If the Union Budget is construed as an annual tug-of-war between populism and fiscal prudence, arguably it is the latter that prevailed in the past four budgets tabled by the NDA. However, populism seems to have gained an upper hand in Arun Jaitley’s latest effort. Despite exceptional buoyancy in direct tax revenues (18.7% growth in FY18) and record disinvestment proceeds (₹1 lakh crore), shortfalls in GST mop-ups and dividend receipts have forced the Finance Minister to ease off on fiscal consolidation as mandated by the FRBM Act. The Budget has reported a fiscal deficit of 3.5% (of GDP) for FY18 and pegged it at a high 3.3% for next year. The Economic Survey prepared the ground for a deviation, yet the actual numbers surprised the markets. Armed with a war chest of ₹24.4 lakh crore in budgeted receipts for FY19, Mr. Jaitley has homed in unerringly on the root causes of distress — unremunerative farm incomes, unemployment, lack of social security nets and the squeeze on the middle-class taxpayer.
With this in mind, Mr. Jaitley has announced a laundry list of ameliorative measures. While his intent is clearly welfarist, resource constraints have forced him to rely significantly on extra-budgetary resources and external agencies to give life to many proposals. If they fail to materialise, it can lead to a gap between promise and delivery. Consider agriculture. After asserting that minimum support prices (MSPs) should cover all crops and assure farmers 1.5 times their production cost, food subsidy allocations for FY19 have been upped by a relatively modest ₹29,041 crore. A ‘fool-proof’ mechanism has been mooted to avoid market prices falling below MSPs, but it is left to the Niti Aayog to work out the modalities. Setting up farmers’ markets is similarly a great idea to free small farmers from the tyranny of Agricultural Produce Market Committees (APMCs), but the project gets a mere ₹2,000-crore allocation.
The ambitious rural package in this Budget brings in free gas connections to three crore new households, free electricity connections to four crore homes, two crore new toilets under the Swachh Bharat Mission, higher micro-irrigation coverage, and so on. But of the massive outlay of ₹14.34 lakh crore required to bankroll these grandiose plans, as much as ₹11.98 lakh crore is expected to be met from extra-budgetary resources. A similar template has been used in social sector schemes. The National Health Protection Scheme, to provide a ₹5 lakh health cover to 10 crore households, is a much-needed social security intervention to benefit poor households that rely overwhelmingly on private health care. But there is little clarity on modalities. The entire clutch of proposals on improving learning outcomes, providing universal health coverage and alleviating the lot of minorities and girl children is expected to be funded through a mere ₹16,000-crore increase in allocations to ₹1.38 lakh crore. Infrastructure appears to be one of the few sectors where the funding problem has been addressed, with PSUs bankrolling a significant proportion of the ₹5.97-lakh crore outlay for FY19.
While being liberal in its announcements for rural India, the Budget has been frugal in its giveaways to the middle class and the corporate sector. Expectations of an increase in the basic exemption limit on income tax have been belied; instead, a standard deduction of ₹40,000 is back for salaried taxpayers. While it is only fair that the salaried pay income tax on their net income (after expenses) as the self-employed do, this deduction (which also replaces transport and medical reimbursements) is too small to establish real parity. The clamour for an across-the-board cut in the basic corporate tax rate from 30 to 25% has also been ignored, with the cut limited to mid-size companies (up to ₹250-crore turnover). Though this will benefit the overwhelming majority of corporate tax filers, how this impacts the competitive edge of India’s largest companies in the global context will be debated. Especially so, since the U.S. recently slashed its corporate tax rate to 21% and European nations average 20%. For the salariat and the corporate sector, the increase in education cess will offset some of the gains from these tax cuts. Senior citizens have benefited, particularly from the tax relief on interest from bank deposits and post office schemes, which has been hiked from ₹10,000 to ₹50,000 a year. These interest payouts are also exempt from the vexatious TDS provisions. This relief renders senior citizens far less vulnerable to steadily dwindling interest rates on bank deposits and small savings schemes; it also helps them to continue relying on fixed-income instruments to cover living expenses. This relief may reverse the unhealthy trend of risk-averse savers shifting wholesale from bank deposits to market-linked options such as equity mutual funds, in search of higher returns.
The imposition of 10% long-term capital gains tax on profits from shares and equity mutual funds could dampen market sentiment in the near term, but is unlikely to have any structural impact on domestic equity flows. Equities are favoured by the relatively affluent savers and alternative financial instruments such as bonds and fixed deposits invite far higher tax incidence. Moreover, the bulk of new allocations flowing into Indian equities in the last two years have come from retail investors, most of them saving for the long term. It is unlikely that they will beat a hasty retreat from shares or mutual funds just because of a modest levy. Overall, the Budget has a sense of direction that is difficult to find fault with. If some of the proposals seem half-hearted or are not taken to their logical end, it may be the result of revenue constraints. It is to be hoped that as the revenue base improves and GST collections stabilise, future budgets can put the finishing touches on the welfare proposals.