduce the incidence of poverty in old age, apart from boosting demand in the economy. Tax cuts too will boost demand and their positive impact will be felt across sectors.

Downside: How will the money be transferred to a worker in the informal sector? Most do not have bank accounts. In the absence of any clear-cut plan on this, the announcement runs the risk of boiling down to an empty pre-poll gimmick.

Furthermore, Moody’s strikes a warning of a different note: the credit rating agency says that while farm sops and tax cuts will give a fiscal stimulus of about 0.45% of the GDP, it will also lead to loans getting costlier in future.

Against this backdrop, let us have a look at the income tax changes of the Interim Budget, and how it affects your personal finance and corporate finance at large.