Analysing the Union Budget for 2018-19

February 03, 2018
10 months

What was special about this year’s Budget?

  • This year’s Budget is the last full Budget of the Narendra Modi government.
  • While electoral compulsions were expected to nudge the budget towards populism, fiscal prudence (limited borrowing) was also expected weigh high.

The following changes were initiated in for the 1st time in the 2017 budget and have been retained in the current budget as well:

  • Advancement - Till 2016, budget was usually introduced in late February.
  • This was creating a delay in kick-starting programs on a full scale as they’ll have to operate on a temporary purse till all appropriation bills are approved.
  • As full clearance takes up at least till end April, this engulfs almost 2 months into the financial year and forces a spending scramble in the end.    
  • Hence, since 2017 the budget was advanced to ensure that spending on schemes and projects kicked in early in the year to avoid these issues.
  • Other Changes - Railway budget was merged with the main budget as there has been a steady decline in its significance in value terms.
  • Also, the plan and non-plan distinction was abolished as it held no meaning when the planning commission itself was abolished.
  • The country is now diversifying from a centrally planned structure to a consensus driven policy making through NITI Aayog.  

How has the economy fared during the current Modi era?

  • Currently, almost 10 years after the global financial crisis, the global economy seems to be in good shape.
  • But the Indian economy is expected to post a growth of only 6.5% in 2017-18, which is the lowest growth rate since the government came to power in 2014.
  • This slowdown was despite low oil prices which usually boosts growth.
  • But the optimism is that India’s growth is expected to be in the mid-7% range for the 2018-19 fiscal as global growth is picking up.

How has the government intended to raise and deploy resources?

  • Disinvestment - The fiscal year ending on March 2018 has already seen the mobilisation of an impressive Rs 1 lakh crore through disinvestment.
  • A target to raise Rs 80,000 crore in 2018-19 through the sale of shares in government companies either partially or fully has been envisioned.
  • Taxes - There was exceptional buoyancy in direct tax revenues (18.7% growth in FY18) but there were shortfalls in GST and dividend receipts.
  • Fiscal Constrains - It was certainly hoped that the government would meet its target on fiscal deficit, which is the excess of revenue over expenditure.
  • But the shortfalls in the proceeds, have forced the Finance Minister to ease off on fiscal consolidation as mandated by the FRBM Act.
  • Spending - The focus will be on infrastructure — mainly 9,000 km of national highways, and connecting interior and backward areas by rail.
  • Significantly, PSUs will be bankrolling a significant proportion of the Rs. 5.97-lakh crore outlay for FY19, and the budget allotment will be 1.5 lakh crores.
  • There is also spending on urban infrastructure like smart cities, water supply, and expansion of airport capacities.

What are the risks involved in a Fiscal slippage?

  • While the fiscal deficit target for 2017-18 was set at 3.2%, the government closed the fiscal at 3.5%, despite increased tax collections.
  • Also, the target for the upcoming 2018-19 fiscal has been revised upwards from the initially targeted 3% to 3.3%.
  • These aspects indicate higher borrowings on the government’s part, which translate into higher bond rates and yields for bond investors.
  • Consequently, this increases the interest rates for the general public and corporates, thereby causing a downward pressure on private investments.
  • The other problem with deviating from targets is that it could pose a credibility risk for the government, which can prove costly form the investment lens.

What were the significant announcements for the farm sector?

  • Marketing – Establishing farmer markets to free farmers from the tyranny of Agricultural Produce Market Committees (APMCs) has been mooted.
  • But merely Rs. 2,000-crore has been allocated for this, which is inadequate.
  • MSP enhancement - ‘National Commission of Farmers’ headed by scientist M.S.Swaminathan had provided an MSP formula in its 2007 report.
  • BJP had promised to implement this during the 2014 election campaign, and the budget speech has merely reiterated this promise without the strategy.
  • While the proposal has been made to enhance MSP for all crops to 1.5 times the production cost, no explicit fund allocation has been made.
  • The scheme would require either direct government procurement or compensation for a distress sale at the market price below the MSP.
  • Precedent - Madhya Pradesh implemented a scheme called “Bhavantar Bhugtan Yojana” for the previous Karif crop.
  •  Here, farmers were assured an MSP for their produce and if market prices fell below this, they were compensated the difference after the sale.
  • But the scheme faced severe flank due to the multiple nefarious designs that came to the fore,which largely benifited traders who suppressed market prices.
  • Mr. Jaitley has said that NITI Aayog, in consultation with the central and state governments, will devise a mechanism to address these issues.

