The Narendra Modi-led National Democratic Alliance presented a populist farm- and poor-friendly budget, as it prepares for key state elections this year and parliamentary polls in 2019. The highlights of the Union Budget presented by finance minister Arun Jaitley in an hour-and-45 minute speech that alternated between Hindi and English were undoubtedly: the promise that the government would acquire key crops at a guaranteed 150% (or 1.5 times) the cost of production; a spend of Rs 14.3 lakh crore on rural infrastructure; health insurance for around 100 million poor families up to a maximum of Rs 5 lakh a family; and a slew of incentives (and sops) for Micro, Small and Medium Enterprises (MSMEs).
“While making the proposals in this year’s budget, we have been guided by our mission to especially strengthen agriculture, rural development, health, education, employment, MSMEs, and infrastructure,” Jaitley said in his speech.
Eight states go to the polls this year, and the Lok Sabha polls are scheduled for next year, although there has been buzz that the Bharatiya Janata Party (BJP)-led NDA may be considering bringing them forward – buzz that grew louder after Thursday’s budget which struck all the right political notes. The Indian economy is reviving, although there are risks to this, but the bigger concern for the government is an ongoing agrarian crisis in several states, a slowing rural economy, unemployment, pain in the MSME sector (on account of 2016’s demonetisation exercise and the 2017 introduction of the Goods and Services Tax), and the growing political mobilisation of Dalits. The budget had something for each of the affected constituencies.
Increased spending in 2017-18, and just 11 months of revenue from the unified GST meant the government missed its fiscal deficit target of 3.2% of GDP and touched a deficit of 3.5%. The deficit is expected to reduce to 3.3% next year, when most of the government’s populist schemes will kick in; the original deficit targeted for 2018-19 was 3%. The government also appears to have made aggressive assumptions for tax receipts next year, although there has been an increase in the number of both individual and corporate tax payers in the past year.
The increase in the fiscal deficit, and fears that the guaranteed 50% return on crops would result in inflation, made bond markets nervous. “Under normal circumstances, a modest slippage in the fiscal deficit this year and the deviation from the earlier target of 3% next year would seem fair and sensible, but given the nervousness in the bond markets, perhaps a more aggressive fiscal consolidation was required,” said Abheek Barua, chief economist at HDFC Bank.
The stock markets, meanwhile, were spooked by the introduction of the long-term capital gains tax on gains on shares held for over a year, although this was widely anticipated. The Sensex, the benchmark stock index of the BSE, closed .16% down at 35,906.66. The index had gained 5.6% in the run-up to the budget.
Still, it was clear that the focus of the budget was not business, although the government did signal its commitment to structural reforms that have made it easier to do business in India. Nor was it the salaried middle class, which will likely pay more income tax (because of a 1 percentage point increase in the cess) and also have to pay more on imported products including mobile phones and cosmetics
“This budget is farmer-friendly, common citizen-friendly , business environment-friendly, and development-friendly. It will add to ease of living,” said Prime Minister Modi who added that the budget would strengthen the vision of New India.
Opposition leaders disagreed. “It is a defeatist budget. It is the budget of a government which has conceded that it has failed to address key issues in the economy… The budget proposals are a big let down,” said former finance minister and Congress leader P Chidambaram. CPM general secretary Sitaram Yechury described the budget as “unconnected to ground realities”, while Congress president Rahul Gandhi took to Twitter to attack the government: “4 years gone; still promising farmers a fair price; 4 years gone; fancy schemes with no matching budgets. 4 years gone; no jobs for our youth. Thankfully, only 1 more year to go.”
The focus of Budget 2018 is clear proof that the NDA is all too aware that there is only one more year to go.