Budget took care of Government finances, but what about business confidence?

This year’s Budget did not enthuse corporates and investors as much as the finance minister would have liked

The Budget 2020 announcements and the Economic Survey have a lot of good news as the fiscal situation is on the mend. However, against the backdrop of a slowing economy, the expectations were high for stoking investment and consumer demand to ease growth worries.

The Government took a slew of measures to jumpstart capital formation through corporate tax cuts in September 2019, but the underlying uncertainties about economic growth and high cost of credit have kept capital formation tepid. While the Government has commendably continued to focus on ease of doing business, the announcements in Budget 2020 have been a mixed bag for many sectors.

Let us review the bright side first. 

1. Changes in the DDT (Dividend Distribution Tax) policy will put Indian shareholders at a level playing field with foreign investors. 
2. The explicit attention paid to ESOPs (employee stock options) as an important instrument for startups to attract and retain talent.
3. The Government has continued to promote digital payments, especially within the large and fragmented MSME (Micro, Small and Medium Enterprises) segment. The raising of the turnover threshold from Rs 1 crore to Rs 5 crore for audit compliance will surely help businesses become more open about their books and overall business turnover.
4. Healthcare has received a significant focus in the Budget, even more than education and skill enhancement. Health issues drive several families to financial distress and the focus on accessible and cheap healthcare is critical to poverty alleviation.
5. Last but not the least, there has been some increase in import tariffs, which is likely to make domestic manufacturing more competitive. While this goes against the fundamental thinking around globalization and free trade, some short-term controls should not push India too far back.

On the flip side, there have been a few challenges. 

1. The option of personal income tax cuts will liberate a section of consumers and drive demand. However, the administration of two parallel tax regimes might make things complicated. Even the ones benefitting from the new tax rates will suddenly find it confusing to invest in financial instruments due to volatility in tax breaks.
2. While the tax breaks for startups seem to have been extended, its effective implementation continues to be a challenge. The effective number of startups which would truly benefit from the tax breaks is still very small and they are contingent on approvals from multiple Government bodies.
3. Some underlying issues such as protection of payments through cheques continue to be ignored. Given the slow speed of the judiciary in settling civil matters and the relatively high cost of debt for working capital needs, it is imperative to build confidence in the business community to continue transacting.
4. Some sectors such as real estate have not seen much support even if it holds the key to releasing cash for consumers and financial lenders alike.
5. Last, the issues businesses face around cash flow crunch due to funds locked in GST (goods and services tax) and the like should have got some attention to reward honest compliant businesses.

Overall, given the economic conditions and the cash flow pressure on the Government, the Budget balanced the tightrope of Government finances but did not enthuse corporates and investors as much as the finance minister would have liked.

Authored by (at the time of writing): 

Madhur Singhal, Leader, Consumer and Retail Practice 

This post first appeared on money control and has been published with permission. Read the original here.

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