Budget Analysis 2018-19

Published in http://www.mydigitalfc.com/plan-and-policy/logistics-remains-critical-focus-area

The Union Budget 2018-19, comes at a time when the Twin Balance Sheet issues continues, wherein, both the banks and the corporates have stretched balance sheets, which prevent the corporates from borrowing any further for investments, while it also prevents the banks from lending any further. In such a scenario, as expected, investments and growth has stayed challenged, even though we see early signs of an upturn in growth.

 Therefore, the only entity that can borrow significantly and can spend in order to spur growth, is the government. Hence it is not surprising that the government decided to breach the fiscal deficit target of 3.3% by 20 basis points in the Union Budget that was presented on February 01.

The Union Budget therefore envisages a total spend of INR 24.42 trillion, and increase of INR 5.4 trillion (roughly 28% increase) from the previous budget’s budgeted estimate.

	2016-17	2017-18 BE
Gross Tax Revenues (Cr.)	17,03,243	19,11,579
Direct Tax (Cr.)	8,47,097	9,80,000
Indirect Tax (Cr.)	8,51,869	9,26,900
Non Tax Revenues (Cr.)	3,34,770	2,88,757
Fiscal Deficit ( % of GDP)	3.5	3.2
Revenue Deficit (% of GDP)	2.1	1.9
Primary Deficit (% of GDP)	0.3	0.1
Net Debt Receipts (Cr.)	5,34,274	5,46,532
Total expenditure ( Cr.)	20,14,407	21,46,735
Revenue expenditure (% of total expenditure)	86.11	85.57
Capital expenditure (% of total expenditure)	13.89	14.43

This obviously raises concerns of (a) abandonment of the glide path to fiscal prudence, (b) stoking inflation and (c) sending wrong signals to investors, thus impacting their sentiments. However, given the situation of the economy, breaching the fiscal deficit appears to be a necessary evil, and it is unavoidable that the associated public spend would lead to inflation, which would happen in any growing economy. This was indeed a tightrope walk call for the budget.

But the more interesting part is how the budget proposes to make the public spending. It continued its signaling of focus on infrastructure development with over INR 50 trillion being committed to for infrastructure spend, which is not entirely through budgetary provisions, but through off-balance sheet mechanisms. The economic impact of such infrastructure spends comes in with significant lag that the economy can ill-afford at this stage. Hence, it appears that by trying to put in more money in the hands of MSME’s through reducing the corporate tax to 25%, and by putting more money in the hands of farmers by providing a minimum support price that is 150% of the costs of farming, there is an attempt to resolve the issue of distress in rural areas and with MSME’s, while also injecting more disposable income which is expected to increase consumer demand, thus kick-starting a virtuous cycle of more investments and more jobs.

The only challenge in the above story appears to be the fact that the 150% of cost support is only for the kharif season, whose crops would hit the market only by around November, thus postponing the expected relief. There are also concerns that the budgetary provisions for such a procurement is not evident.

However, as per the expectation set in the 2017-18 budget to reduce corporate tax from 30% to 25% over a period of time, atleast the same has been done for MSME’s with turnover of less than Rs 250 crores, and hence it signals the government’s intent to make India a lower tax country for corporates. But a re-introduction of Long Term Capital Gains Tax (LTCG) of 10%, while not removing the Securities Transaction Tax (STT – which was introduced in lieu of LTCG being abolished earlier), turned out to be a dampener for the storyline of being a lower tax regime destination for investments.

The theme of the Union Budget was clearly a focus on rural, women, underprivileged and the marginalized as substantial announcements were made for rural industries including fisheries and animal husbandry and for SC/ST’s. The most spectacular part of the budget is the strong intent to strengthen the social safety net by providing a whopping Rs 5 lacs per household health insurance for 100 m households (which translates to covering 500 m households). This is indeed the mother of all healthcare programs, if successfully implemented. Alongwith it, the announcement of 1 medical college in every three districts, setting up of high quality Eklavya schools and providing all-weather motorable roads to every habitat, underlines the shift towards not just providing benefits, but providing high quality benefits. Even if the above is not achieved in the short-run, it sets the agenda for all future governments to strive and deliver on these audacious targets.

Overall, the budget appears to have covered most of the bases, leaving out the taxpaying salaried middle-class, who appear to have a higher tax burden through increased cess and indirect taxes. The only concern would be the developments in other parts of the world, such as the change in US tax rates and possible hardening of US fed rates, which could suddenly put brakes on the FDI, FPI and remittances inflows. Then again, a healthy forex reserves of over USD 400 billion would help buffer Indian against any such sudden brakes on fund flows.