Budget 2019: Aggressive Batting, Wary Plodding, Erratic Accounting

In her speech, Sitharaman started aggressively, turned cautious, and finally lost the plot with erratic accounting.

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Video editor: Mohd Ibrahim
Video producer: Anubhav Mishra
Cameraperson: Abhishek Ranjan

“The Government would start raising a part of its gross borrowing programme in external markets in external currencies. This will also have beneficial impact on demand situation for the government securities in domestic market.”
Nirmala Sitharaman in Budget 2019

This was the first bouncer Finance Minister Nirmala Sitharaman hooked for a big six. 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.

Frankly, 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 treasury skills to hedge the dollar in international currency markets. But she showed a bit of swag.


Next was a delectable square cut to the fence. Swoosh! For over a year, India’s infant bankruptcy code was bedeviled by a few ambiguous, and therefore crippling, tax rules, scaring away prospective buyers. Again, with one stroke, she fixed it:

  • Acquirers under the bankruptcy provisions have been allowed to carry forward and set off earlier losses; similarly, unabsorbed deprecation and losses can be deducted.
  • And, tax will be waived if shares are received at a price below FMV (fair market value).

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 IT 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?

Clearly, the aggressive batswoman was beginning to block on the front foot, becoming incremental. India’s shadow banking sector (aka weak NBFCs) has been reeling under a cash crunch which is threatening to become a systemic crisis. She should have opened the throttle towards the Ben Bernanke-authored TARP (Troubled Assets Reconstruction Programme) that saved America’s financial sector in 2008.

Instead, 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.

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:

  • At the point of sale, there is a capital gains tax and a securities transaction tax
  • Dividend payouts attracted a distribution tax to be paid by companies
  • And finally, dividend was taxable in the hands of the equity holder

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 percent (plus 12 percent surcharge) “buy back 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 crore of potential equity sales – thereby again dampening equity prices – multinationals may use this “excuse” to de-list altogether. So who loses? You and me aka ordinary shareholders, of course.

“Today we are nearing a $3 trillion level. So when we aspire to reach a $5 trillion level, many wonder if it is possible.”
Nirmala Sitharaman in Budget 2019

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 syncs with an Indian GDP of Rs 375 lakh crore. 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 percent, 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!

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