Budget 2018 came out fairly balanced, with disappointments on the income tax and LTCG tax fronts for households and markets, respectively. Further, the government’s projections on growth appear to be reasonable. Overall, the Budget was nowhere near as radical as the hype around it suggested. After the hype created around Budget 2018 considering it was to be the last before elections in 2019, the final outcome has been fairly balanced — with nothing really radical and with the goal being to move along the FRBM path. A higher deficit ratio of 3.5 per cent for FY18 has given scope for lowering the same to 3.3 per cent in FY19. The assumption of 11.5 per cent growth in GDP based on 7.2-7.5 per cent real GDP and four per cent inflation looks reasonable, with an upward bias in case inflation is higher. There have been two disappointments on the tax side. The first is that there has been nothing significant for the households in terms of tax benefits. As the government has made the increase in the number of tax assesses a scoring point last year, logically, it was expected that there could be lowering of the tax rates or increasing the tax slabs. The sops provided are very peripheral in nature. Second, the long-term equity gain tax, though expected, has shaken the market. Further, given that households have migrated to the equity market from deposits, they would have to reconsider their options. While markets revive fast, the way forward is important because a buoyant market is needed for successful disinvestment, which was a major victory last year. A large part of the success of the programme may be attributed to a robust stock market with high valuations. The Budget speech was more on the expenditure side, with higher allocations being announced for infrastructure and social services. This, again, was expected.
However, given that the overall size of the Budget has been increasing at the trend rate of 10 per cent, it could be interpreted as being more of such allocations moving in the right direction, albeit at the normal rate. But, reading into the finer details, some interesting points arise. First, the government actually cut its capital expenditure (capex) last year from the budgeted amount of Rs 3.09 trillion (Rs 3.09 lakh crore) to Rs 2.73 trillion (Rs 2.73 lakh crore). Which means that in case it was achieved, the fiscal deficit ratio would have been higher by around Rs 300 billion (Rs 30,000 crore), which is 3.7 per cent. The compromise was on roads and Railways by around Rs 150 billion (Rs 15,000 crore). Therefore, the higher number for FY19 would actually take the total expenditure back to the Rs 3.0-trillion (Rs 3.0-lakh crore) mark. Further, the subsidy bill of the government deserves comment. Overall, subsidies are to increase from Rs 2.64 trillion (Rs 2.64 lakh crore) to Rs 2.92 billion (Rs 2.92 lakh crore) with food subsidy rising by about Rs 290 billion (Rs 29,000 crore). The surprising part is the fuel subsidy, which has been retained at the same level. Given that crude oil prices would rule higher, the Budget has not provided for additional subsidy, which means that the inflation impact would be sharper than expected. Surprisingly, it has cut the subsidy on kerosene and increased the same on LPG. The overall borrowing programme of the government appears to be neutral and this should resonate well for the bond market yields. The Budget, however, takes in a lower incremental interest payment of around Rs 450 billion (Rs 45,000 crore) this time (Rs 5.31 trillion to Rs 5.76 trillion) compared with Rs 500 billion (Rs 50,000 crore) in FY17. This is puzzling considering that there would be Rs 1.45 trillion (Rs 1.45 lakh crore) of recap bonds, which at 7.5 per cent would imply a cost of around Rs 110 billion (Rs 11,000 crore). Therefore, this could be a surprise element in the revised estimate presented next year.
The author is chief economist, CARE ratings