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