Interim Budget 2019 Highlights

The Union Interim Budget 2019 was presented by Finance Minister Piyush Goyal on 1st
February 2019. The Budget session began at 11 A.M.

1. Tax proposals for Individuals

2. Tax proposals for Businesses
3. Measures for the poor and backward class
4. Women Empowerment
5. Banking Reforms & Insolvency and Bankruptcy Code (IBC)
6. Positive disruptions in Pension Sector
7. Agriculture Reforms

1. Tax proposals 2019-2020 at a glance for Individuals

 Income Tax slabs will remain the same for FY 2019-20.

 No tax on notional rent of second Self-occupied House under “Income from House Property”
(up to two self-occupied house properties) to be considered for exemption.
 Tax Rebate Limit under 87A increased from Rs. 3.5 lakhs to Rs. 5 lakhs for taxpayers. The
maximum limit of the tax rebate increased to Rs.12,500 from the present limit of Rs. 2,500.
 TDS limit hiked from Rs 10,000 to Rs 40,000 on Post Office Savings and Bank Deposits.
 TDS threshold on rent increased from Rs 1,80,000 to Rs 2,40,000
 Standard Deduction for the salaried class increased from Rs 40,000 to Rs 50,000.
 Section 54 exemption now available on the second house property, provided the capital
gains is less than or equal to Rs. 2 crores – to be availed only once in a lifetime.

2. Tax proposals 2019-2020 at a glance for Businesses, MSME & Real estate

 Benefits under Section 80-IBA to be extended for one more year – to the housing projects
approved till 31 March 2020.
 Period of exemption from levy of tax on notional rent, on unsold inventories is extended
from one year to two years, starting from the end of the year in which the project is
completed.
 SMEs with earnings below Rs 5 Crores will soon file GST returns only once in 3 months.
 MSMEs and Traders to note that GST Registered SME units will get 2% interest rebate on an
incremental loan of Rs. 1 Crore.
 The requirement of sourcing from SMEs by Government enterprises has been increased to
25% with 3% reserved for women-owned SMEs.
 A scheme of ‘Business loans up to Rs. 1 crore in 59 minutes’ will be implemented.

3. Measures for the poor and backward class

 60,000 crores are being allocated for MGNREGA in Budget Expenditure 2019-20. Additional
amount would be provided if required.
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4. Women Empowerment

 Providing cleaner fuel for rural women – out of the 8 crores promised free LPG connections,
6 crores is already delivered under Ujjwala Yojana and remaining will be delivered in the
coming year.
 More than 7,000 beneficiaries of PM Mudra Yojana are women. 15.56 crore loans of ₹7.23
lakh crore disbursed under MUDRA Yojana.
 Benefits of maternity leave of 26 weeks have provided support to women.

5. Banking Reforms & Insolvency and Bankruptcy Code (IBC)

 Outstanding loans of public sector banks increased from Rs 18 lakh crore to Rs 52 lakh crore.
Under the clean banking initiative, the 4R approach i.e. Recognition, Resolution,
Recapitalisation and Reforms is being followed.
 3 banks namely Bank of India, Bank of Maharashtra and Oriental Bank of Commerce are out
of Prompt Corrective Action (PCA)
 8 public sector banks still remain within PCA framework which imposes restrictions on
lending and expansion.
 IBC has instituted a resolution-friendly mechanism to speed-up recovery of NPAs.
Consequently, Rs 3 lakh crore has already been recovered to this effect.
 A sum of Rs 2.6 lakh crore has been directed towards recapitalisation of Public Sector Banks
(PSBs).
 Amalgamation of banks in place to avail economies of scale, better capital and wider
geographical coverage.

