The HINDU Notes – 03rd February 2020 - VISION

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Monday, February 03, 2020

The HINDU Notes – 03rd February 2020

πŸ“° Centre rejects advice on special grants for States

Finance panel report made public

•The Centre has rejected the 15th Finance Commission’s recommendation to give special grants worth Rs. 6,764 crore to States in 2020-21 to ensure that they do not receive less than the previous year’s allocation.

•This was one of the few recommendations that the Centre did not accept in the commission’s report made public on Sunday.

•The Commission had submitted its interim report for 2020-21 to the President on December 5, 2019.

•Major recommendations accepted by the Centre include the 41% share for States out of the divisible pool of tax collections, the suggested grants-in-aid and post-devolution revenue deficit grants of Rs. 74,340 crore for 14 States. It also accepted recommendations for grants to local bodies, disaster-related grants and sectoral grants.

•The Centre asked the Commission to reconsider the recommendation for special grants “as it introduces a new principle”. These grants were suggested to ensure that in 2020-21, “no State receives in absolute terms less than what it received in 2019-20 on account of tax devolution and revenue deficit grants.”

πŸ“° Removal of DDT will boost investments: CBDT

Centre believes the new regime will encourage low-income people to invest in the capital market

•A day after the Union Budget proposed removal of the dividend distribution tax (DDT) levied on companies, the government said on Sunday that the new regime was expected to encourage more people, especially in the low tax bracket, to invest in the capital market.

•The government said that with dividend now being proposed to be taxed in the hands of the investors at their applicable slab rate, non-residents would get some relief even as it addressed the “issue of inequity in dividend taxation”.

•“Single rate of taxation is always iniquitous as it favours taxpayers who are in higher tax brackets and works against those who are in lower tax brackets,” says a Central Board of Direct Taxes statement. “Thus, it was a case of reverse subsidy from the poor to rich taxpayers. Further, non-residents were taxed at a higher rate than the treaty rate with the possibility of no tax credit in the home country,” it said.

•According to the government department, while the DDT was pegged at 15%, the effective rate touched 20.56% due to surcharge and cess. Additionally, individuals were required to pay another 10% plus surcharge if the dividend income exceeded Rs. 10 lakh in a fiscal.

•The government believes that the new regime, however, would encourage individuals in the low-income bracket to invest in the capital market as the tax incidence would drop significantly.

•“...person with an income up to Rs. 5 lakh will not have to pay tax on dividend income as against 20.56% paid by them indirectly. Similarly, under the new tax regime, persons with an income from Rs. 5 lakh to Rs. 7.5 lakh would pay tax at 10% and persons with Rs. 7.5 lakh to Rs. 10 lakh would pay tax at 15%,” it explained.

•All these taxpayers would benefit from the abolition of the DDT as the tax to be paid by them on their dividend income would be less than what they were earlier paying indirectly through it, it added. The government believes that the proposal will make more investors look at debt mutual fund products since under the prevailing framework, the effective DDT on such products was between 38% and 50%.

πŸ“° Study on bats and bat-hunters of Nagaland comes under scanner

It was carried out by researchers from U.S., China and India

•The report of a government inquiry into a study conducted in Nagaland by researchers from the U.S., China and India on bats and humans carrying antibodies to deadly viruses like Ebola was submitted to the Health Ministry, officials confirmed to The Hindu .

•“The Indian Council of Medical Research (ICMR) sent a five-member committee to investigate. The inquiry is complete, and a report has been submitted to the Health Ministry,” a senior government official told The Hindu .

•The inquiry comes as officials worldwide grapple with the spread of novel coronavirus (nCoV) 2019 from Wuhan in China to over 20 countries.

Wuhan researchers

•The study came under the scanner as two of the 12 researchers belonged to the Wuhan Institute of Virology’s Department of Emerging Infectious Diseases, and it was funded by the U.S Department of Defence’s Defence Threat Reduction Agency (DTRA).

