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Dear Readers,

Smt. Nirmala Sitharaman, Union Finance Minister of Bharat, presented the government’s budget for 2019-20 on July 5, 2019. The budget has emotionally charged the Bharatwasis who believe it would boost growth, employment, investment, exports, MSMEs, farmers’ income, infrastructure, social infrastructure, and bring more money into the hands of lower middle class by allowing larger tax relief on housing and tax relief to medium turnover companies. Let us analyse each point.

Economy: Bharat’s economic growth is targeted at $3 trillion in FY20 and $5 trillion by 2024-25. India needs quick growth, more investment and savings, and rising exports. For this, large investment is required. Presently, it is negligible. Promoters/entrepreneurs/start-ups and big corporate houses have been accumulating huge debt due to capital investments, high rates of interest, various charges, losses due to global competition, slow economy, and other factors. Debt is being considered as a death trap. Tax rates are among the highest and most complicated in India compared to the rest of the world. Due to high tax rates, industrialists do not have substantial money to save and invest. FDI will flow on its terms. It is also costly. Chinese businessmen and industrialists pay interest at the rate of 5.5% max, while Bharatwasi entrepreneurs pay at 12 to 17%.

Exports: World economy is slowing with an anti-globalisation sentiment, protectionism, nationalism to protect employment, national growth. Global trade wars are affecting growth. India is also not competitive globally. Bharat has one of the highest costs of land, labour, capital, electricity etc. On top of that, inadequate infrastructure pushes up the cost of logistics. Productivity is also low. Exports have been quite stagnant since 2013.

Bharat’s external debt is $543 billion (as of March 2019) while Forex Reserve Reserves stood at $427.67 billion as on July 7, 2019. The external debt is 19.7% of GDP in 2019. The government is planning to raise $10 billion from the issuance of its first overseas 10-year sovereign bond. This will enable the government to borrow cheaper funds from overseas. The government has budgeted net market borrowing at Rs. 4.73 lakh crore in 2020. The concern of financial wizards is that money should not be spent on unproductive expenditure. Instead, it should be used for capital expenditure to generate wealth and employment. Also, the government must proceed on this path very carefully as the foreign exchange risk also needs to be factored in. Former RBI Governor Bimal Jalan and Rangarajan have said that this is not good for the Nation.

Financial chaos has been created by various rules and regulations. The controversial February 12, 2018 circular of the RBI, which was struck down by the Supreme Court has hurt the industries and the economy adversely.

NBFCs: The Non-Banking Financial Companies’ (NBFCs) crisis will hurt all. Crisis has developed due to default of IL&FS despite having more assets, debtors and unexecuted projects as reported. The IL&FS crisis was apparent due to the lack of entrepreneurial ownership, which exists in a number of sound NBFCs. DHFL, a housing finance company, is in the grip of default. In the budget, it has been announced that the RBI will regulate the housing finance companies instead of the National Housing Bank. Service holders, who have taken housing finance, fail to serve the loan, when they are out of employment. So, it happens with small retailers/businessmen/self-employed. As the economy is very slow, employment is shrinking and scope for employment is negligible, default by the loan-takers is increasing. Unrealistic regulations will further add to the panic and government’s plan to promote housing in PSUs’ and government’s lands will be futile. Real estate industry is in a bad shape. There is more than 90 lakh sq. ft. built-up area, which remains unsold.

The FM said that the crisis in NBFC had bottomed out. In the budget, the FM has mentioned that Public Sector Banks (PSBs) would purchase high-rated pooled assets of financially sound NBFCs amounting to a total of Rs. 1 trillion during the current financial year. For this, the government will provide a one-time six months’ partial credit guarantee to Public Sector Banks for their first loss up to 10%. However, this step was necessary when the crisis broke out in September 2018. There is ambiguity on which NBFCs actually qualify as ‘financially sound’ ones. Details of this scheme are awaited by the industry.

In the budget, FM proposed to scrap the obligation of debenture redemption reserves (DRR), a provision that requires NBFCs to build a reserve over the term of the debt to repay investors. It was often termed as a stumbling block for NBFCs to raise money via public bonds. Until now, in order to do a public placement, NBFCs, in addition to maintaining DRR, also had to maintain a special reserve as required by RBI. This requirement NBFCs need tax parity with banks. NBFCs should be allowed to accept deposits from public. Law for recovery and possessions of assets also needs to be simplified.

MSMEs: The budget has provided several incentives for the micro, small and medium enterprises (MSMEs). Allocation of Rs. 350 crore under the Interest Subvention Scheme (up to 2%) for fresh and incremental loans to GST registered MSMEs is a good move. On the issue of delayed payments to MSMEs, a payment platform for MSMEs will be created to enable easy filing of bills and payment. By allowing one woman from every self-help group (SHG) to be eligible for a loan of up to Rs. 1 lakh under the MUDRA Scheme, women entreprenuers are being encouraged. This is expected to encourage women-led SHGs to form enterprises.

As a result of incentives/benefits extended to SMEs differently by the states governments, units in other states and even in own state become sick and start making losses wiping capital and debts. Debts so wiped out in losses are treated as fraud leading to criminalisation. Almost all tax and commercial laws, rules and regulations have been made so rigid to the extent of turning into criminal laws.

Infrastructure: Budget 2019-20 targets an investment of Rs. 100 trillion for infrastructure over five years. The creation of national grids for power, water, gas, inland waterways, regional airports and internet will build a vibrant new India. This will definitely increase employment. However, the specifics on where the investment will be mobilised from have not been shared. Credit Guarantee Enhancement Corporation will be set up for long-term bonds with specific focus on the infrastructure sector. The regulations for setting up the Credit Guarantee Enhancement Corporation have been notified by the RBI. State-run banks will get Rs. 70,000 crore capital infusion and this is likely to provide some impetus to the lending activity of the PSBs.

A model tenancy law will be circulated to states to boost investment for rental purpose. Around 1.95 crore houses under Pradhan Mantri Awas Yojana (Rural) will be built up. These steps, along with the tax incentives given for first-time buyers of affordable housing (priced Rs. 45 lakh or less), are expected to provide momentum to the housing construction industry and its allied industries.

Under the present economic circumstances, achieving an annual GDP growth of 8% can be quite challenging if corrective measures are not taken. It is imperative to create faith among entrepreneurs and business houses.