Rural boost will shore up economy–Deccan Herald–06.02.2018

By Ajit Ranade Feb 6 2018, 1:43 IST
The Economic Survey had indicated that this year’s Union Budget was to be seen as a pre-election budget. This meant that there would be expenditure compulsions to cater to certain voter constituencies. That is why we see that there is big focus on rural and agriculture sectors.
In any political economy, the expenditure pressures are from focused interest groups, whereas revenue is raised from the wider diffused body of taxpayers. Hence any democracy has an inherent deficit bias. The challenge for a finance minister is to be able to cater to various spending priorities and yet keep within fiscal limits.
India’s tax to GDP ratio is one of the lowest in the world, so there is some room to go on the revenue side. It is fortuitous that demonetisation and increased formalisation of the economy have led to big jumps in direct and indirect taxpayers. That is why the direct tax collections are in line with the target set last year.
Next year’s spending is budgeted to go up only by around 10% whereas, due to higher inflation, nominal GDP will go up by 11%. The direct tax collection, thanks to a widening net, will go up at twice the rate of spending, that is nearly 20%. Hence, the fiscal deficit target of 3.5% of GDP is reasonable and credible.
The finance minister said that the minimum support price (MSP) assured to the farmer would be 150% of the cost of production. The MSP is like an option or insurance. It kicks in only if the market prices drop below a particular threshold. If prices stay high next year (as seems likely in the case of soya and sugar, for instance) then the outgo on MSP would be minimal. Hence, budgeting for MSP is difficult to quantify.
Not surprisingly, the budget documents show only about 20% increase in food subsidy (which includes MSP), not much different from last year. So, despite a big political announcement, the impact on the exchequer is small.
The other measures, like a tax holiday to farmer producer cooperatives, or the cluster approach for certain agricultural commodities, modernising 22,000 rural mini-marts are all measures that could help the farmer.
Ultimately, what is needed is unshackling agriculture from various input and output controls and connecting farm-to-fork. What is needed is to increase value-adding activity like agro-processing, and basically make farming a viable business proposition, not something that needs to be reimbursed for or subsidised.
The biggest announcement in the budget was extending health insurance coverage of Rs 5 lakh to 10 crore families. The actual premiums paid would be much smaller, and actual drawdown would depend on hospitalisation. Hence, impact on the exchequer will perhaps not be very high.
As such, India’s expenditure on health and education as a proportion of GDP is much smaller than its peers. Nevertheless, this is a first step toward universal health insurance and should be welcomed. Of course, merely providing health insurance financing will not suffice. It must be accompanied by a substantial increase in healthcare facilities like beds, hospitals and doctors.
The focus on health and education is to be seen as enhancing India’s human capital. Hence, expenditure on teachers and doctors’ salaries should not be counted as revenue spending, but rather capital spending. India’s demographic potential cannot be fully realised without enhancing human capital in terms of skilling, education and health.
Welcome measure
One significant and welcome step was the reintroduction of long-term capital gains tax after a gap of almost 21 years. The LTCG which escaped taxes was estimated to be about Rs 3.7 lakh crore last year. LTCG accrues mostly to the higher income classes. Also, a tax on LTCG is a direct tax, unlike GST, which is an indirect tax, like excise on petrol and diesel. Indirect taxes tend to be regressive and hurt the poor disproportionately. The ratio of indirect taxes in total taxes had been going up steadily in the last three years. Hence, it is good that LTCG has been introduced.
The government overachieved its disinvestment target, which is quite impressive. But this was done partly by the left pocket buying from the right pocket. The other non-tax revenues from spectrum fees and auctions as also dividend from the RBI have been falling. So, next year’s target is only modestly higher, and achievable
For the urban middle class, there is not much to cheer. But then, the growth boost from increase in the rural purchasing power will benefit them indirectly. The focus on social sectors like health, education and the elderly is welcome. The other priorities, like job creation or boost to exports and manufacturing, have each got some support, but nothing as big as the health insurance initiative.
With some luck, the global macro environment will be favourable (despite the rise in oil prices). This can induce better growth in exports and manufacturing in India, and support growth at around 7.5%. Such an outcome would be a validation of the growth-inducing effect of the budget.
(The writer is an economist and Senior Fellow, Takshashila Institution)

via Rural boost will shore up economy

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