•They would have required special permissions as foreign entities to undertake the exercise.

•The study was investigated for how the scientists were allowed to access live samples of bats and bat hunters (humans) without due permissions.

•The results of the study, conducted by scientists of the Tata Institute of Fundamental Research (TIFR), the National Centre for Biological Sciences (NCBS), the Wuhan Institute of Virology, the Uniformed Services University of the Health Sciences in the U.S. and the Duke-National University in Singapore, were published in October last in the PLOS Neglected Tropical Diseases journal, originally established by the Bill and Melinda Gates Foundation.

•The NCBS authorities were not available for immediate response.

•The U.S. Embassy and the Union Health Ministry declined to comment on the inquiry. In a written reply to questions from The Hindu , the U.S. Centre for Disease Control (CDC) in Atlanta said it “did not commission this study and had not received any enquiries [from the Indian government] on it.” An American official, however, suggested that the U.S. Department of Defense might not have coordinated the study through the CDC.

•The study states that the researchers found “the presence of filovirus (e.g. ebolavirus) reactive antibodies in both human and bat populations in Northeast India, a region with no historical record of Ebola virus disease.”

πŸ“° U.K. to seek Canada-style free trade deal with EU

‘Such a pact viable only if Britain brings its rules in line with EU regulations’

•Two days after Brexit, British officials pushed the European Union on Sunday for a Canada-style free trade arrangement as British Prime Minister Boris Johnson geared up for a key speech to spell out his government’s negotiating stance.

•Foreign Secretary Dominic Raab told Sky News that Britain will seek a deal that imposes very few tariffs even though he said Britain will not seek to align its regulations with the EU.

•“We are taking back control of our laws, so we are not going to have high alignment with the EU and legislative alignment with their rules,” Mr. Raab said. “We will want to cooperate and we expect the EU to follow through on their commitments to a Canada-style free trade agreement. That’s what we are pursuing. There is a great opportunity here for win-win.”

•EU officials, despite offering friendly words to the British public over the weekend after the divorce that took effect on Friday night, warn that Canada only achieved largely tariff-free trade status by bringing many of its rules in line with EU regulations. EU officials fear that the U.K. could water down its environment or health and safety precautions, undermining EU businesses.

•The trade talks are vital because now that Britain has officially left the bloc — the first nation ever to do so — Mr. Johnson hopes to have a wide-ranging new deal in place by the end of the year.

Johnson’s speech

•After celebrating Brexit by banging on a gong in the final seconds before it took effect, Mr. Johnson plans to detail Britain’s trade stance in a speech Monday.

•European leaders have said that Britain will not be able to get a deal like Canada’s if it breaks significantly with EU rules on food safety, environmental standards, worker’s rights and other matters impacting on public well-being.

•Irish PM Leo Varadkar on Sunday urged Mr. Johnson’s Conservative government not to follow the mistakes of his predecessor by establishing “rigid red lines” that make it much more difficult to reach an agreement.

•Mr. Varadkar did say he believes Mr. Johnson’s reassurances that Britain “will not seek to undercut” the EU when it comes to labour standards, environmental standards, product standards and health and safety.

πŸ“° Money earned in India by NRIs will be taxed, says Nirmala

Clarification follows letter from Kerala CM over impact on workers in West Asia

•Union Finance Minister Nirmala Sitharaman on Sunday scotched fears that provisions introduced in the Budget would bring Indian workers’ income in zero tax jurisdictions, like the UAE, into the Indian tax net.

•The Finance Bill has proposed three major changes to prevent tax abuse by citizens who don’t pay taxes anywhere in the world — reducing the number of days that an Indian citizen can be granted non-resident status for tax purposes from 182 to 120; citizens who don’t pay taxes anywhere will be deemed to be a resident; and the definition of ‘not ordinarily resident’ has been tightened.