6. Positive disruptions in Pension Sector

 Benefits to 10 crore workers in the unorganised sector as part of the Mega Pension Yojana.
 Contribute Rs. 55-100 per month and govt will contribute the same – to get Rs. 3000 pension
monthly post 60.
 Over Rs 35,000 crore has been allocated under the ‘One Rank One Pension’ scheme for
Defence personnels.
 Rs. 500 crore allotted for pension schemes for individuals in other sectors
 NPS rules amended in December are implemented – with increased Government
contribution from 10% to 14%

7. Agriculture Reforms

 Minimum Support Price (MSP) fixed at 50% more than the cost for all the 22 crops.
 Pradhan Mantri Kisan Samman Nidhi (PM-Kisan) to benefit around 12 crore small and
marginal farmers with direct income support of Rs 6000 annually. Rs 75,000 crore has been
allocated to this.
 The amount of interest subvention has been doubled and crop loans to farmers increased to
Rs 11.68 lakh crore.
  Allocation for Rashtriya Gokul Mission increased to Rs 750 crore. Rashtriya Kamdhenu Aayog
has been established to genetically upgrade cow resources.
 Under Kisan Credit Card scheme, farmers pursuing animal husbandry and fisheries will get
2% interest subvention. An additional 3% interest subvention will be provided for timely loan
repayment.
 Under National Disaster Relief Fund (NDRF), farmers affected by natural calamities will get
2% interest subvention. A prompt repayment incentive of 3% will be given for the entire
loan reschedulement period.

Monetary policy is the process by which the monetary authority of a country, typically the central
bank or currency board, controls either the cost of very short-term borrowing or the monetary base,
often targeting an inflation rate or interest rate to ensure price stability and general trust in the
currency.

The Fed can use four tools to achieve its monetary policy goals: the discount rate, reserve
requirements, open market operations, and interest on reserves. All four affect the amount of funds
in the banking system. The discount rate is the interest rate Reserve Banks charge commercial banks
for short-term loans.

merger

A merger is an agreement that unites two existing companies into one new company. There are
several types of mergers and also several reasons why companies complete mergers. Mergers and
acquisitions are commonly done to expand a company's reach, expand into new segments, or gain
market share.

Mergers and Acquisitions Can Take a Long Time to Market, Negotiate, and Close. Most mergers and
acquisitions can take a long period of time from inception through consummation; a period of 4 to 6
months is not uncommon.

Repo rate

is the rate at which the central bank of a country (RBI in case of India) lends money to commercial
banks in the event of any shortfall of funds. ... Repo rate is used by monetary authorities to control
inflation.

Repo rate refers to the rate at which commercial banks borrow money from the Reserve Bank of
India (RBI) in case of shortage of funds

How does Repo Rate work?

When you borrow money from the bank, they charge an interest on the principal. Basically, it
is cost of credit. Similarly, banks too can borrow money from RBI during cash crunch on
which they must pay pay interest to the Central Bank. This interest rate is repo rate.

Technically, Repo stands for ‘Repurchasing Option’. It is a contract in which banks provide
eligible securities such as Treasury Bills to the RBI while availing overnight loans. An
agreement to buy them back at a predetermined price will also be in place. So, this interest
rate is levied on these kinds of repo transactions as well.

What are the components of a Repo transaction?

The components of a repo transaction between the RBI and the bank are as follows:

a. Banks provide eligible securities (RBI-recognized securities that are above the Statutory
Liquidity Ratio limit).

b. RBI gives 1 day or overnight loan to the bank.

c. RBI charges an interest (repo rate) from the bank.

d. Banks repay the loan after one day and repurchase the security they gave as collateral.

How does Repo Rate affect the economy?

Repo rate is a powerful arm of the Indian monetary policy that can regulate country’s money
supply, inflation levels and liquidity. Additionally, the levels of repo have a direct
relationship with the cost of borrowing for banks. Higher the repo rate, higher will be the cost
of borrowing for banks and vice-versa.

a. When inflation rises

During high levels of inflation, RBI makes strong attempts to reduce the money supply in the
economy. One way to do this is to increase the repo rate. This makes borrowing a costly
affair for businesses and industries, which in turn slows down investment and money supply
in the economy. As a result, it negatively impacts the growth of the economy. This also helps
bring down inflation.

b. When RBI wants to flow cash into the system

On the other hand, when the RBI needs to pump funds into the system, it lowers repo rate.
Consequentially, businesses and industries find it cheaper to borrow money for different
investment purposes. It also increases the overall supply of money in the economy. This
ultimately boosts the growth rate of the economy.

