o This will reduce probability of
government borrowing crowding out
The Hindu Analysis: 6 July 2019
BUDGET: 2019-20
Analysis
$5 trillion Economy
• Starting with a base size of $2.7 trillion in
2018-19, the Budget is pushing the Indian
economy to a size of $5 trillion by 2024-25.
• It is possible at:
o a nominal growth rate of 13% per
annum; or
o a real growth rate of 8%-9% and
o an inflation rate of 5%-4%; and
o an assumed rate of depreciation on the
Indian rupee of 2% per annum.
 In economics, a real value, of a good or other
entity, is one which has been adjusted for
inflation, enabling comparison of quantities as
if prices had not changed.
 Changes in real terms therefore exclude the
effect of inflation.
 In contrast with a real value, a nominal value
has not been adjusted for inflation, and so
changes in nominal value reflect at least in
part the effect of inflation.
• The Union Budget has proposed a number of
growth-promoting initiatives to achieve the
above target of $5 trillion economy.
• First, the government proposes to access
global investors by floating sovereign bonds
denominated in external currency.
o This will ease pressure on domestic
savings and interest rates which will
eventually facilitate an effective
transmission of a repo rate reduction to
lending rates.
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the private sector borrowing
o It will help in either reducing the
interest rates or keep the interest rates
stable.
o It will also help getting dollar flows
thereby improving the Balance of
Payments as well as foreign exchange
reserve.
 It should be noted that India’s sovereign
external debt to GDP is among the
lowest globally at less than 5%.
• Second, the government has come out with a
clearer focus on Make in India where the
emphasis will now be on relatively limited
sectors such as MSMEs, start-ups, defence
manufacturing, automobiles, and electronics.
• Third, the government aims to invite global
investors for setting up mega-
manufacturing plants to bring in advanced
technology in electric vehicles, electronics
and other related areas.
• Fourth, the burden of NPAs on the banking
sector is likely to ease with a budgeted capital
infusion of ₹70,000 crore.
• Fifth, the Budget has announced that NBFCs
would also be allowed to access the
facility currently available to banks wherein
interest on bad loans paid by loss-making
entities is taxed in the year in which it is
actually received.
• Sixth, government has shown its inclination
to reinvigorate PPPs for its ambitious
infrastructure expansion plans.
o Given the past experience with PPP
initiative, this may be a challenging task.
Angel Tax and Start-ups
• Angel tax is applicable to unlisted
companies that have raised capital through
 sale of shares at a value above their fair
market value (is the price that property would
sell for on the open market).
• This excess capital is treated as income and
taxed accordingly.
• This tax predominantly affects start-ups and
the angel investments they attract.
• As part of its attempts to boost fund-raising by
start-ups and ventures, especially those in the
social field, the government has proposed a
novel idea in the form of a social stock
exchange, wherein such entities can list and
raise capital in the form of equity or debt.
Budget Proposals
• At present, start-ups are not required to justify
fair market value of their shares issued to
certain investors, including Category-I
Alternative Investment Funds (AIF), the
Budget has proposed to extend this benefit to
Category-II Alternative Investment Funds also.
o Therefore, valuation of shares issued to
these funds shall be beyond the scope of
income tax scrutiny.
• The Budget also propose to extend the period
of exemption of capital gains arising from sale
of residential house for investment in start-
ups up to 31.3.2021 and relax certain
conditions of this exemption.
• So far, 19,665 start-ups are recognised by
the Department for Promotion of Industry
and Internal Trade (DPIIT). They are eligible
for availing tax and other incentives.
What is a Start-Up
• A start-up company means a private company
incorporated under the Companies Act, 2013
and recognised as a “start-up” in accordance
with the notification issued by the
Department of Industrial Policy and
Promotion, under the Ministry of Commerce
and Industry.
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• The DIPP notification has defined a start-up
as an entity that is incorporated or registered
in India.
• Furthermore, the department said an entity
will be considered a start-up:
o Up to a period of seven years from the
date of incorporation/registration. For
biotechnology firms, that period is ten years.
o Provided it has an annual turnover not
exceeding Rs 25 crore in any preceding
financial year, and
o If it works towards innovation,
development or improvement of products or
processes or services, or if it's a scalable
business model with a high potential of
employment generation or wealth creation
o With respect to start-ups in the
biotechnology sector, an entity shall cease to
be a start-up on completion of ten years from
the date of its registration or if its turnover for
any previous year exceeds Rs 25 crore,
according to the notification.
