Definitely a consumption Budget: Nirmala Sitharaman

Finance minister Nirmala Sitharaman and other senior functionaries of the finance ministry left no stone unturned on Friday to impress upon the industry, economists, academicians, and the press that the Union Budget for FY21 presented on February 1 wasn’t short on measures to boost consumption.

The first reactions to the Budget presented had held that it was a growth-oriented Budget that focussed on infrastructure, and rural and agricultural growth, but missed out on short-term measures that could boost consumption in an economy that is facing a demand-led slowdown.

In a first-of-its-kind outreach programme post the Budget, Sitharaman, along with senior secretaries from her department, met a diverse set of stakeholders in Mumbai, the country’s financial capital, explaining their future vision for the Indian economy. Sitharaman and her team will be in Chennai on Saturday and Kolkata on Sunday for a similar exercise. And this is after she completed the customary interviews to news channels and publications post the Budget and engaged with industry associations like the Federation of Indian Chambers of Commerce & Industry (FICCI) and Confederation of Indian Industry (CII) in New Delhi.

Atanu Chakraborty, secretary of the department of economic affairs in the ministry of finance, stated that the “Budget drove consumption very hard,” by spending as much as ₹2.83 lakh crore on rural development, and ₹69,000 crore for healthcare. “These kinds of allocations across sectors spur consumption,” Chakraborty said.

Rajiv Kumar, finance secretary, added that hiking the target for credit to the rural sector to ₹15 lakh crore (from ₹12 lakh crore earlier), simplification of the income tax structure with lower personal income tax rates would also lead to more money in the hands of people. Despite the compulsions of not deviating from the stipulated fiscal deficit target for FY21 too much, the government allocated ₹22,000 crore to two infrastructure finance entities—a subsidiary of the National Investment Infrastructure Fund and India Infrastructure Finance Co. Ltd. “This capital provided to these entities can be leveraged by them seven to eight times to raise additional capital for infrastructure investments,” Kumar added.

The government also vigorously defended the new personal income tax structure announced by the finance minister in her Budget speech, which is characterised by lower tax rates across income slabs in lieu of taxpayers giving up on deduction (from taxable salary) that they earlier enjoyed such as life insurance premium payment and housing loan interest and principal repayment. The move, with the explicit aim of putting more money in the hands of people, had caused some confusion as the extent of benefits to different classes of salaried individuals wasn’t immediately clear.

Revenue secretary Ajay Bhushan Pandey stated that the notion that the new income tax regulations won’t benefit most people was wrong. He went on to explain that his department had conducted an exercise to estimate how many people who filed tax returns could opt for the new structure (one can continue to claim exemptions and pay taxes under the old, higher rates). Pandey said that the government had information for 5.76 crore taxpayers who filed returns in FY2019. “We ran their information through an algorithm and found that 69% of those who filed returns in FY2019 will find the new structure beneficial. The monetary benefits to them under the new structure could be up to ₹74,000, and this would mean a total amount of ₹40,000 crore in the hands of consumers.”

“The ultimate aim is to lower the tax rates and that is definitely possible with a higher tax base,” Pandey said.

The new personal income tax structure (which gives rate benefits to taxpayers who forego exemptions) has also come under some criticism for potentially disincentivising people from buying insurance. Reacting to this, Sitharaman said: “I feel we are underestimating the Indian taxpayer because he is the best judge of whether he wants to save or spend and whether he wants to use his money to buy a house or a vehicle or insurance,” Sitharaman said.

Finance ministry officials also tackled the subject of the disinvestment target of ₹2.1 lakh crore, which the ministry has set for itself for FY21. Many commentators have observed that the target appears to be too stiff to achieve, but Kumar insisted that the disinvestment target and the process were “real,” and unlike earlier when disinvestment basically meant a public sector enterprise (PSE) picking up the Indian government’s stake in another PSE.

He explained that this target included the portion of the FY2020 disinvestment target that the government couldn’t achieve, along with Life Insurance Corp. (LIC) of India’s proposed public offering, as well as the sale of the government’s stake in companies such as Bharat Petroleum Corp. and Container Corp. of India.

Sitharaman’s audience in Mumbai comprised several noted heads of financial services firms and fund managers. Two of them, Motilal Oswal, chairman and managing director of Motilal Oswal Financial Services, and veteran investment banker Hemendra Kothari asked the finance minister to relook at the rate at which dividend income is to be taxed at the hands of the receiver.

The Budget did away with the dividend distribution tax (DDT), which had to be earlier paid by the company issuing dividends. Such dividends will now be taxed at the hands of the dividend earner in line with the income tax rate applicable to him. While retail shareholders of companies will benefit as they would have to pay a dividend tax lesser than what they had to earlier bear by way of DDT, this would lead to a very high rate of taxation for high net worth individuals and Indian promoters of companies.

In the end, Sitharaman also lauded the Reserve Bank of India (RBI) for the proactive approach that it was taking to solve some of the pain points faced by the industry, over and above its main task of setting interest rates and managing inflation. In the latest bi-monthly monetary policy announced on February 6, the RBI kept rates unchanged but announced a slew of measures that are expected to boost the flow of credit to the economy and also bring down banks’ cost of lending. The central bank extended the debt recast window for micro, small, and medium enterprises (MSMEs) till December 31, 2020; it removed banks’ cash reserve ratio (CRR) requirement for fresh retail housing, auto, and MSME loans; and opened up longer-term repo windows through which banks can borrow from the RBI at competitive rates for onward lending.

“The RBI is working in lockstep with the government and the way it is being supportive of the MSME sector, tweaking CRR norms and opening a liquidity tap, is the need of the hour,” Sitharaman said.