Home > Budget 2019 > Opinion > Budget 2020 directional in nature, to create more efficient markets
Finance Minister Nirmala Sitharaman. (Photo: PTI) (PTI)
Finance Minister Nirmala Sitharaman. (Photo: PTI) (PTI)

Budget 2020 directional in nature, to create more efficient markets

  • Budget focuses on farming and infrastructure sector
  • Budget to help India realise growth potential in long term

The equity markets may have set its expectations from Budget 2020 a little too high, given its reaction to the announcement. But this year’s budget needs to be seen as one that is more directional in nature – one that is focused more on laying the groundwork for helping India realise its growth potential over a longer term. It therefore comes as no surprise that there has been a strong focus on the rural and farm economies as well as on infrastructure.

With two-thirds of our population and 70 per cent of our workforce residing in rural India, it was only but expected that this critical segment of our economy get the attention that it has. India’s farm sector too, which employs 50 per cent of our workforce and makes up under 20 per cent of GDP has been in focus in this year’s budget.

From the purview of the financial markets, one could argue that since the FM had little headroom to provide for sops and incentives, she could have focused on bold structural reforms that could have paved the way for a more vibrant market. But the steps announced today provide a glide path towards a deeper and more efficient market. The budget has announced that certain specified categories of government securities would be opened to non-resident investors while also being made available to domestic investors. While this is arguably a small step, it is a positive one that potentially takes India one step closer to global bond index inclusion in the future. This would help the crowding out risks and maintain a healthy demand-supply dynamic in the bond market. The decision to also increase the limit for foreign portfolio investors (FPIs) in corporate bonds to 15 per cent of the outstanding stock from nine per cent at present would not only help in more efficient price discovery for corporate issuers, it would also allow them access to a larger and longer-term pool of capital.

Moving towards having India included on global bond indices would provide issuers access to a larger and deeper pool of global capital which would help lower longer tenor yields and in turn aid in the transmission process. This would also reduce the dependence of the government on domestic banks as a source of demand for their issuances. This is particularly true in the current environment where deposit mobilisation is happening at a modest pace and banks are expected to lend more to offset the slowdown in NBFC sector credit growth. With the slow pace of deposit mobilisation, it is difficult for banks to increase both their credit disbursals substantially and also buy enough government paper to maintain a healthy demand-supply dynamic in the bond market.

However, on the corporate tax front, we would have liked to see uniformity established between domestic and foreign companies. While the corporate tax rate being lowered to 22 per cent has been a welcome move, placing India at par with many of its regional peers, the tax rate for foreign companies in India remains rather high at 40 per cent. We keenly look forward to parity being established on this front.

While the decision to extend the credit guarantee scheme for NBFCs is a welcome step, we would have liked to see the government go further and provide the sector some extra comfort given the constraints it still faces. The real estate sector too would have benefited from measures to ease up the liquidity constraints it faces which would create a positive mood within the sector and for buyers at large.

The FM has had little room to manoeuvre in order to provide a Budget rich in tax sops as many were expecting. But given the constraints that she has had to work against, what she has delivered needs to be understood and appreciated.

The author is Chief Country Officer, Deutsche Bank, India.

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