• Meanwhile, in a move that provides a major
relief to budding entrepreneurs, the
government also ruled that start-ups can avail
tax concessions if the funds they raise,
including from angel investors, do not exceed
Rs 10 crore.
Who is an Angel Investor?
• An angel investor is usually a high net worth
individual who provides financial backing for
small startups or entrepreneurs.
• Often, angel investors are found among an
entrepreneur's family and friends.
• The funds that angel investors provide may
be a one-time investment to help the business
get off the ground or an ongoing injection to
support and carry the company through its
difficult early stages.
• Angel funds can make investments only in
investee companies that:
o are incorporated in India and are not
more than 3 years old; and
o have a turnover not exceeding Rs 25
crore; and
o are unlisted; and
o are not promoted, sponsored or related
to an Industrial Group whose group turnover
is in excess of Rs. 300 crore; and
o has no family connection with the
investors proposing to invest in the company.
How do Angel Investors differ from Venture
Capitalists?
• Both Venture Capital Funds and Angel
Investors invest on the basis of taking a stake
in a business, but there are some differences.
• Angels invest in early stage ventures or start
ups where they see a potential for the
company to grow, they complement the family
and friends' money.
o VC Funds invest in later stages of the
company - beyond the stage of proof of
concept, and at levels that are beyond the
level of angels investing.
• Venture Funds are targeted by their investors
to invest in specific areas / sectors.
o Angel investors would consider investing
in any area where some of their members
have expertise.
• Venture Funds usually have a life of 7 years
and most investments are made in the first 3
years. After the investments are made, VC
funds give direction and look for an exit
through an IPO, Strategic sales etc.
o Angel investing continues - individuals
invest as long as they wish. They, however,
look at a 2 to 3 year exit and the most
common exits are strategic buy outs /
mergers & acquisitions.
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• The VC funding process is more complex as
they are funds and have a statutory
framework within which they work.
o Angel investing provides for a simpler
process as angels investments are an
alternative asset class for individuals and the
angels invest directly in the investee
companies.
• Angels invest their own monies and are more
often than not entrepreneurs themselves.
o VC Funds have now adopted a model
where they have people with domain
expertise / thought leadership in a sector to
advise them on deal flows and then nurture
companies.
In short:
• o Seed Funds: a) Provide the initial capital
to start the company.
o Angel Funds: b) Those which invest in
early stage companies.
o Venture Funds: c) Those which invest in
new companies which are particularly risky.
MSMEs hail move to raise corporate tax limit
• The Micro, Small and Medium Enterprises
(MSME) sector has cheered the extension of
a lower rate of 25 % corporate tax to all
companies with an annual turnover of up
to ₹400 crore.
• Currently, this rate is only applicable to
companies having an annual turnover up to
₹250 crore.
• This will cover 99.3% of the companies.
o Although these companies cover 90% of
the number of companies, their tax
payment is less than 10-15%.
o If large investments have to be attracted,
then the reduction should have been
general and the scaffolding approach
can only disincentivise the companies to
grow bigger and better.
 o This only discourages the companies
from becoming larger.
o While the Economic Survey is eloquent
about the need to transform the ‘dwarfs
into giants’, the various measures taken
in the Budget to incentivise the MSMEs
amount to reiterating that ‘small is
beautiful’.
Different sectors of the economy
• The Gross Valued Added (GVA) growth rate
for agriculture and allied sectors fell sharply in
FY19.
• The service sector's growth rate recorded a
dip while the industry sector grew by 1% point.
• The overall growth registered a slight dip.
o Gross value added = GDP + subsidies
on products - taxes on products.
Unequal distribution
• Only 50% of the total agricultural credit
disbursed went to small and marginal farmers
in 2018-19.
• The trend was the same in the last three
years.
• But out of the total land holdings in India, the
share of small farmers is close to 85%.
 Marginal Farmer means a farmer cultivating
(as owner or tenant or share cropper)
agricultural land up to 1 hectare (2.5 acres).
 Small Farmer means a farmer cultivating (as
owner or tenant or share cropper) agricultural
land of more than 1 hectare and up to 2
hectares (5 acres).
 Other Farmer means a farmer cultivating (as
owner or tenant or share cropper) agricultural
land of more than 2 hectares (more than 5
acres).
