Irrational concerns

Misplaced fear of the higher surcharge on the super rich, overseas borrowings and increase in the free float of listed non-PSUs

Every budget stirs passion for a variety of reasons. These include runaway spending, increase or decrease in allocation to social programs, and taxing of the middle class. The Union Budget for 2019-20 has all the ingredients to make it appear wholesome. There is commitment to ease of living. The thrust on digitalization will make the tax collection process anonymous and transparent. To move towards Housing for All by 2022, the interest payment on loans for affordable housing eligible for deduction has been enhanced. There is nod to reforms. These include a higher target for disinvestment of PSUs, with many intended for outright sale. The 51% controlling stake in non-financial PSUs will be clubbed with that of government entities, thereby clearing the way for dilution of direct government stake. Consolidation of PSUs in related sectors will lead to effective utilization of capital. Treating foreign portfolio investment on par with FDI ceiling for the sector will open up more investment opportunities. If at all the recent budget merited scepticism, it is for lacking details of achieving the targets. A committee will determine the road map to mop up Rs 100 lakh crore needed for infrastructure-building over the next five years.  There is no clarity on how Uday, a scheme assisting the transition of state power distributors to health that has received lukewarm response, and power generators and tariffs can be reformed without prompt and fair payment by end users. The subsidy for food is higher than in the previous year.  It would have been still more had the Food Corporation of India not been enlisted to raise resources. Instead, the firepower has been directed at three proposals that ideally should have been embraced for their salutary impact on revenue collection and liquidity.

The two-tier hike in surcharge on taxable income above Rs 2 crore will affect only a small portion of the tax base. The suggested scary outcomes range from fleeing of the heeled to warmer climes to drying up of private investment. Crippling taxes do crimp entrepreneurship but are not the only obstacles to boosting productivity. Stability in policy-making, with no retrospective shocks, and a transparent mechanism to address grievances and enforce the law has not received adequate attention. Ramping up the effective tax rate on high earners will hurt professional managers. Most of the business class lives on  dividend income, paying 10% tax if the cash-flow exceeds Rs 10 lakh a year, from the companies they have promoted or invested in. They pay as little as 10% long-term capital gains tax if a stake-sale is undertaken.  Portfolio managers earning fixed or variable fees will end up with a lower tax of 25% up to turnover of Rs 400 crore if they convert into corporates, a move that will help shine a light on the sources of their funds.    

Opposition to the Central government’s intent to borrow from overseas markets is based on the conjecture of adverse exchange rates giving rise to the possibility of debt default. The situation will not arise if the funds are used to create assets rather than finance the deficit. The shrinking of the government’s presence in the domestic debt market will result in availability of capital at softer rates to small and medium companies without access to dollars and crowded out by large peers. The current time of falling yields is opportune to supplement the chest of forex reserves as a hedge against outflow of foreign portfolio investors on the prospect of rising yields back home. It will keep the current account deficit in check and insulate the country’s currency from volatility headwinds. In the run-up to any sovereign debt issuance, India’s balance sheet will come under heightened scrutiny, encouraging fiscal discipline. An upgrade in sovereign rating will lift well managed local companies. Hopefully, the confidence of servicing dollar-denominated debt will reignite the debate on capital account convertibility for wider acceptance of the rupee as a global currency, eliminating the need to issue sovereign debt in future. The liquidity provided by 35% minimum public holding in listed non-PSU companies will improve price discovery. Mutual funds and foreign investors, worried about price fluctuation due to their entry or exit, will feel comfortable owning such stocks. Increased institutional presence will lead to better governance. The higher free-float will increase the weight of Indian companies in various emerging market indices. Cash from offer for sale or issue of new shares can be utilized to undertake organic or inorganic expansion to bump up earnings. The three propositions in the budget do not appear to be offhand. They seem to have been formulated after much thought. Like most other initiatives of the Modi government, their impact will be felt over time.  

