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Budget Detailed Analysis - Farm Sector, Taxation and NBFCs - Suman Chowdhury - Acuité Ratings & Research Limited

Posted On: 2020-02-03 10:37:12

One of the key elements in Union Budget 2020 is the intent to kick-start farm sector reforms. With a target to double farm incomes by 2022, the government has announced multiple measures or action points to strengthen the agricultural ecosystem in the country. The state governments would be urged to adopt the model acts on land leasing and contract farming. 20 lakh farmers are expected to benefit from the solar pump scheme; further, they would be permitted to set up solar generation capacity on their barren lands and supply power to the grid, thereby augmenting income. Substantial investment in warehousing infrastructure for perishable produce will improve the pricing power of farmers; government proposes to provide viability gap funding for such warehouses at the taluk level on a PPP basis. Rail and air logistics support have also been envisaged for farm produce, animal husbandry and horticulture. Negotiable Warehousing Receipts is intended to become an accepted method of rural credit and is to be integrated with the digital National Agricultural Market (e-NAM). Further, ambitious targets have been set for expanding milk and fish production capacity. Overall, the budget has allocated an amount of Rs. 2.83 Lakh Cr for agriculture and the rural development sector.

Another important aspect in the budget has been the attempt to simplify the taxation mechanism. While lower tax slabs have been announced for personal income taxes, these are applicable only without exemptions currently applicable and therefore the net savings on taxes may not be significant. However, the attempt to simplify the tax code is a step in the right direction. The government has also proposed a scheme to reduce litigation in direct taxes; settlement of disputed amount by March 2020 will lead to waiver of penal interest. Another significant measure is the removal of the dividend distribution tax which should encourage cash rich companies to enhance their dividend payouts.

The third important measure has been to strengthen the financial sector. To address concerns on the safety of bank deposits, the insurance coverage under DICGC has been raised substantially to Rs. 5 lakh from Rs. 1 lakh. IBC has been a game changer for loan recoveries; further, smaller NBFCs have now been given the access to SARFAESI Act. The amendment to the Factor Regulation Act will enable NBFCs to provide invoice financing to MSMEs through the TReDS platform, thereby increasing its size and depth. The proposal to provide subordinate debt to MSMEs by banks, duly guaranteed by CGTMSE is a significant step which will enhance the borrowing capacity of the sector.

In Acuité's opinion, the budget has primarily attempted to strengthen the long term fundamentals of the economy by taking steps towards agricultural and tax reforms. No significant measures, however have been announced to boost the near term growth momentum in the economy, as expected by market participants except the rationalisation of personal income tax rates that can push up demand to a moderate extent.

Source: Equity Bulls

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