•“Let’s say an NRI, living in Dubai or elsewhere, is not taxed for his income there, but has some earnings through something in India for which he doesn't pay tax here. We are saying, for that income which is generated in India, pay a tax,” she said.

‘It will hurt Indians’

•Alarmed by the possible implications of the new provisions, Kerala Chief Minister Pinarayi Vijayan wrote to Prime Minister Narendra Modi on Sunday, recording the State’s strong disagreement over the provision as it will hurt Indians working in the Middle East, “who toil and bring foreign exchange to the country” through remittances.

•“The new provision is being interpreted to create an impression that those Indians who are bonafide workers in other countries, including in the Middle East, and who are not liable to tax in these countries, will be taxed in India on the income that they have earned there. This interpretation is not correct,” the Finance Ministry said in a statement.

•The Ministry will incorporate a clarification, if required, into the law so that only income derived from an Indian business or profession will be taxable for such citizens, the Minister said.

πŸ“° The Budget’s blurred social sector vision

Low allocations and specific policy statements point to greater privatisation and withdrawal of the state

•Finance Minister Nirmala Sitharaman began her speech by saying that the Union Budget was “woven around three prominent themes” — aspirational India, economic development for all and building a caring society. Achieving any of these would require extraordinary efforts on the social sector front starting with allocating additional resources for health, education, nutrition, employment guarantee, and social security schemes.

•Given the current state of the economy, with decelerating growth, a slump in rural demand and stagnant real wages in rural areas, an expansionary budget with a focus on the social sector would have also made economic sense. It would have meant more money flowing into the rural areas, creating jobs as well as purchasing power, while at the same time making a dent on the poor outcomes in health, nutrition and education that continue to haunt India.

•Unfortunately, the allocations for the social sector this year once again fail to deliver for the country’s poor and marginalised. And this is the situation across the board.

NREGA deserves a closer look

•The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and the Public Distribution System (PDS) are two important lifelines for the rural poor: providing employment and food during times when the market fails them. The allocation in this Budget for MGNREGA is Rs. 61,500 crore which is Rs. 10,000 crore less than the revised estimate (RE) for the current year (Rs. 71,000 crore for 2019-20) and, in real terms, even less than what was allocated last year (Rs. 60,000 crore). It is obvious that in current times when the levels of unemployment are at their peak, the demand for employment will only increase. But MGNREGA is failing to fully play the role of filling the gap because of poor implementation and inadequate funds. There is also a need to revise the MGNREGA wages to bring them on a par with minimum wages. All of this would require much higher allocations for the scheme, which are entirely justified as the MGNREGA expenditure is also known to have high multiplier effects through boosting consum
ption demand in rural areas.

•On the food front, excess food stocks to the tune of almost 60 million tonnes, high food inflation in recent months and reports of hunger from across the country warranted some announcement expanding the PDS. This could have been done by universalising ration entitlements in the poorest districts, increasing quantity given per individual, including pulses. However, what is seen in the Budget is an allocation which is not even enough to support the existing PDS under the National Food Security Act (NFSA). The food subsidy allocated for 2020-21 is only Rs. 1.11 lakh crore, which, once again, is slightly higher than the previous year’s RE of Rs. 1.08 lakh crore. This is much less than the budget estimate (BE) of last year, of Rs. 1.8 lakh crore, which is closer to the actual subsidy required for meeting the costs of the grain distributed through the PDS and other welfare schemes.

•Over the last few years, the government has been funding the Food Corporation of India (FCI) for this gap in funding through loans from the National Small Savings Fund (NSSF). As seen in the latest Economic Survey, in FY 2018-19, the total food subsidy released was Rs. 1.7 lakh crore which included an NSSF loan of Rs. 70,000 crore to FCI — it does not get reflected in the Budget documents. Once again, this is not prudent economics, as it only increases the interest burden in the long run; what it does in the short term is that it makes it possible to artificially show a lower expenditure, and hence smaller fiscal deficit. On the other hand, such mismanagement is then made an excuse to call for the dismantling of the PDS and FCI, which is entirely unwarranted.

