The budget presented by Finance Minister Arun Jaitley on February 1 was closely watched as it was the last full-year budget of the NDA government before the 2019 general elections. So, the critical question was whether the budget would be populist or pragmatic? And, could the finance minister achieve the perfect balance between the objective of boosting growth, maintaining macro stability and remaining on the fiscal consolidation path?
While the budget smartly balances populism with prudence, the fiscal deficit target slips from the budgeted number, as expected. The government could have completely moved away from fiscal consolidation, given that this is an election-heavy year, or it could have continued on the pre-announced fiscal 'glide path' by aggressively cutting expenditure. Instead, a middle path has been chosen as suggested in the Economic Survey. The revised estimate for fiscal deficit for FY2018 has risen to 3.5% from the budgeted 3.2% of GDP due to lower-than-budgeted indirect tax collection following the roll-out of GST, a shortfall in non-tax collection, and revenue lost from a small excise duty cut on petro-products. In hindsight, it is obvious that the tax estimates were optimistic as those were based on the assumption of an ambitious nominal GDP growth rate of 11.8%, which slowed to 10.2%.
The government did not give in completely to the temptation of populism. The FY2019 fiscal deficit is estimated at 3.3%, just a 30-basis points deviation from the recommended glide path.
From the next fiscal, the government will do away with the announcement of Revenue Deficit targets. It is argued that the expenditure on education and health are not considered capital expenditure but is necessary for human capital formation in the country. Moreover, infrastructure expenditure is being met through off-budget borrowings. This makes the budgeted numbers of capital expenditure misleading.
As expected, the budget's focus was on agriculture, health, education and infrastructure. In recent months, rural sector distress has been obvious. The budget tries to improve farmers' incomes through various initiatives, like a minimum support price (MSP) 1.5 times the farmer's input costs, improving market infrastructure to bring farmers closer to consumers, launching 'operation green', and liberalising agri-commodity exports. As almost half of the farm income comes from allied activities, two new funds of Rs 10,000 crore for fisheries and animal husbandry were announced.
The government also announced a National Health Protection Scheme to cover over 10 crore poor families, providing coverage up to Rs 5 lakh per family per year for hospitalisation - a game-changing idea. It is touted as the world's largest government-funded healthcare programme. However, the allocation needed for such a huge programme is not clear, and implementation challenges remain.
There was hardly enough fiscal space to give any tax incentives to salaried individuals. Instead, the introduction of a Long-Term Capital Gains (LTCG) tax of 10% on gains from equity came as a negative surprise.
Job creation has been a problem in the country. High growth has not been able to stir up the job market. This has led some to call it 'jobless growth'. The budget tries to address this issue. The corporate tax rate for companies with turnover less than Rs 250 crore has been reduced to 25% from 30%. This is projected to benefit almost 99% of MSMEs, which create the largest number of jobs in the country.
The government will also contribute the 12% EPF contribution for new employees for the next three years and establish skill centres in every district. Higher allocations for textile and leather sectors, rail and road, border connectivity, urbanisation and smart cities, tourist sites and a low-cost housing programme are positive and can help create much-needed jobs.
Nascent recovery
Rural demand has stabilised with the fading impact of demonetisation and supported by a good monsoon. Various indicators like tractor sales, two-wheeler sales, and rural wages point towards it. The budget further
aims to support the momentum with higher allocation for agriculture and rural infrastructure. This will give a boost to rural demand. With increase in consumption demand, capacity utilisation will improve and private investments will start flowing in.
By deviating only slightly from the fiscal target in FY2019, the Centre did a good balancing act. The budget is all about the agricultural sector and the common man. An expansionary fiscal stance could have driven
inflation higher resulting in premature monetary policy tightening by the RBI that would be disastrous at this fragile stage of economic recovery. The private investment has finally bottomed out. So, higher borrowing by government will result in higher interest rates and raise the cost of funds for investments for the private sector.
The government has already undertaken several disruptive structural reforms in the last couple of years. Now, the time is to consolidate these and complete the various schemes started. There still exist some implementation glitches in GST. The focus should be to make tax-filing easy and speed up input tax credits and refunds to ease up working capital flows.
However, the risk from higher oil prices remains. It has the potential to derail the budgeted numbers. If global oil prices inch up, the government would have to cut excise duty on petroleum products to protect consumers. This will lead to loss of revenues. The subsidy burden may also rise over the Rs 25,000 crore budgeted. Higher oil prices will also put pressure on inflation.
A point to note here is that increasing MSP by 1.5 times the input cost might also push inflation high. However, it seems that the details of MSP hike have not been worked out yet. Unless it is rolled out soon and actually helps in increasing farmers' incomes, the budget will fail to address rural distress. This might prove costly for the ruling government.
(The writer is a research scholar at IIFT and adviser at Policy Monks)