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Easily one of the most challenging budget announcements for the Modi government, Budget 2020 touched upon many relevant economic and sociocultural aspects. It was divided into three areas, namely Aspirational India, Economic Development, and Caring Society.
Budget 2020 was unveiled to the Indian public at 11:00 AM on February 1, 2020. Presented by India’s first female Finance Minister Nirmala Sitharaman, the budget speech went on for over 2 hours, detailing the government’s measures and budget allocations for various sectoral reforms.
In her second union budget 2020 presented today, Sitharaman put forth several ambitious proposals to take India’s economy forward and achieve the elusive $5 trillion target. The budget highlights from 2020 include a host of economic incentives such as corporate tax cuts, capital infusion by means of public-private partnerships, and proposed reforms in the Income Tax Act, 1961.
While the execution of the schemes introduced in the previous year’s budget has been grossly insufficient to give India’s slowing economy the push it desperately needs, it’s possible that the incentives and measures discussed in the union budget 2020, if executed correctly, could help the economy bounce back.
The general sentiment sweeping across the country prior to the presentation of this budget was the hope that it would succeed in steering the economy back on the path of progress. Here are some of the main proposals put forth in budget 2020.
The customs duty on items like gold and precious metals has been increased to 12.5%. Furthermore, the customs duty on steel has been increased to 7.5% from the earlier 5%. Finance Minister Nirmala Sitharaman also announced that the tariff on imported furniture and footwear is to be hiked. Furthermore, import of medical equipment shall now be subject to health cess. Among other fiscal measures, cash withdrawals in excess of Rs 1 crore per annum shall suffer a levy 2% TDS (tax deducted at source).
Budget 2020 also brought about a bold reform with regard to taxation of personal income. FM Nirmala Sitharaman announced a new scheme of taxation, which is an optional system that taxpayers could choose to abide by. According to this new scheme, personal income is to be taxed at a much lower rate when compared with the old (current) scheme of taxation.
The Finance Minister has provided taxpayers two options:
Here’s how the new income tax rates proposed in Budget 2020 compare with the earlier rates of tax.
Income slab (in rupees) |
Tax rate as per the new scheme |
|---|---|
0 to 2,50,000 |
Nil |
2,50,001 to 5,00,000 |
5% |
5,00,001 to 7,50,000 |
10% |
7,50,001 to 10,00,000 |
15% |
10,00,001 to 12,50,000 |
20% |
12,50,001 to 15,00,000 |
25% |
Above 15,00,000 |
30% |
As is evident from the new rates, the rates of income tax have been reduced as follows:
For income between Rs. 5 lakhs to Rs. 7.5 lakhs, the tax rate has been reduced to 10% from 20%.
For income between Rs. 7.5 lakhs to Rs. 10 lakhs, the tax rate has been reduced to 15% from 20%.
For income between Rs. 10 lakhs to Rs. 12.5 lakhs, the tax rate has been reduced to 20% from 30%
For income between Rs. 12.5 lakhs to Rs. 15 lakhs, the tax rate has been reduced to 25% from 30%
And anyone having an income between Rs. 0 to Rs. 5 lakhs does not have to pay income tax
Know more on Income Tax Slab FY 2020-21 post budget 2020.
Among the many sectors that stood to benefit from this year’s union budget, the agricultural sector is at the forefront. The Finance Minister proposed that Kisan Rail is to be set up by the Indian Railways via a public-private partnership, to support the transportation of perishable goods like fish and milk. The NABARD refinance scheme shall be expanded, and the agricultural credit target for 2020-21 has been proposed at Rs 15 lakh crores.
Healthcare is another sector that was highlighted in budget 2020, with Nirmala Sitharaman assigning a total of Rs 69,000 crores for this segment of the economy. Of this, the PMJAY scheme is to receive Rs 6,400 crores. Several more empanelled hospitals will be brought under the Ayushman Bharat Yojana program thereby creating new employment opportunities in the healthcare sector.
On the educational front, a total of 150 higher education institutes are to be equipped to support apprenticeship programmes by March, 2021. Urban local bodies shall also be encouraged to provide fresh engineers a job opportunity for one year by means of a 1-year internship program.
The union budget for 2020-21 shall have a direct impact on the country’s GDP growth. And with this being a crucial point in time for India’s economic setup, budget 2020 shall play a key role in influencing the country’s GDP. The Finance Minister stated that the estimated nominal growth of GDP for the year 2020-21 is 10%. If we take inflation into account, this number comes down to an expected 5% to 5.5% growth in the country’s GDP.
While this year’s budget made no direct move to tackle the issue of unemployment, the Finance Minister made several proposals that could create employment opportunities for the country’s youth. For instance, the National Infrastructure Project is ripe with around 6,500 projects. The implementation of these schemes shall create more jobs, which is what the country’s economy desperately requires at this point. The government also plans to involve youth from the rural coastal areas in fishery extension projects. Furthermore, the Government aims to push the Start-Up India program in order to encourage more youngsters to join entrepreneurs who are creating new jobs through their flourishing businesses.
Nirmala Sitharaman also announced the automatic enrolment of individuals into the National Pension Scheme for universal pension, in order to encourage people to plan for their old age.