-Mohan Sule

The right notes

The Union Budget 2019-20 keeps sight on achieving growth, generating resources and easing living

The Modi 2.0 government’s first budget continued the relentless focus on repairing and refurbishing the economic model by chipping away the deadwood (pushing for the replacement of Pan with Aadhar and clubbing the multiple labour laws into four broad codes) and applying varnishing where the lustre had faded (improving Uday and infusing Rs 70000 crore to recapitalize public sector banks weakened by provisioning for bad loans). India is to be propelled into a US$ 5-trillion economy without disturbing the fiscal balance and crimping on capital expenditure unlike last year, when inter-PSU sales had to be organized to meet the 3.5% fiscal deficit target. With the middle class (up to Rs 5 lakh of taxable income out of the net on utilizing appropriate savings instruments) and the farmers (Rs 2000 cash transfer every quarter) taken care of by the interim budget, mobilization of resources, the crisis in the financial services sector and ease of living took centre stage. A national gas, water and highway grid, coming after the last-mile delivery of sanitation, houses and power, signals that the animal spirits of the people can be unleashed if they have access to basic amenities.  A committee will suggest how to mop up Rs 100 lakh crore of low-cost capital over the next five years to build infrastructure. Besides the message of managing currency volatility, the unexpected decision to offer sovereign debt implies confidence of earning investment-grade rating going ahead so as to lower borrowing costs. Inviting private partners to bring in some of the Rs 50-lakh-crore investment required between FY 2018 and FY 2030 is a public acknowledgement that running railways is a business. Fully foreign-owned airlines, animation studios and insurers are likely. Making electronic parts in India will get tax incentives. Aligning the foreign portfolio investment ceiling with the sector cap rather than restricting it to 24% across the board, too, will accelerate dollar inflows .Stocks will get better discounting. More companies will have dispersed shareholding.   

The credit crunch in the financial services sector has resulted in a slump in consumption. The government’s move to guarantee up to 10% loss for the first six months on buying up to Rs one lakh crore of securitized assets of sound NBFCs will embolden banks to open up the liquidity tap. Besides strategic sale to meet the Rs 1.05-lakh-crore divestment target, CPSEs will hike public presence to at least 25% of the share capital. Minimum government control of 51% will now be relaxed to include holdings of other government entities and foreign shareholding of PSUs in the emerging market index will be synchronized with the sector limit to make them attractive. Exchange traded funds investing in CPSEs are to be put on par with ELSS to make them popular with retail investors. The peak tax rate has been reduced to 25% on companies with turnover up to Rs 400 crore from Rs 250 crore. Interest outgo up to Rs 3.50 lakh on mortgages to finance residences up to Rs 45 lakh will be eligible for deduction. Capital gain on sale of residential house will be exempted if invested in start-ups by March 2021.

Three proposals in the harmlessly optimistic vision document provoked the market. Petrol products did not absorb the volatility in international crude prices for the near two-month duration of the Lok Sabha polls. Half of the two-tier higher levy of Re 1 each per liter on petrol and diesel will hopefully go to compensate the PSU oil market companies’ losses. The other half will contribute to the national highway network. The move signals a soft outlook for petro products and another nudge along with the Rs 1.5-lakh relief on servicing of loans to buy e-vehicles. The concern of supply overhang knocking down valuations of non-government companies to maintain the new 35% threshold for free float is misplaced as the outcome will be better price discovery. Reverse book-building by MNCs to delist will be an opportunity for decent capital appreciation. The 20% tax on buybacks by listed companies plugs the loophole to avoid the dividend distribution tax and levels the field in choosing one of the two options to reward the shareholders. No-charge digital payment for establishments with over Rs 50-crore turnover, pre-filled IT forms and simplified quarterly GST returns for businesses with less than Rs 5 crore of sales, scrapping scrutiny of sources of funds and share premium charged by new ventures making regular disclosures and between 3% and 7% effective increase in tax rate on the super rich. The budget has paved the way for more rate cuts.

 -Mohan Sule