Finance & Capital Market

Modi 2.0 budget hikes import tariffs, taxes on super rich

Indian government led by Prime Minister Narendra Modi has raised import tariffs on nearly 75 items including gold and automobile parts besides increasing taxes on the super-rich to help pay for recapitalising banks and supporting small business in its first budget after being relected with a brute majority and solid mandate, said media reports.
 
Finance Minister Nirmala Sitharaman on Friday unveiled the proposals while presenting to parliament the budget for the fiscal year ending March 31, 2020, the first since the Modi-led government was re-elected in a vote spanning April and May.
 
These strategic measures are all part of the government bid to revive sagging growth, reported Reuters.
 
Aiming to restart investment that’s at its weakest level in years, Modi’s government also proposed giving foreign investors a bigger role in India’s giant insurance and aviation sectors, which have been tightly controlled for decades, it stated.
 
Modi, boosted by his election victory, has set a target of growing India into a $5 trillion economy by 2024/2025 from $2.7 trillion. A government report on Thursday said this will be done on the back of higher investment, savings and exports in the way China’s growth was propelled.
 
“This budget is setting out a vision, a target, for every sector of our society,” Sitharaman said to the thumping of desks in parliament.
 
The fiscal gap for the year that began on April 1 is estimated at 3.3% of gross domestic product, down from 3.4% set in February’s interim plan, Finance Minister Nirmala Sitharaman said in her maiden budget in Parliament in New Delhi on Friday.
 
However, the country's new finance minister surprised most analysts by narrowing the budget deficit target even though the economy is in need of a stimulus after slowing to a five-year low, according to Bloomberg.
 
Many analysts said was likely based on ambitious expectations of higher tax collections.
 
Clearly India is not loosening the purse and yet there’s all this talk about boosting infrastructure,” said Prakash Sakpal, Asia economist at ING Groep NV in Singapore. 
 
“There is a bit of a misplaced assumption about how are we going to get growth going up when there isn’t enough spending.”Sitharaman said the nation needs 20 trillion rupees annual investment on infrastructure, and the government will be tapping the overseas bond market for funds.
 
Meanwhile, experts said India’s government is expecting a higher dividend payout from the central bank to help plug the fiscal deficit and spur economic growth.
 
The government estimates it will receive Rs900 billion in income from the Reserve Bank of India, Subhash Chandra Garg, economic affairs secretary in the Finance Ministry, told reporters Friday. 
The government has earmarked Rs1.06 trillion ($15.5 billion) as dividends from the central bank, state-run banks and financial institutions in the fiscal year to March 2020, according to the budget presented by Finance Minister Nirmala Sitharaman.
 
That’s higher than the Rs829.1 billion estimated in February’s interim budget and Rs741 billion pegged last year. 
 
TAXES ON SUPER RICH
 
Sitharaman raised import duties on gold and other precious metals to 12.5% from 10%, and levied an import tax of one rupee per tonne on crude oil to boost federal revenue just as global oil prices have softened from their highs.
 
The government also increased local levies on a liter of petrol and diesel by two rupees each, stoking fears of inflation, reported Reuters.
 
The finance minister said the government would provide state-owned banks Rs700 billion ($10.23 billion) of additional capital that are laden with bad debt which has affected their ability to lend and also spur economic growth. Indian banks and financial institutions, in all, hold bad debt of over Rs10 trillion.
 
The government raised income tax surcharge on people with an annual income of more than 20 million rupees who make up the top end of Indian society.
 
Currently, India imposes a 10% surcharge where total income is between 5 million rupees and 10 million, and 15% on income above 10 million rupees.
 
The new rate will include 25% surcharge on income between 20 million and 50 million rupees, and 37% on income exceeding 50 million rupees a years.
 
“This budget is a mixed bag with a significant increase in taxation for the wealthy. Also, the increase in excise duty for petrol and diesel will stoke inflation,” said Abhimanyu Sofa, head of research at IIFL Securities Ltd.
 
Sitharaman cut corporate tax rates to 25% from 30% for companies with an annual turnover of up to 4 billion rupees, from current ceiling of 2.5 billion rupees.
 
FOREIGN OWNERSHIP
 
The government said 100% foreign ownership will be permitted for insurance intermediaries and local sourcing norms will be eased for FDI in retailers selling a single brand.
 
India currently allows foreign direct investment in single-brand retail but mandates investors to source locally 30 percent of the value of good purchased.
 
At present, India allows 49% foreign ownership through the automatic route in the insurance sector, which is worth billions of dollars and has been tightly controlled for decades for fear of a backlash from the unions.
 
“It is high time India gets fully integrated into the global value chain of production of goods and services but also becomes part of the global financial system to mobilize global savings mostly institutional in insurance, pension, and sovereign wealth funds,” Sitharaman said.