The Union Budget 2019 was christened as an interim budget but almost gave a slew of announcements like a regular budget. Normally, election budgets in the past have been interim budgets purely intended to seek a vote on account. The vote on account is to get Parliament approval for necessary government spending till the elections are completed and a new government is in place. To that extent, the Budget 20-19 has set a new trend altogether. It has not only refrained from any reference to vote-on-account but it has also presented massive reforms and Direct Tax proposals that are normally done only in a normal budget. That is what makes this budget 2019 special because it makes the Union Budget more of a rolling affair and immune to the vagaries of political shifts. Let us look at some larger implications of the Budget announcement.
A budget with a big rural impact
The budget expectations were built around two broad factors viz. a push for farm incomes and an approach to universal basic income (UBI). The budget has effectively combined both into a single package. The Budget has announced a direct transfer of Rs.6,000 to every farmer with land holding of less than 2 hectares. This transfer of funds will be done in 3 tranches of Rs.2,000 each taking the total payout to Rs.6,000 per year. This will cover nearly 12 crore marginal farmers to begin with and therefore the total outlay will be in the region of Rs.75,000 crore. Looked at differently, this is Rs.75,000 crore of additional purchasing power given to rural India. If you combine this with the impact of loan waivers, higher MSP, free cooking gas and electricity as well as the benefits of MGNREGA; the multiplier effect on rural purchasing power could be huge. This could be directly demand accretive for sectors like two wheelers, tractors, entry level cars, FMCG products, consumer durables, NBFC services, gold loans etc.
Some real good sops for the middle class
The urban middle class has complained that they have hardly got any attention in the last few budgets. That has been substantially reversed in this budget. The budget has made income up to Rs.5 lakhs free by offering Rs.12,500 as tax rebate. In addition, the level of standard deduction has been enhanced from Rs.40,000 to Rs.50,000 and that more than makes up for the benefits of medical allowance and transport allowance that tax payers lost last year. When you add up the exempt limit to the standard deduction as well as benefits under Section 80C, Section 24 and Section 80D, even an overall income of Rs.10 lakhs can be tax free. Since this segment has a large propensity to consume, the direct impact on consumption can be substantial. Again, the positive impact is likely to rub off on sectors like automobiles, FMCG, consumer durables, banking services, insurance purchases etc. Most of the consumer-facing sectors are likely to benefit from rising disposable incomes.
Some respite for the realty sector in the budget
The realty sector has been under pressure due to a combination of weak demand, glut of supply, implementation of RERA and the strain on black money post demonetization and GST. All these have put tremendous pressure on the real estate sector. There seems to be some respite for this sector in the budget:
The concept of taxation based on notional rent in case of second property has been down away with. This will ensure that individuals are not penalized in case they have a second house and don’t earn anything from it. Now that this has been done away with, it could be an incentive for individuals to invest in a second property.
The higher tax benefits for lower income groups and the big rural boost is likely to give a boost to middle end housing and to low cost housing.
The definition of Section 54 has been changed to include reinvestment of sale proceeds in two houses. This will encourage people to claim, capital gains tax benefit even while purchasing two properties in small towns in lieu of one large property in big cities. This can boost demand for properties in second and third rung cities.
Section 80IA benefit for low cost housing has been extended for one more year and that is also likely to be a boost for the housing sector. Broadly, realty companies and HFCs have reasons to celebrate.
One last word on government finances
While the intent of the budget is good, there are just two concerns on the financing front. Firstly, the government has spoken about a fiscal deficit of 3.4% in this year and the next year. While the higher farm transfer outlays are accounted for, the government has not accounted for lower revenues from disinvestments and GST. Secondly, the divestment target of Rs.90,000 crore for 2019-20 looks quite aggressive considering that the government has struggled to even get close to its target of Rs.80,000 crore this fiscal.
All in all, it is a budget that is focused on putting more money into the pockets of the rural and urban Indian. What are the political implications of this move remains to be seen!