The Union Budget is hoping to spur the economy byrevitalising the financial sector

The maiden budget of Nirmala Sitharaman has many interestingfeatures, but it does not have a defining central theme. There wereexpectations of a big growth push through either tax cuts or large expenditureprogrammes even if it meant a rise in the fiscal deficit. But the FinanceMinister has chosen to be fiscally conservative, opting to play the long-termgame, though it could lead to pain in the short term. The only indulgence shehas permitted herself is a big ₹70,000 crorecapital infusion in banks that will, it is hoped, spur lending to growthsectors in the economy. Also, quite notably, the budget has sought to addressthe problems that have plagued the non-banking finance companies space over thelast few months and the consequent credit freeze and loss of confidence in themarket. Ms. Sitharaman has comprehensively addressed the important issues ofliquidity, solvency and poor governance in the NBFC sector. She has madeavailable a liquidity window of ₹1 lakh crore topublic sector banks through the Reserve Bank of India to buy pooledassets of NBFCs and offered a one-time credit guarantee for first loss of up to10%. To enable better supervision of the sector, housing finance companies,which have been the main villains of the piece, will come under the RBI’sregulatory ambit. A long-standing demand of NBFCs for equitable treatment withbanks in the matter of taxing interest receivable on bad loans has beenconceded. They will not need to maintain a Debenture Redemption Reserve onpublic placements that was leading to locking-up of funds, which is their rawmaterial for business. These are important reform measures for NBFCs. Moreinteresting is the move towards reviving development financial institutions.The big problem faced by NBFC financing infrastructure is the lack of long-termfunding sources to match their lending tenure. This pushed them into borrowingshort-term funds to lend to long-term projects, leading to asset-liabilitymismatches. The proposal to set up a committee to study the issue, includingthe experience with development finance institutions, is welcome.

There are several reform measures that have been announced,but the most interesting is the reiteration of the government’s commitment tostrategic disinvestment and the declaration that it is willing to allow itsstake to fall below 51% in non-financial PSUs. Start-ups can heave a sigh ofrelief as the angel tax is practically off the table. The government seems tobe moving towards a single identity card for citizens in the form of Aadhaar,which will now be interchangeable with the PAN card. Taxpayers who do not havea PAN card can file returns quoting their Aadhaar number, which effectively canbe a substitute for PAN in all transactions. Another reform measure is the introductionof faceless e-assessment of tax returns taken up for scrutiny. This willeliminate the scope for rent-seeking by officers as there will be no interfacebetween assessee and official. In fact, the assessee will not even know theidentity of the officer scrutinising the return. This is an absolutely welcomemeasure but needs to be closely watched for implementation. The corporatesector has got a minor sop with the turnover limit for the 25% tax bracketbeing raised to ₹400 crore per annum from ₹250 crore.The expectation was that this would be extended to all companies irrespectiveof size. It appears that the government wants to wait for the finalisation ofthe Direct Taxes Code, which is being examined by a committee. Real estatecompanies may have reason to cheer as the generous tax concession foraffordable housing may create demand, especially in the smaller metros.

The ‘nudge theory’ of economist Richard Thaler, mentionedextensively in the Economic Survey 2018-19 presented in Parliament on Thursday,has been put to use by the Finance Minister to push forward two of thisgovernment’s pet themes — increasing digitalisation of money and promotingelectric mobility. On the first, there will now be a 2% tax deducted at sourcewhen withdrawals from bank accounts exceed ₹1 crore ina year. This is a commendable measure, but it could lead to genuine problemsfor businesses such as construction and real estate that are forced to deal incash for wage payments. Of course, the TDS can be set off against theiroverall tax liability. The second, and more interesting ‘nudge’, is towardselectric vehicles where those taking loans to buy one will get a tax deductionof up to ₹1.5 lakh on the interest paid by them. But thefact is that there are not too many electric vehicles in the market now.And even for those that are there, the waiting period to deliver one is long.Besides, there is no ecosystem, such as charging points, even in the majorcities. The government’s hope seems to be that this incentive will create amarket for e-vehicles that will then lead to the development of the ecosystem.

The budget documents show that the government has stuck tothe glide path for fiscal deficit, which will be at 3.3% this fiscal. This is,however, based on exaggerated growth projections in tax revenues. The estimatedtotal revenue receipts this fiscal is ₹19.62 lakh crore,which implies a 25.56% growth compared to the actual receipts of ₹15.63 lakhcrore (as presented in the Economic Survey) in 2018-19. This is an extremelyambitious projection, especially given the ongoing slowdown in the economy. Ofcourse, the Finance Minister could get a comfortable buffer if the Bimal Jalancommittee that is going into the sharing of RBI’s reserves with the governmentcomes up with favourable recommendations. The government also appears to besliding into a protectionist mode, going by the increase in customs duty oneverything from cashew kernels to PVC, newsprint and even auto parts. Whilesome of it may be well-intentioned to promote domestic manufacturing, thissends out a retrograde signal on the reforms front.