4. What is meant by Reverse repo rate?

A Reverse Repo Rate is a rate that RBI offers to banks when they deposit their surplus cash
with RBI for shorter periods. In other words, it is the rate at which the RBI borrows from the
commercial banks. When banks have excess funds, but don’t have any other lending or
investment options, they deposit/lend the surplus funds with the RBI. This way banks can
raise additional interest from their funds.
The reverse repo rate has an inverse relationship with the money supply in the economy.
During high levels of inflation in the economy, the RBI increases the reverse repo. It
encourages the banks to park more funds with the RBI to earn higher returns on idle cash. As
a result, every excess rupee is put to use in banking system. Banks are left with lesser cash to
extend loans, curbing the purchasing power of individuals.

Repo Rate Reverse Repo Rate

It is the rate at which RBI borrows money

It is the rate at which RBI lends money to banks
from banks

It is higher than reverse repo rate It is lower than repo rate

It is used to control inflation It is used to control money supply

It involves sale of securities which would be It involves transfer of money from one
repurchased in future. account to another.

5. Current Repo Rate and its impact

RBI keeps changing the repo rate and reverse repo rate according to changing
macroeconomic factors. Whenever RBI modifies the rates, it impacts every sector of the
economy; albeit in different ways. Some segments gain as a result of the rate hike while
others may suffer losses. Looking at the built up of inflationary pressures, RBI recently hiked
the repo rate by 25 basis points to 6.50% and the reverse repo rate to 6.25%.

In some instances, change in the reverse repo rates can impact big ticket loans like home
loans. If the RBI cuts down this rate, it need not necessarily mean that the home loan EMIs
would get lesser. Even the interest rates may not come down significantly. The lending bank
also needs to reduce its ‘Base Lending’ rate for the EMIs to decrease. Home loan rates or
fixed rate consumer loans aren’t impacted by RBI’s rate cut. The rate of interest is fixed with
respect to fixed loans.

What is Inflation

Inflation is a quantitative measure of the rate at which the average price level of a basket of
selected goods and services in an economy increases over a period of time. Often expressed
as a percentage, inflation indicates a decrease in the purchasing power of a nation’s currency.
As prices rise, they start to impact the general cost of living for the common public and the
appropriate monetary authority of the country, like the central bank, then takes the necessary
measures to keep inflation within permissible limits and keep the economy running smoothly.
Inflation is measured in a variety of ways depending upon the types of goods and services
considered, and is the opposite of deflation which indicates a general decline occurring in
prices for goods and services when the inflation rate falls below 0 percent.
Inflation Rate

The inflation rate is the percent increase or decrease in prices during a specified period. It's
usually over a month or a year. The percentage tells you how quickly prices rose during the
period. For example, if the inflation rate for a gallon of gas is 2 percent a year, then gas prices
will be 2 percent higher next year. That means a gallon that costs $2.00 this year will cost
$2.04 next year.

If the inflation rate is more than 50 percent in a month, that's hyperinflation. If inflation
occurs at the same time as a recession, that's stagflation. Rising prices in assets like housing,
gold or stocks are called asset inflation.

The inflation rate is a critical component of the misery index. The other component is the
unemployment rate. When the misery index is higher than 10 percent, it means people are
either suffering from a recession, galloping inflation, or both.

Causes

A standard but inaccurate definition of inflation is an increase in the money supply. That's a
misinterpretation of the theory of monetarism. It says the primary cause of inflation is the
printing out of too much money by the government. As a result, too much capital chases too
few goods.

An increase in the money supply not a definition of inflation, but can contribute to the causes
of inflation.

The most common cause is demand-pull inflation. That's when demand outpaces supply for
goods or services. Buyers want the product so much they are willing to pay higher
prices. Cost-push inflation is another cause. That's when supply is restricted but demand is
not. That happened after Hurricane Katrina damaged gas supply lines. Demand for gasoline
didn't change but supply constraints raised prices to $5 a gallon.

Inflation and the CPI

The U.S. Bureau of Labor Statistics uses the Consumer Price Index to measure inflation. The
index gets its information from a survey of 23,000 businesses. It records the prices of 80,000
consumer items each month. The CPI will tell you the general rate of inflation. The Bureau of
Labor Statistics chart below uses the CPI to track the inflation rate between 2008 and 2018.