A Budget usually strives to strike a fine balance between the government’s immediate political priorities and its attempt to influence overall economic growth. By that criterion, the Narendra Modi government’s last full Budget has chosen to tilt heavily in favour of its political priorities. This is a Budget mainly with an eye on the next general election. India’s restive rural economy was the focus of much attention in finance minister Arun Jaitley’s speech. The solutions he proposed, however, were straight out of the playbook of his predecessors – such as guaranteed support prices for crops.
On the positive side, the Budget recognised India’s learning crisis and proposed steps to enhance education standards. Another praiseworthy measure was the emphasis on healthcare. Fiscal deficit, the gap between expenditure and income which is bridged through loans, is a measure of the prudence with which government manages the economy. There was a slight slippage in 2017-18, with deficit as a proportion of GDP at 3.5% as against the targeted 3.2%. Next financial year’s target is 3.3%, higher than what was projected a year ago.
To an extent, the slippage is understandable as it incorporates transition cost of GST. But other signs are worrisome. To illustrate, NDA’s primary tool to help farmers is a “pre-determined principle” of fixing support price for kharif crops at one-and-a-half times the product cost. This is to be complemented by efforts to increase coverage of farmers who can avail themselves of it. Product costs vary and are influenced, among other things, by international crude prices. Politically, it will become tough for governments to move away from this kind of generous guarantee. It can lead to a dangerous situation in an adverse environment.
Jaitley announced a generous increase in the Centre’s health insurance package with a cover of Rs 5 lakh annually per family for hospitalisation. But to what extent it can be funded and what its reach will be remains to be seen. The recognition of India’s education crisis was a positive highlight of the Budget. Enrollment in schools may have increased by leaps and bounds, but this has not been matched by satisfactory learning outcomes. There now seems to be a sense of urgency in tackling this problem, with teachers being brought to the forefront of the plan.
Quality education is a long term solution to dealing with changes in the structure of economic activity catalysed by technological advancement. For the short term Jaitley has tried to address the shortage of satisfactory jobs by helping small industries as they are relatively more labour intensive. Corporate income tax has been reduced to 25% for companies with a turnover of up to Rs 250 crore, but this will only marginally help job creation. The Indian economy is relatively open when measured in terms of two-way international trade. Given a renewed global move to lower corporate taxes, India cannot afford to have a high headline tax rate and a complicated tax architecture for long as large corporates will soon look to lower their tax burden by outsourcing activities abroad.
For the middle class, there is little to cheer. Another cess of one percentage was added to the existing levy in order to fund government’s education and healthcare spending. This offset potential gains by introducing a standard deduction on taxable income for salaried people. For taxpayers in higher slabs, the net impact will be an increase in tax incidence. The other negative aspect was the introduction of 10% long term capital gains tax on listed equity, equity oriented mutual funds and a distribution tax on income from equity oriented mutual funds. This will chill equity markets which have worked so far to partially offset the credit slowdown of beleaguered banks.
On balance, this is best described as an election Budget. Triggering the economy’s animal spirits is not what it is about. This is odd as the absence of fresh investment will help no one and hurt economic growth. Ironically, the two-year deceleration in growth caused by limited incentive to private investment crimped Jaitley’s space in preparing this Budget.