Research
• In the direction to promote research in the
country, it is a welcome measure to note the
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proposal to establish a National Research
Foundation (NRF).
• Besides this, in the current financial year, the
government has provided ₹400 crore to
upgrade the quality of education.
o It is a good start but would need more
fund allocations.
Labour Laws
• The government has proposed to streamline
multiple labour laws into four labour
codes. Industry will keenly look forward to
this reform.
NBFCs
• The Budget has comprehensively addressed
the important issues of liquidity, solvency and
poor governance in the NBFC sector.
• The government will provide a one-time, 6-
month partial credit guarantee to PSBs for the
first loss up to 10% amounting to ₹1 lakh
crore.
• The government has decided to give more
powers to the central bank to regulate the
non-banking finance companies.
• RBI will have the power to supersede the
board of the shadow banks, apart from those
owned by the government.
• According to the Finance Bill, if the RBI is
satisfied that in the ‘public interest’ or to
prevent the affairs of an NBFC being
conducted in a manner detrimental to the
interest of the depositors or creditors, the
board can be superseded for a maximum five
years and an administrator can be appointed.
What is shadow banking?
• The term refers to the practice of banking like
activities performed by non-banking finance
companies, which are not subject to strict
regulation.
• However, these institutions function as
intermediaries between the investors and the
 borrowers, providing credit and generating
liquidity in the system.
• The shadow banking system had overtaken
the regular banking system in offering loans in
US before the financial crisis erupted in 2008.
• Basel III norms require central banks to
tighten supervision on shadow banks across
the globe through steps such as defining
minimum capital.
• The RBI will also regulate housing finance
companies which are under the purview of
the National Housing Bank.
o The NHB, besides being the refinancer
and lender, is also regulator of the
housing finance sector.
o This gives a somewhat conflicting and
difficult mandate to NHB.
o In this context, the Budget proposed to
return the regulation authority over the
housing finance sector from NHB to RBI.
o It will bring higher supervision and
support from RBI and therefore, timely
availability of funds for this sector.
o As a consequence, even banking related
pain-points in this sector may also be
addressed.
• The budget also proposed that foreign
institutional investors and foreign portfolio
investors will be allowed to invest in debt
securities by shadow banks, which help
NBFCs to raise more funds.
• A long-standing demand of NBFCs for
equitable treatment with banks in the matter
of taxing interest receivable on bad loans has
been conceded.
o They will not need to maintain a
Debenture Redemption Reserve on
public placements that was leading to
locking-up of funds, which is their raw
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material for business. These are
important reform measures for NBFCs.
• More interesting is the move towards reviving
development financial institutions.
o The big problem faced by NBFC
financing infrastructure is the lack of
long-term funding sources to match their
lending tenure.
o This pushed them into borrowing short-
term funds to lend to long-term projects,
leading to asset-liability mismatches.
o The proposal to set up a committee to
study the issue, including the experience
with development finance institutions, is
welcome.
Digital Payments
• To promote digital payments further, the
Budget proposes to take a slew of measures.
• TDS of 2% has been proposed on cash
withdrawal exceeding ₹1 crore in a year from
a bank account to discourage the practice of
making business payments in cash
• Businesses with an annual turnover of over
₹50 crore who will offer the payments options
such as BHIM UPI, UPI-QR Code, Aadhaar
Pay, certain Debit cards, NEFT and RTGS,
no charges or Merchant Discount Rate (MDR)
would be imposed on them or their customers.
o These costs will be absorbed by the RBI
and banks from the savings that would
accrue to them as a result of handling
less cash.
• The payments industry has welcomed the
proposals saying these would help create a
robust payments infrastructure in the country.
• However, the industry leaders underlined the
need for sufficient Internet penetration and
data reach to achieve the aspirations.
Disinvestment
• The government has set itself a target of
₹1,05,000 crore for disinvestment proceeds
for financial year 2019-20 which will hinge in
very large measure on the successful sale of
Air India
• The government was considering reducing its
direct majority shareholding in some
companies to below the 51% mark.
o The government’s disinvestment policy
till date rested on two prongs.
o Disinvestment through minority stake
sale in CPSEs to retain majority 51%
shareholding (with management control),
and through strategic disinvestment up
to 50% or more along with transfer of
management control, according to the
Department of Investment and Public
Asset Management.