Giving short shrift to health

•Health and education also did not see any significant increases in allocations this year. The BE for the much publicised Ayushman Bharat Yojana/Pradhan Mantri Jan Arogya Yojana stays at Rs. 6,400 crore, the same as last year (RE was 50% lower at Rs. 3,200 crore). The budget for the Prime Minister’s Overarching Scheme for Holistic Nutrition, or POSHAN Abhiyaan, another flagship scheme of this government, sees a meagre increase of Rs. 300 crore (from Rs. 3,400 crore to Rs. 3,700 crore).

•The funds allocated for the maternity entitlement scheme, Pradhan Mantri Matru Vandana Yojana remains the same as last year — Rs. 2,500 crore. There is an overall increase of Rs. 5,000 crore-Rs. 6000 crore each in the overall education and health budgets which are hardly sufficient to cover for inflation.

•As we look at the various schemes, including social security pensions, Anganwadi services, mid-day meals and those mentioned above, the same pattern emerges — first, we see a much reduced RE for 2019-20 compared to the BE of 2019-20, indicating underspending in the current year. This means people are being left out, coverage is low and benefits are irregular; field reports suggest all of this to be true.

•Second, there are some increases as seen in the BE for 2020-21 which barely bring the allocations to the same level as the previous year’s Budget estimates in real terms. Considering that all these sectors are grossly underfunded in the first place, there is not much hope of seeing anything different in terms of what ultimately reaches people.

•It is clear that the agenda of the present government for the social sector is for greater privatisation and withdrawal of the state. This is reflected not just in the low allocations but also policy pronouncements such as introducing the public-private partnership model for medical colleges and district hospitals or the push, in the Economic Survey, for narrowing the coverage under the PDS. This would be a worrying direction in the current context.

πŸ“° Falling short of aspirations

The economic outlook rests on government meeting investment targets and keeping promises made to stakeholders

•There were many expectations from the Union Budget 2020: that it would reverse the falling growth rate, reduce unemployment and rekindle the animal spirits needed to revive private investment. Does the Budget really hold out the promise on these counts? To answer the question, the Budget can be judged in terms of its effect on rural demand, investment and private sentiments — all critical elements for recovery. While the Budget offers hope on the last count, it leaves much to be desired on several other parameters.

Skill development allocation

•Of the Finance Minister’s own accord, there is a huge, unmet demand for teachers, paramedical staff and caregivers, and skilled workers. Well-paying jobs are created in the organised services and industry but require candidates with quality education and skills. Both elude India’s youth due to the poor quality of education and lack of opportunities to acquire practical skills. Still, the Finance Minister has allocated a paltry Rs. 3,000 crore for skill development. Skilling will require massive investment and concerted efforts. The Budget could have given tax incentives to companies to provide internships and on-site vocational training to unemployed youth. The country cannot afford to let the world’s largest workforce waste this way.

•The government remains very determined to present itself as being fiscally prudent. Total expenditure is slated to go up marginally to 13.5% GDP from 13.2% of GDP for the current fiscal (revised estimates). The fiscal deficit is pegged at 3.5% of GDP. Going by the experience with the current fiscal, the deficit level is not paramount concern for the market. Due to the ‘slippage in tax collections this fiscal year combined with stepped up government expenditure, market borrowings by the government have gone up as much as 15%’. Still, yields on government securities have not gone up significantly. Neither inflation nor the current account deficit have set alarm bells ringing, as feared by the government.

