Promise and delivery: on Union Budget 2018 

Promise and delivery: on Union Budget 2018 

Context

If the Union Budget is construed as an annual tug-of-war between populism and fiscal prudence, arguably it is the latter that prevailed in the past four budgets tabled by the NDA.

Arun Jaitley’s Budget will be judged by whether it can bridge the gap

Armed with a war chest of ₹24.4 lakh crore in budgeted receipts for FY19, Mr. Jaitley has homed in unerringly on the root causes of distress — unremunerative farm incomes, unemployment, lack of social security nets and the squeeze on the middle-class taxpayer.

Welfare intent

  • List of welfare measures announced but due to resource constraints major part to the funds for the plans is to be met via extra-budgetary resources and external agencies

Effect: This can lead to gap between promise and delivery

Consider agriculture.

  • MSPs increased but food subsidies upped by a modest amount only
  • A ‘fool-proof’ mechanism has been mooted to avoid market prices falling below MSPs, but it is left to the Niti Aayog to work out the modalities
  • Setting up farmers’ markets is similarly a great idea to free small farmers from the tyranny of Agricultural Produce Market Committees (APMCs), but the project gets a mere ₹2,000-crore allocation.

Funds to be met via extra budgetary resources

The ambitious rural package in this Budget requires a massive outlay of ₹14.34 lakh crore out of which, as much as ₹11.98 lakh crore is expected to be met from extra-budgetary resources.

Similar situation in social sector schemes

  • Like for the National Health Protection Scheme, there is little clarity on modalities
  • The entire clutch of proposals on improving learning outcomes, providing universal health coverage and alleviating the lot of minorities and girl children is expected to be funded through a mere ₹16,000-crore increase in allocations to ₹1.38 lakh crore.

Funding problem of Infrastructure sector has been addressed though

Infrastructure appears to be one of the few sectors where the funding problem has been addressed, with PSUs bankrolling a significant proportion of the ₹5.97-lakh crore outlay for FY19.

Nothing major for middle class

While being liberal in its announcements for rural India, the Budget has been frugal in its giveaways to the middle class and the corporate sector.

Income tax slabs remain unchanged

  • Standard deduction instead: A standard deduction of ₹40,000 is back for salaried taxpayers.
    • Too small though: This deduction (which also replaces transport and medical reimbursements) is too small to establish real parity.

No cut in the basic corporate tax

The clamour for an across-the-board cut in the basic corporate tax rate from 30 to 25% has also been ignored, with the cut limited to mid-size companies (up to ₹250-crore turnover).

  • Global effect:
    • Though this will benefit the overwhelming majority of corporate tax filers, how this impacts the competitive edge of India’s largest companies in the global context will be debated
    • Especially so, since the U.S. recently slashed its corporate tax rate to 21% and European nations average 20%.

Increase in education cess will offset gains

For the salaried class and the corporate sector, the increase in education cess will offset some of the gains from these tax cuts.

Tax relief to senior citizens

  • Senior citizens have benefited, particularly from the tax relief on interest from bank deposits and post office schemes, which has been hiked from ₹10,000 to ₹50,000 a year
  • These interest payouts are also exempt from the vexatious TDS provisions
  • This relief renders senior citizens far less vulnerable to steadily dwindling interest rates on bank deposits and small savings schemes; it also helps them to continue relying on fixed-income instruments to cover living expenses
  • This relief may reverse the unhealthy trend of risk-averse savers shifting wholesale from bank deposits to market-linked options such as equity mutual funds, in search of higher returns.
  • Little to cheer for middle class in spite of analysts expecting a populist budget in wake of coming elections
  • The proposal on MSPs is shrewdly timed, though it would mean higher prices for consumers.

Capital gains tax

The imposition of 10% long-term capital gains tax on profits (exceeding Rs. 1 lakh ) from shares and equity mutual funds could dampen market sentiment in the near term, but is unlikely to have any structural impact on domestic equity flows

  • The reason for not much impact
    • The bulk of new allocations flowing into Indian equities in the last two years have come from retail investors, most of them saving for the long term.
    • It is unlikely that they will beat a hasty retreat from shares or mutual funds just because of a modest levy.

Conclusion

Overall, the Budget has a sense of direction that is difficult to find fault with. If some of the proposals seem half-hearted or are not taken to their logical end, it may be the result of revenue constraints. It is to be hoped that as the revenue base improves and GST collections stabilise, future budgets can put the finishing touches on the welfare proposals.

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