Job creation will come only out of new investment.
This Budget for 2018-19 had to be presented against a background of rising expectations. There were many concerns such as slowdown in growth, inadequate private investment and distress in agriculture. The Budget had to address these concerns. The Budget has addressed them, though not fully. And also much will depend upon how the expenditure programmes announced will be implemented.
It was expected that expenditures would go up. But the concern was whether government would stick to the path of fiscal consolidation. There is a slippage in the current year as far as fiscal deficit is concerned. The fiscal deficit of 3.3% of GDP for next year is slightly on the higher side.
But the problem is not the numbers as such. The question is whether the government would deliver this. If the government slips again, the credibility to the Budget number will be lost. In fact, the acceptance of the recommendations of the N K Singh Committee will require the fiscal deficit of central government to go down to 2.5% of GDP after a few years.
The government of India has not been able to fulfil the 3% target even in good years when the growth rate was high. The numbers on fiscal deficit for the current year and next year may be seen as acceptable, given the circumstances. But what is at stake is credibility. The government cannot let another year go with a slippage.
The issue of fiscal deficit takes us immediately to revenue projections. Very optimistic revenue projections can put the fiscal deficit number under cloud.
Gross tax revenue is expected to increase in 2018-19 over revised estimates of 2017-18 by 16.7%, which is indeed high, given an expected normal GDP growth of 11.5%.
In recent years, the buoyancy has increased. Even then, to expect gross tax revenue as percentage of GDP to rise from 11.6 to 12.1 is truly optimistic. It is true that how GST will behave in terms of revenue collection is not clear. The government will have to keep a close watch on how revenues behave.
The main focus of the Budget speech is on expenditures, particularly in relation to agriculture, health and education. It goes without saying that increased expenditures in these areas are welcome. But the problem is how well tuned the expenditure programmes are and how effectively the funds are spent. One or two programmes are also unclear to start with, such as National Health Protection Scheme.
On taxation, there are no major changes. The reduction in corporate tax rate is confined only to one subset. Changes in personal income tax are minimal. The introduction of standard deduction will help the salaried class.
Perhaps the one change that has already caused some turmoil in the stock market is the long-term capital gains tax on equities. However, in principle, there can be no objection to the proposed change. Will the Budget promote growth and investment?
Total expenditures in 2018-19 are expected to rise by 10% over revised estimates. Within it, capital expenditures are also expected to rise by the same percentage. As a ratio of GDP, it remains the same. There is nothing directly in the Budget to stimulate corporate investment except the measures announced to benefit micro, small and medium enterprises (MSMEs). If, however, the Budget as a whole helps to create a favourable sentiment, investment may rise.
In fact, the fall in growth rate is directly related to fall in Gross Fixed Capital Formation rate. It remains around 26% of GDP against 33% in 2007-08. Job creation will come only out of new investment. The composition of expenditures is geared to meet the current concerns and is appropriate. Higher expenditures on health and education are very much needed. They should also go with improved efficiency. Fiscal deficit is an area that needs continued vigil.