Kumar Mangalam Birla on Budget 2018: A fine balance
One of the key themes of the government’s reforms in the recent past has been greater formalisation of the economy. The budget suggests that these measures have started yielding results in terms of widening the tax net and buoyancy in direct tax revenues, enabling the government to use this fiscal dividend for larger social and infrastructure spending.
Agriculture and health are the thrust areas of this budget. Two announcements are remarkable and promise to be game changers. First is the enhancement of the minimum support price (MSP) for agricultural produce to 150% of the cost of cultivation. Along with institutional measures announced for the development of agro markets and ‘Operation Green’ to address price fluctuations in perishable crops, it will go a long way in realising the government’s mission of doubling farmers’ incomes. At a time when the farm sector appears to be under a lot of stress, these are thoughtful measures.
The second big announcement is the National Health Protection Scheme that would provide a robust medical insurance cover to nearly 40% of India’s population.
The unforeseen need for hospitalisation tends to impoverish vulnerable sections of the population; the new scheme will tackle that vulnerability. Initiatives towards improving the quality of education and the training of teachers too are forward steps.
In the last two years, India’s growth has fallen short of our long-term potential as the economy adjusted to major structural reforms and because of legacy issues like the overhang of non-performing assets (NPAs) weighing down the banking system.
The recapitalization of public sector banks and the roll-out of the Insolvency and Bankruptcy Code (IBC) are already addressing the issue of NPAs.
Another big push to infrastructure development through the budget—with a record provision of close to Rs6 trillion, almost 20% higher than in 2017-18, is an apt growth-booster in the current macroeconomic environment. Allocations for roads, urban infrastructure and railways are expected to provide the much-needed multiplier effect.
One would expect this to also crowd in private capital expenditure as Indian companies reduce debt on their balance sheets and capacity utilisation levels move up.
The government will be contributing the 12% of basic pay that is contributed by employers to the retirement corpus of new employees for three years. This is a welcome move too, recognising the imperative for the creation of formal sector jobs.
On the taxation front, the benefit of lower corporate tax rate of 25% has been extended to medium-scale companies, which is in line with the focus that this government has had on the micro, small and medium enterprises (MSME) sector.
The FM has brought back a long-term capital gains tax on equity investments. However, this has been done in a balanced manner, as capital gains until 31 January 2018 are being spared from the tax.
The social and infrastructural spending has meant some slippage from the path of fiscal correction.
The fiscal deficit for FY19 is budgeted at 3.3% of GDP, as opposed to the previous glide path target of 3%. Given the needs of the economy, the magnitude of the slippage appears to be within acceptable limits. It should not disturb rating agencies.
In fact, a fiscally hawkish stance could have perhaps proved to be counter-productive in the current context. From a fiscal consolidation point of view, what is encouraging is the fact that the government remains focused on its mission of widening the tax net.
It has also formally adopted the Fiscal Reform and Budget Management Committee’s target of bringing down the Centre’s debt to 40% of GDP.
Apart from tax buoyancy, the government’s commitment to the disinvestment agenda will also help it move towards a sustainable path of fiscal consolidation.
Overall, I believe that this Budget has managed the balance between fiscal discipline and its growth and the social agenda remarkably well.
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