Bond market participants will be keeping a close eye on non-tax revenues of the government, momentum in GST collections, as well as government expenditure. Photo: Hemant Mishra/Mint
Bond market participants will be keeping a close eye on non-tax revenues of the government, momentum in GST collections, as well as government expenditure. Photo: Hemant Mishra/Mint

Budget 2018: Balancing populism and pragmatism

All in all, the budget does a reasonable job of catering to urgent policy priorities like supporting agriculture and MSMEs, enhancing the social security net, and giving a fillip to infrastructure creation

The Union budget for the next fiscal year attempts to do a fine balancing act between being populist and at the same time pragmatic.

From a policy perspective, the announcement of a new National Health Protection Scheme (NHPS) was the most significant, but the budget also had a distinct rural and infrastructure thrust and tax goodies for micro small and medium enterprises (MSMEs).

The new NHPS scheme—India’s version of Obamacare—proposes to provide 100 million poor and vulnerable families coverage of up to Rs5 lakh per family per year for secondary and tertiary care hospitalisation. The scheme is certainly ambitious as it proposes to cover a whopping one-third of Indian households.

As of March 2017, around 440 million Indians were covered under health insurance schemes, and the NHPS could potentially more than double this coverage. The modalities of implementation of the scheme have not been specified, but the administration would certainly be challenging given the scale envisaged and paucity of health infrastructure in large swathes of the country.

More significantly, the budgetary allocation to this scheme seems inadequate and, therefore, it is likely that this scheme will be administered over a period of time rather than having any immediate impact.

For MSMEs, the reduction in corporate income tax rate to 25% for all companies having a turnover of up to Rs250 crore in fiscal year 2017 is clearly a positive. This, along with the proposal to onboard public sector banks and corporates on the Trade Electronic Receivable Discounting System (TReDS) platform and link this with Goods and Services Tax Network (GSTN), will help improve the cash flows of MSMEs.

Extending fixed-term employment, currently applicable only to apparel and footwear sectors, to all sectors is another significant step in the direction of labour reforms.

The decision to fix the minimum support price (MSP) of all crops at least at 50% more than their cost of production and liberalize the export of agri-commodities will help support agricultural incomes, but at the same time runs the risk of fanning inflationary pressures. The proposal to evolve a suitable mechanism to make available credit to tenant farmers without compromising on the rights of the land owners is also structurally significant, as around one-quarter of agricultural output in India comes from tenant farmers.

On the infrastructure side, while outlays to traditional segments such as roads, railways and power has increased at a modest pace, there is a strong push given to affordable housing and education.

The budget also lacked big ideas to boost consumption, which would be a disappointment for consumption-oriented sectors, although the rural thrust could provide some succour. The salaried class, particularly, would have been hoping for more. While benefit of standard deduction of Rs40,000 has been provided, the tax benefits on transport allowance and reimbursement of medical expenses has been removed—the cumulative benefit on both these counts was Rs34,600—and the cess on personal income tax has been increased by one percentage point, which would more than offset the benefit of standard deduction.

The corporate bond market should get a fillip from the proposed move to relax regulations to permit investments in bonds with a credit rating of “A" as also nudge large corporates to meet about one-fourth of their financing needs from the bond market.

Bond market participants though will be keeping a close eye on non-tax revenues of the government, momentum in GST collections, as well as government expenditure. Any slippage on these counts would impact the fiscal deficit target, pegged at 3.3% for fiscal 2019. The yields on the benchmark 10-year government security jumped 20 basis points on budget day (compared to the previous closing), indicating caution over the fiscal position of the government.

The imposition of long-term capital gains tax on sale of equity shares was a widely expected move. The proposal to grandfather gains made up to 31 January 2018 though will limit the impact. Inflows into equity mutual funds, particularly from outside the top 15 cities, could be adversely impacted by the proposal to tax distributed income of equity-oriented mutual funds at 10%. These cities—called B15 cities—cumulatively account for around 20% of assets under management of the mutual fund industry.

All in all, the budget does a reasonable job of catering to urgent policy priorities like supporting agriculture and MSMEs, enhancing the social security net, and giving a fillip to infrastructure creation. The key over the next one year would be to match the stated intent with implementation without slipping on the fiscal.

Nagarajan Narasimhan is business head and senior director, CRISIL Research

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