Tax cuts alone are not enough to kick start GDP growth. With an increase in expenditure being the need of the hour, budget 2020 explored various areas that required the government’s financial support. In a bid to make MSMEs competitive again, the central government has given NBFCs the nod to extend invoice financing. Compared to that of last year, the budgetary allocation for MSMEs have also seen a significant increase of around 71%. Furthermore, the government, in a bid to increase MSMEs’ productivity, is also seeking to expand the interest subvention scheme.
The Finance Minister in her budget announcement talked about building trust by providing a stable economic and business environment. In order to reduce the incidents of non-compliance, the budget proposed the introduction of faceless appeals, which would enable taxpayers to respond to the various demands and orders through the income tax website itself.
The process of filing the tax return has also been made easier with stakeholders now having the option to automatically prefill their details instead of having to manually enter them. In addition to this, the Finance Minister also proposed better input tax credit flow and simplified GST returns with support for SMS-based filing.
Budget 2020 turned out to be in tune with the market’s expectations with regard to the introduction of disruptive policies. The central government, taking cognizance of the economic slowdown and dwindling demand and consumption, largely played it safe. In fact, the budgetary announcements were so cautious that it didn’t even include any changes to the GST rates and completely avoided bringing up the Long Term Capital Gain (LTCG) aspect.
However, giving into the demands of the common man, the Finance Minister announced the introduction of a new income tax regime for individuals with revamped tax slabs and rates. In addition to this, the Budget also abolished the concept of Dividend Distribution Tax (DDT), thereby shifting the onus of paying tax on dividends onto the recipient rather than the company. These two tax measures are hardly disruptive in nature, and were solely aimed at satisfying the stakeholders’ expectations.
The tools to kickstart consumption and stimulate affected segments of the economy are well within reach. All that remains to be done is implementation of the right policies and strategies. Here are some ways in which the Indian economy recover.
Developmental schemes like Make in India and Digital India, which were introduced during Modi 1.0, require a push to deliver the results they promised. The vision of India leading the way with smart cities now seems further off than it did then, but if the government makes the right moves in implementing budget 2020’s vision, the country could still achieve what was once envisioned, although belatedly.
The Pradhan Mantri Awas Yojana (PMAY), which was introduced to make housing more affordable for the urban poor and the weaker sections of the economy, is another developmental scheme that requires a thrust in the right direction. Although the 80c tax exemption benefit available on home loans may now have been revoked as per the new tax regime. If this essential sector gets the support it deserves, India’s economy may make a turn for the better sooner than we can expect.
Modi 1.0 saw the introduction of Startup India, an initiative that aims to provide funding support, incentives, and tax relaxations to startups in the country, among other things. While the notion behind this initiative seems excellent on paper, the execution is yet to match up. With the GST woes and general decline in demand, startups in India often fizzle out before they have a chance to shine. Making India more startup-friendly can help give the economy a boost, since it creates job opportunities and triggers consumption. The Finance Minister has announced the setting up of an Official Body to help with the end to end needs of Start-Ups. She also mentioned that provisions will be undertaken to make seed funding more easily available to new businesses.
On the one hand, India appears to be open to foreign investments. Measures like corporate tax cuts prompted the country to jump up to the 63rd spot in the World Bank’s Ease of Doing Business Report for 2020. However, on the other hand, curbs on imports, hikes in import tariffs, and the general attempt to side with traders stirring against e-retailers like Amazon and Flipkart make foreign investors wary of investing in India. The need of the hour is to ensure that the world knows India is open to foreign investments, since that’s the saving grace the economy needs.
India’s Export Import Policy (known as the EXIM policy) has been tightened in recent years. It’s becoming harder to import several goods like palm oil, iron, steel, and pulses. Electronics and electronic goods may also see an increase in import tariffs. Not only is this directly impacting the industries related to these products, but it has also adversely affected other segments of the economy that rely on these items to manufacture other goods that require the items on which there’s a restriction.
Lack of local high-quality replacements affects the quality of other goods and services, thus pulling the economy down even further. What India needs now is a relaxation of these stringent export-import laws.
India has adopted a protectionist view to trade in recent times. By backing out of RCEP (Regional Comprehensive Economic Partnership), it has showcased a conservative approach to international trade. Changing that could be beneficial.
Relaxation of import-export guidelines may also prompt a revision of existing International Trade Agreements (ITAs), so India can revisit what it charges other countries that wish to trade in the subcontinent. New ITAs that reflect a more liberal standing will encourage foreign investors to back Indian businesses, thus giving the country’s economy the assistance that it requires.
Without external assistance, the entire burden of tackling the slowdown falls on the Indian government. Considering the steep decline in the GDP growth rate, this level of overhauling isn’t something we can accomplish without foreign aid. Revising existing ITAs or formulating new ones can help put India back on the road to recovery.
Budget 2020, with the introduction of a new optional personal tax regime, finally gave individual taxpayers something to cheer about. With an increase in the budget allocation for the education sector, the Finance Minister announced that the New Education Policy is almost around the corner.
While the abolishment of Dividend Distribution Tax (DDT) was a much-awaited move, the Budget did not provide enough to kick-start the almost non-existent industrial activity. There’s still some hope left, though, as the Government, with its renewed focus on the Public-Private-Partnership (PPP) model, tries to shift the economy over to the positive side.
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