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Monday, February 12, 2018

Budget 2018: How Good It Is?

Given the disruptions such as demonetisation, launching of GST etc., and the resulting revenue uncertainties that the current fiscal 2017-18 faced and the multiple pressures that the Finance Minister has to deal with before an election year, Arun Jaitley, who earlier took pride in honouring fiscal deficit target, has to ease off fiscal consolidation as mandated by the FRBM Act while presenting the 2018 budget.

Yet, it is difficult to find fault with his budget, for it has a definite sense of direction: it focuses on “strengthening agriculture and rural economy, provision of good health care to economically less privileged, taking care of senior citizens, infrastructure creation, and working with the states to provide more resources for improving the quality of education in the country.”

The deficit for the current fiscal 2018 is 3.55% against the target of 3.2%.   It is of course a different matter that much of this has substantially been contributed by the sale of HPCL assets to ONGC, another public sector company, and has thus had no impact on overall public sector savings. The projected deficit for FY2019 is estimated to be 3.3% and thus the Finance Minister has shifted the goal for complying with the fiscal deficit target.  Nevertheless, in the light of the risk of rising oil prices and inflation, the budget appears to be prudent, but at a substantial cost of under-provisioning for various mega schemes that he has announced.

In his anxiety to reach out to the farming community that has hitherto been neglected, that too, well before the elections, he has promised a minimum support price for all crops of 50% above the cost of production.  And yet there is hardly a rise of Rs. 29,041 cr towards food subsidy allocations for FY2019. He has however assured, “Niti Aayog, in consultation with central and state governments, will put in place a foolproof mechanism, so that farmers will get adequate price for their produce.” To free the small farmers from the tyranny of Agricultural Produce Market Committees, he proposed a novel idea of upgrading the existing 22,000 rural Haats into Gramin Agricultural Markets, but with a meagre budgetary allocation of Rs. 2,000 cr. Similarly, announcing ambitious rural welfare package—gas connections to three crore new households, free electricity connections to four crore homes, two crore new toilets under Swachh Bharat Mission, increased micro-irrigation coverage, etc.—he has heavily relied on extra-budgetary funds to ground the schemes. So, any miss in the expectations may create a gap between his promise and delivery.  
He proposed a health insurance scheme (NHPS) claiming it as the world’s largest government funded health care program, to cover over 10 crore poor families with an insurance cover of Rs. 5 lakh each. This is however disturbing, for the scheme apparently looks at private hospitals to provide basic health care instead of strengthening the existing government hospitals network and making them accountable. There is, of course, no clarity on modalities. Yet, the budgeted outlay of Rs. 1,200 cr falls too short to cover the required premium of around Rs. 10,000 per family. 

On the education front, Jaitley announced two new initiatives that are long overdue: one, to step up investments in research and related infrastructure, he proposed a scheme,  ‘‘Revitalising Infrastructure and Systems in Education (RISE) by 2022’’ with a total investment of Rs. 1 lakh cr in the next four years; and two, ‘‘Prime Minister’s Research Fellows (PMRF)’’ scheme, under which he proposes to identify 1,000 best B.Tech students each year and provide them facilities to do PhD with a handsome fellowship. He also proposed to establish Eklavya Model Residential Schools for tribal children, training of teachers during service for bettering the learning outcomes, establishment of schools of planning and architecture, etc., which are cumulatively sure to change the educational scenario. Besides this massive surge towards social sector, the Finance Minister has also upped allocation towards infrastructure development—notably towards railways and highways—from Rs. 4.94 lakh cr in 2017-18 to Rs. 5.97 lakh cr—a neat jump of about 25% over the last year’s allocation. Encouragingly, funding of infrastructure allocation has been well taken care of.  

Interestingly, when it comes to giveaways, he turned pretty frugal.  Proposed no changes to the existing tax structure except: one, cut the corporate tax from 30% to 25% to companies having turnover not exceeding Rs. 250 cr; two, introduced standard deduction of Rs. 40 000 for salaried taxpayers; three, senior citizens are granted tax relief on interest on bank deposits up to Rs. 50,000 per year and raised their income tax deduction limit for health insurance premium and/or medical reimbursement to Rs. 50,000.

On the other hand, he has introduced 10% LTCG tax on capital gains exceeding Rs. 1 lakh, which is of course understandable. However, it could have been more convincing if the tax at the corporate level over dividend distribution is withdrawn and/or turnover tax, for it amounts to taxing the return on capital twice. There is yet another difficult to swallow tax proposition: a substantial and wide-ranging increase in customs duty on a variety of consumption items has been proposed, which can incidentally trigger cost-push inflation. The only explanation for this reversal in tax philosophy could be: fiscal compulsions.

Coming to growth, there appears to be nothing much in the budget that could act as a stimulus for growth in the economy, for there is no appreciable raise in the fixed investment. It is however hoped that once the banks are recapitalised, credit flow to private sector would pick up. Secondly, the cut in corporate tax from 30 to 25% to corporates with a turnover less than Rs. 250 cr is hoped to act as stimulus for investment by small corporations.  If the government is hoping for growth to happen through private investment, one may be heading for a disappointment, for private investment squarely rests on capacity utilisation that is linked to consumption growth which, in the light of rising oil prices appears to be a challenge. 

It is from the perspective of these constraints that one must agree to say that Jaitley succeeded in presenting a budget that is focused on welfare but with prudence, while containing fiscal deficit within reasonable bounds. 


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