Budget 2018: The great balancing act by Jaitley on social and fiscal fronts | Business Standard News–02.02.2018

Finance Minister Arun Jaitley may have blotted his copybook by conceding a slippage in his fiscal deficit target of 3.2% of gross domestic product (GDP) for 2017-18.

After all, this is the first time in the last four years that Mr Jaitley failed to meet the fiscal deficit target and announced a revised deficit figure of 3.5% for the current year and a reduction of two percentage points next year.

He may have good reasons for failing to meet the target, thanks to the effects of the goods and services tax (GST), a shortfall in non-tax revenues and overspending under revenue expenditure.

But the big relief is that his fifth Budget largely steered clear of the many traps that ensnare most budgets presented before a series of Assembly elections in 2018-19, followed by a general election in May 2019. 

The many social sector schemes and tax concessions announced in the Budget did not have as big an impact on the government’s finances as could be feared in a pre-election Budget. 

Indeed, a fiscal slippage of three percentage points in the current year over the target and a modest correction to reach a level of 3.3% of GDP next year suggests that the damage that could have been caused by electoral imperatives has been minimised.

That could well be because the expenditure numbers for many of these social sector schemes appear to be an underestimation. For instance, the Centre’s health outlay next year goes up by three% even though a major scheme for an enhanced health insurance coverage was announced. Similarly, the outlays for education and rural development go up by only 3.8% and 1.4% respectively.

On the contrary, Mr Jaitley may have used the same electoral imperatives to boost the government’s revenues and address distortions in the taxation system. Thus, he taxed the rich, imposed long-term capital gains tax on earnings above Rs 100,000 and gave tax relief to senior citizens and smaller companies below an annual turnover of Rs 2.5 billion.

In the process, he failed to fulfil his promise of reducing the corporation tax rate for all companies to 25%, but there was merit in his argument that his decision to reduce the tax rate on all companies with a turnover of Rs 2.5 billion would cover 99% of the corporate taxpayers. Moreover, the 7,000-odd big companies that are still left to pay a higher 30% tax rate actually have an effective tax rate of 22-23%, thanks to the many exemptions available to them. Once these exemptions are phased out, the promise of reducing the tax rate for the large companies may also be fulfilled.

Domestic industry also got an indirect benefit from increases in the customs duty on a range of electronic items, whose imports may have undermined local manufacturers. The increased customs duty would be viewed as protectionism, but the move is in sync with the government’s idea of promoting domestic manufacturing.

Yes, he made several announcements of new programmes and schemes for agriculture, rural development, health and education. But these are largely schemes that would not rely on central finances in a big way. Thus, the likely adverse impact of these schemes on the Union government’s finances will be limited.

Which is why, perhaps, the outlay for agriculture and allied sectors has increased only 13% for 2018-19, about three% for health, four% for education and 1.4% for rural development. Thus, the burden of these social sector schemes may not have to be borne by the central Budget. 

On the taxation front, he succeeded in widening the tax base – both in indirect taxes including GST and in direct taxes. This is likely to help the government in the long run in achieving the targets of reducing fiscal deficit to 3% of GDP by 2024-25 and the government debt to 40% of GDP from the current level of 49%.

On the whole, Mr Jaitley’s fifth Budget has a good dose of schemes that offer benefits to farmers, employees, particularly women and health insurance to people. But while presenting a Budget with a significant social impact, he did not allow any major slippage in the fiscal situation. 

via Budget 2018: The great balancing act by Jaitley on social and fiscal fronts | Business Standard News

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