• It has also decided that the 51% of
government control will be calculated after
including the stake owned by government-
controlled institutions.
o For example, if this proposal is passed
without modification, the government can
reduce its shareholding in a PSU to, say,
40% from 51%, with the remaining 11%
being owned by the LIC or any other
government-controlled institution.
• The reasoning behind this move was to open
up the market for small retail investors.
• Strategic disinvestment is conducted through
a consultation process among different
Ministries and NITI Aayog, which advises on
the entities and the amount to be divested, as
also their valuation.
• The routes followed are:
o IPO,
o OFS (offer for sale),
o Follow-on OFS and
o Further Follow-on PO.
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• It also adopts the Exchange Traded Fund
route for offering companies across diverse
sectors in a single shot.
Middle Class
• The Budget had many announcements that
could benefit the middle class income earners.
• First and foremost, allowing people to use
Aadhar in place of PAN number is a big move.
It will potentially help in easy on-boarding of
customers in financial markets as well as
various digital platforms.
• Second, affordable house buyers are being
given tax incentives in the form of an
additional tax benefit, if one buys a property
before 31 March, 2020.
o This will not only help in reducing the
EMI burden, it can also help a large pool
of working people own their dream
house.
o Allowing ETFs to qualify under Section
80 C is a good move for saving tax as
well as giving one more choice to
investors.
• Budget 2019-20 proposed to raise the
minimum public holding for listed firms
from the current threshold of 25% to 35%.
Simpler Securities Transaction Tax
• The budget proposes to give relief in levy of
Securities Transaction Tax (STT) by
restricting it only to the difference between
settlement and strike price in case of exercise
of options.
• This assumes significance as rationalisation
of STT was a long-standing demand of
market participants.
• Currently, traders who exercised the options
contracts had to pay a huge STT as typically
the settlement value is significantly higher
than the premium.
KYC norms for foreign portfolio investors to
be investor-friendly
• The government has also proposed merging
the investment route for Non-resident Indians
(NRIs) with that for the FPIs.
• Even though India is the world’s top
remittance recipient, NRI investment in Indian
capital markets is comparatively less.
Electric Vehicles
• The Budget proposed that customs duty is
being exempted on certain parts of electric
vehicles, including e-drive assembly and on
board charger, to further incentivise e-mobility.
• In February this year, the Cabinet had
approved the second phase of the Faster
Adoption and Manufacturing of Electric
Vehicles or FAME scheme, with an outlay of
₹10,000 crore for three years. This came into
effect from April 1, 2019.
• The main objective of the scheme is to
encourage faster adoption of electric vehicles
by way of offering upfront incentive on
purchase of electric vehicles and also by
establishing the necessary charging
infrastructure.
• Only advanced battery and registered e-
vehicles will be incentivised under the
scheme with greater emphasis on providing
affordable & environment friendly public
transportation options for the common man.
• The Union Budget proposes to provide an
income tax deduction of ₹1.5 lakh on the
interest paid on loan taken to buy electric
vehicles (EV).
• Accordingly, the buyer of an EV will get a total
benefit of ₹2.5 lakh over the purchase period.
o The EV industry believes that this would
bring the cost of ownership of EV
significantly down and therefore expedite
EV adoption in the country.
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o But the fact is that there are not too
many electric vehicles in the market now.
And even for those that are there, the
waiting period to deliver one is long.
o Besides, there is no ecosystem, such as
charging points, even in the major cities.
The government’s hope seems to be that
this incentive will create a market for e-
vehicles that will then lead to the
development of the ecosystem.
• The government has already moved the GST
Council to lower GST on EV from 12% to 5%.
Defence
• Close to 11% of India's total expenditure in
FY20 is allocated for the defence sector.
• The military budget has fallen by 0.6% point
in FY20 compared to FY19.
• India's military expenditure accounted for
2.4% of its GDP in 2018. Over the last 5
years, the share has remained constant.
• India was the leading arms importer between
2014 and 2018 except in 2018 (China).
• The world's 5 largest arms importers are in
the last 5 years are: India > China >
Pakistan > USA > Brazil.
Water Schemes
• Jal Shakti Mantralaya is formed by
integrating the Ministry of Water Resources,
River Development and Ganga Rejuvenation
and Ministry of Drinking Water and Sanitation.
