Budget 2019: Aggressive Batswoman, Cautious Plodder & Erratic CA

Sitharaman went from an aggressive batswoman to an erratic accountant before finally walking back to dressing room.

When Finance Minister Nirmala Sitharaman picked up her elbow protection (aka red bahi khata), walked out of the pavilion (aka North Block) and took her debut guard at the striker’s end (aka Parliament), she was staring at a treacherous pitch:

Her two-hour sojourn at the crease can be divided into three clear spells, as she went from an aggressive batswoman to an erratic accountant before finally walking back, cautiously, to the dressing room.

Aggressive Batswoman

One of the early bouncers she faced was hooked for six, when she announced that India would sell sovereign bonds in overseas markets. Whack! In one stroke, she moved the foreign currency risk on to her fiscal accounts, spread joy in domestic bond markets, and heralded lower local interest rates.

I was thrilled that she was taking an entrepreneurial risk, especially since our foreign debt to GDP ratio is at an unnecessarily safe 3.8 percent. Of course, her ministry will now have to develop sophisticated foreign risk management skills to hedge the dollar and launch nimble treasury operations in international currency markets. Be that as it may. At least she showed a bit of swag (aka Sehwag).

Next was a delectable square cut to the fence. Swoosh! For over a year, India’s infant bankruptcy code was bedevilled by a few ambiguous, and therefore crippling tax rules. These were holding up resolutions in court, scaring away prospective buyers, and inflating the purchase price by an uncertain, incalculable tax liability. Again, with one stroke, she fixed it:

• Acquirers under the bankruptcy provisions have been allowed to carry forward and set off earlier losses, an incentive which is not available when a company changes hands in the ordinary course of business
• Similarly, unabsorbed depreciation and losses can be deducted by companies referred to NCLT (National Company Law Tribunal)
• Finally, if shares are received at a price below FMV (fair market value), tax will be waived for certain specified categories. While a detailed notification is to be issued, the intent seems to be clear, ie exempt cases where the sale consideration is outside the control of the parties to the transaction, as in a bankruptcy process

Finally, she dug a yorker out of the blockhole, sending it to mid-wicket for a critical single. Thump! The despicable angel tax was abolished. As long as both the investor and investee companies had filed details in their tax returns, nobody would question why they valued a start-up at 2X and not X/2. So far so good.

But honestly, she should have tried to hit a boundary here. Why not abolish Section 56(2) of the Income Tax Act for every company? Why only for a bunch of start-ups which are certified to be “high tech” by a group of IAS officers?

I mean, can we really trust bureaucrats to understand why a car-pooling outfit may be “low tech” while a legacy battery-maker may be on to a really cutting edge technology? Isn’t such discretion the fountainhead of high-handed, arbitrary, unfair sarkari (ie, government) calls?

Clearly, the aggressive batswoman was beginning to block on the front foot.

Cautious Plodder

Now she swivelled to the incrementalism that is Prime Minister Modi’s hallmark. India’s shadow banking (aka weak NBFCs) have been reeling under a cash crunch which is threatening to become a systemic crisis. She should have opened the throttle towards the TARP (Troubled Assets Reconstruction Programme) that saved America’s financial sector in 2008. Instead, she chose to do a defensive shuffle (aka half-measure).

She offered a partial, six-month sovereign guarantee to commercial banks if a tenth of the assets that they acquired from shadow banks went bad. She did ease some debenture redemption reserve requirements against bonds issues by NBFCs, but frankly, the problem is a tad mightier than what such half-measures will solve. So this wound could continue to fester and hurt.

Next, she played all over another yorker. Modi government 1.0 had displayed an astonishing “anti-equity bias” (for all its talk of igniting the animal spirits of entrepreneurs!). Equity investments were taxed four times:

Four taxes on the same equity investment. But wait. She added a fifth one. Until now, companies could buy back their shares without paying any levy, even as the individual seller paid the capital gains tax or used the loss as a tax shelter. That’s all over now. Companies will pay a 20% (plus 12% surcharge) “buyback tax”, making the whole plan relatively unattractive, and thereby dampening equity values.

As if this wasn’t enough, there is a move to increase the mandatory float of listed companies by ten percentage points. While this could create an overhang of Rs 4 lakh crores of potential equity sales (thereby again dampening equity prices), multinationals may use this “excuse” to delist altogether. So who loses? You and me (aka ordinary shareholders), of course.

Erratic Accountant

In the twilight of her innings, the bad tax-master became an erratic accountant. Nominal GDP will grow by 12 percent, but tax revenues will leap by 18 percent, even as they have barely grown at the end of the first quarter. Which portends an expected growth of nearly 23 percent in the remaining three quarters. Pray how?

And ultimately, this false fixation with the $ 5 Trillion Economy. Assuming that the rupee depreciates by just ten percent against the US dollar until 2024, that synchs with an Indian GDP of Rs 375 lakh cr. And that, in turn, means a nominal GDP increase of 13-14 percent per annum.

Now, if the inflation rate has to be pegged at 4 percent, real GDP will have to grow at 9-10 percent every year to achieve this target. However, if inflation goes up to 6%, we can hit that target if real GDP was to grow much slower at 7-8 percent. But of course, the rupee may depreciate by more than 10 percent if the inflation rate is high, so that’s a minor complication!

Net net, just as cricket is a game played by 11 “flannelled fools”, the Union Budget is for those in white, starched khadi, not flannels.