What does the budget hold for businesses?

  • Despite pressures due to corporate tax cuts in EU and the US, the hoped comprehensive tax cuts across the spectrum for businesses didn’t happen
  • Rather, tax was cut from the present 30% to 25% for companies that net less than 250 crores annual turnover (mostly MSMEs).
  • Lending under MUDRA scheme for promotion of MSME enterprises has been target at Rs.3 lakh crores for the 2018-19 fiscal.

What steps has the Budget taken to create more jobs?

  • Reduced PF contribution - The  mandatory provident fund contribution norm  of 12% has been relax for women in their first three years of work to 8%.
  • Fixed-Term Employment - There has been a push to expand this system to footwear, leather and other compatible sectors.
  • This will ensure clearly contracted provisions and statuatory benifits like allowances, working hours etc... for employees akin to permanent works. 
  • But this will also facilitate easy hire and fire flexibility for corporates, which has found favour with business but opposition from trade unions.
  • Capital Spending - As the government has intended a  higher infrastructure spending, thus could bring more jobs, with more entrepreneurs pouring in.

What are the proposals for financial markets?

  • Long term Capital Gains Tax – While the government is nudging people to invest in the financial market, the introduction of this tax seems contradictory.
  • This is a tax on capital gains made by investors, who sell stocks after holding it for over a year (which is in addition to the Securities Transaction tax).
  • While this was previously untaxed, the government perhaps feels that stock investments and mutual funds investors can afford to pay the 10% tax.
  • The calculation is that equity investors are better off than the rest and hence can be capitalised to enhancing budgetry revenues.
  • While this might dampen market sentiment, it is expected to be only transient.
  • Bond Market - There is a proposal for the SEBI to mandate companies to raise a quarter of their funds from the bond market.
  • This can significantly impact company borrowings and will speed up the development of  the bond market and ease the dependence on banks.
  • For banks, this would give room for greater diversification of their lending portfolio as they will be considerably freed from lending to big corporate.

What are the schemes for the poor?

  • There are schemes to provide free power connections to 4 crore homes and extend free gas connections to further 3 crore homes under Ujjwala scheme.
  • Notably, these are only free for establishment of connections and the subsequent services aren’t free. 
  • Further, under the Swachh Bharat Mission, 2 crore toilets are to be build over the current fiscal.
  • The goal to enable every Indian own a house by 2022 is also in focus through both the rural and urban components of the PM Awas Yojana.
  • Ayushman Bharat – The scheme is a health sector initiative to provide for a 5 lakh/annum insurance cover for over 10 crore poor families.
  • This translates to around 50 crore beneficiaries for secondary and tertiary medical care and is touted as the world’s largest public healthcare initiative.

What does the Budget have for the elderly?

  • For senior citizens, tax exemption on interest earned on deposits with banks and post offices has been raised from Rs 10,000 to Rs 50,000.
  • There will be no tax deducted at source on their fixed and recurring deposit.
  • Also, Income-tax limit for deduction on health insurance premiums has been enhanced from Rs 30,000 to Rs 50,000.
  • The limit for deduction on medical expenditure for certain critical illnesses has been raised from Rs 60,000 to Rs 80,000 for senior citizens.

What are other miscellaneous provisions? 

  • Insurance Sector Consolidation – A proposal to merge three public sector insurers “United India Insurance, Oriental Insurance, and National Insurance” has been mooted.
  • This would lead to an enhanced scale for operation, which will better equip them to face the challenges of a growing market.
  • It is also in alignment with the government’s plan to consolidate in sectors such as oil and gas, and banking.
  • There is not much For Salaried Classes -expcept for the re-introduction of the standard deduction of Rs. 40,000.
  • This is instead of the current exemption on medical reimbursements and transport allowance and will benefit the middle income groups. 

How can the budget be perceived overall?

  • Considering the number of schemes and programmes aimed at the poor and vulnerable sections, the budget could be said as populist.
  • This broad targeting of those at the bottom of the pyramid could mean significant gains for the government politically.
  • But considering the larger than expected deficits and various other pressures in the economy, there is a risk that growth might become a causality. 


Source: Indian Express


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