• One of its aim is to ensure piped water supply
to all rural households by 2024 under the Jal
Jeevan Mission.
• This Mission, under the Department of
Drinking Water and Sanitation, will focus on
integrated demand and supply side
management of water at the local level,
including creation of local infrastructure for
source sustainability like rainwater harvesting,
 groundwater recharge and management of
household wastewater for reuse in agriculture.
• The Jal Jeevan Mission, which has no
budget allocation of its own — will need to
converge with other Central and State
government schemes to achieve its
objectives of sustainable water supply
management across the country.
• The ongoing Jal Shakti Abhiyan, a water
conservation campaign in 256 water-
stressed districts also has no separate
allocation, depending on funds available
under existing schemes, mostly in the rural
development sector.
Subsidies
• The share of three major components in
decreasing order is: Food subsidy >
Fertilizer Subsidy > Petroleum Subsidy.
Self Help Groups
• Every verified member of a Self Help Group
possessing a Jan Dhan Bank account would
be given ₹5,000 over and above their savings
and at least one woman per SHG would be
eligible for a loan of up to ₹1 lakh under
MUDRA scheme.
Tax Reforms
• The Budget proposes the introduction of
faceless e-assessment of tax returns taken up
for scrutiny.
• This will eliminate the scope for rent-seeking
by officers as there will be no interface
between assessee and official.
• In fact, the assessee will not even know the
identity of the officer scrutinising the return.
• This is an absolutely welcome measure but
needs to be closely watched for
implementation.
What is nudge theory?
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• The ‘nudge theory’ of economist Richard
Thaler, mentioned extensively in the
Economic Survey 2018-19.
• Richard Thaler, the father of ‘nudge theory’,
has been awarded the Nobel economics prize.
• The concept is a relatively subtle policy shift
that encourages people to make decisions
that are in their broad self-interest.
• It’s not about penalising people financially if
they don’t act in certain way.
• It’s about making it easier for them to make a
certain decision.
• It is knowing how people think, so as to make
it easier for them to choose what is best for
them, their families and society.
Terms in news
What is zero budget farming that Finance
Minister referred to?
Zero Budget Natural Farming
• Zero budget farming is a set of farming
methods that involve zero credit for
agriculture and no use of chemical fertilisers.
• This evolved as a farming movement in
Karnataka as a result of collaboration
between agriculturist Subhash Palekar and
state farmers association Karnataka Rajya
Raitha Sangha (KRRS).
• As it attained considerable success in
Karnataka, the model was replicated in many
other states, particularly in South India.
• The zero budget farming aims at pulling the
farmers out of the debt trap that they found
themselves in with the liberalisation of Indian
economy. This is also an attempt to make
small scale farming a viable vocation.
• Andhra Pradesh has become the first State
to implement Zero Budget Natural Farming
(ZBNF), a chemical-free method that would
cover all farmers by 2024.
• In ZBNF, yields of various cash and food
crops have been found to be significantly
higher when compared with chemical
farming.
• In early 2016, Sikkim was declared India’s
first fully organic State.
• But organic agriculture often involves addition
of large amounts of manure, vermicompost
and other materials that are required in bulk
and need to be purchased. These turn out to
be expensive for most small farm holders.
Emerging Market Index
• The MSCI Emerging Markets Index captures
large and mid cap representation across 26
Emerging Markets (EM) countries.
• The index covers approximately 85% of the
free float-adjusted market capitalization in
each country.
his nomination papers for a Rajya Sabha seat
from Tamil Nadu.
• The conviction will not disqualify him from the
electoral contest, as he has been sentenced
only to a one-year term.
• Only a sentence of two years and above will
attract disqualification provisions under the
Representation of the People Act.
• Sedition, or Section 124A of the IPC, is not
one of the offences that entail disqualification,
regardless of the length of the prison term.
What are Alternative Investment Funds
• Details will be covered soon.

Sunrise Sector
• Sunrise sector simply means a very
fast growing industry and chances of its rapid
boom in future.
• Information Technology or simply IT industry
is known as the "Sunrise sector of India."
Bimal Jalan Committee
• It is looking into the issue of sharing of RBI’s
reserves with the government.
Vaiko gets one-year jail term in 2009 sedition
case
• Marumalarchi Dravida Munnetra Kazhagam
(MDMK) general secretary Vaiko is set to file

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