On flagship welfare schemes

•Indeed, there are plenty of private savings that the government can tap to boost growth and raising public investment. However, the Finance Minister has opted for a longer route. The Budget falls well short of expectations when it comes to boosting demand. Budgetary allocations for the Pradhan Mantri KIsan SAmman Nidhi (PM-KISAN) and the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) are disappointing. The MGNREGA is allocated Rs. 61,500 crore, which is less than Rs. 71,000 crore for the current fiscal year. Going by the last year, disbursement under the PM-KISAN will also be less than budgeted, unless the beneficiary base is expanded. This is unfortunate. These two schemes are good instruments for income transfers to small and marginal farmers, landless labour who spend most of their income and generate demand for a wide range of goods and services. Higher disbursement under these schemes would have benefited most sectors of the economy. Budgetary allocations for health and education are also well below what is needed.

•Focus of schemes such as micro irrigation schemes for 100 water-stressed districts is welcome and so is a modest increase in allocations for agriculture and rural development schemes. Rural roads, cold storage, and logistical chains are crucial for the growth of income and employment in rural India, as the multiplier effects of rural infrastructure investment on growth and employment are large and extensive.

•The allocation of Rs. 1.7 lakh crore for transportation infrastructure is also a welcome step. But a lot will depend on whether the money actually gets invested or remains unspent as it has happened in the current fiscal year. If the public investment infrastructure actually materialises, it will lend credence to the government’s stated commitment to revive the investment cycle — to spur job-creating growth. To pull in private investment, the public funding should be front-loaded in under-implementation projects. Small irrigation and rural road projects are also relatively easy to complete and deliver immense benefits to several sectors.

Getting private investment

•The Budget’s main growth plank is the hope for a deluge of private infrastructure investment through public-private partnership (PPP) and external sovereign wealth funds that have been given 100% tax exceptions in the Budget. But private investment depends on the cost of capital along with the certainty of returns.

•Many projects have been mired in contractual disputes with government departments and various regulatory hurdles. All these factors make infrastructure investment unnecessarily risky and render these projects unattractive for investors.

Bonds and startups

•The fundamental problem of infrastructure finance is the asset-liability mismatch which can be addressed only by developing a vibrant ‘corporate bond market. However, the focus of the Budget is the multiple schemes for government bonds mainly through additional room for foreign portfolio investors and exchange traded funds in government bonds. These are welcome moves but are not enough’. A well-developed bond market should draw upon domestic insurance funds, pension funds and mutual funds which are capable of investing in corporate bonds across different schemes.

•The other leg of the “aspirational” Budget is the startups. Some relief on the tax they have to pay and on taxation of the Employee Stock Option Plans is welcome but the reluctance to abolish the angel tax that results in harassment of start-ups and their investors is unfathomable. Another welcome feature is the scheme to allow the non-banking financial companies into the Trade Receivables Discounting System (TReDS) — an ecosystem that aims to facilitate the financing and settling of trade-related transactions of small entities with corporate and other buyers, including government departments and public sector undertakings.

•To reduce the compliance burden on small retailers, traders and shopkeepers who comprise the Small and Medium-sized Enterprises (SMEs) sector, the threshold for audit of the accounts has been increased from Rs. 1 crore to Rs. 5 crore for those entities that carry out less than 5% of their business transactions in cash. It is also good that the Finance Minister has extended the window for restructuring of loans for micro, small and medium-sized enterprises till March 31, 2021.

•However, for many products produced by these enterprises, the tax rates are higher for inputs than the final goods. In addition, many SMEs suffer from high taxes on imports of raw material and exports of intermediary services by them.

•It is good that the Finance Minister has recognised the need to revive the dying spirit of the private sector. Accordingly, she has assured decriminalisation of several civil offences by firms under the Companies Act. The abolition of dividend distribution tax, and the assurance that tax-related disputes will be considered with compassion might deliver the expected results provided these promises are fulfilled in letter and spirit. The same logic applies to ‘the scheme to reimburse to exporters assorted duties, such as excise duty on transport fuels and electricity’.

•Everything considered, the future of the economy will turn on whether the government walks the talk in terms of public investment and the promises made to different sections of society including the taxpayer and companies. When it comes to reviving private sentiments, actions will speak much louder than the budgetary promises.