The Budget for FY19 definitely does not smell like a pre-election policy document and instead reveals a commitment to being on the Fiscal Responsibility and Budget Management (FRBM) track. This can be seen from the fiscal deficit target of 3.3 percent targeted for the year which is lower than 3.5 percent for FY18 but higher than the ideal 3 percent mark. This is pragmatic as the economy is still grappling with the major tax reform of goods and services tax (GST) where the outcomes would take time to stabilise. Besides, distress in the rural sector needs to be addressed.
The way the Budget has been drawn gives a feeling that the idea was to get the number right rather than do anything big on reforms. To this extent, it has been successful in making allocations across sectors while being realistic on revenue. What is the macro economic impact?
First, the impact on gross domestic product (GDP) is limited. The allocations made are across various social sectors and infrastructure which can provide some push. However, there are no measures to boost consumption and hence, demand would have to be driven by other forces.
Second, with the introduction of GST, the inflation impact is more or less insignificant and hence, with the exception of oil products, the Budget does not have any real influence. Therefore, the effect is neutral again.
Third, is there anything for savers? The answer here is probably not as the present structure has not made savings its centrepiece and the move to tax equity gains can confuse the household.
While the 10 percent tax for instruments held above 1 year is lower than the 30 percent tax paid on fixed deposits, the present exodus of savings from banks to the market could move back gradually given the narrowing of tax advantage.
Fourth, how about investment? Here, the government has actually cut back on capex last year by almost Rs 30,000 crore to balance the Budget. The present allocation is around Rs 3 lakh crore, which though useful cannot really drive the economy which would be sized at Rs 187 lakh crore for FY19.
Fifth, has the Budget managed subsidies well? The answer is ‘only partly’ as it has definitely provided a boost to the farm sector by focusing on the MSP which has resulted in an increase in the food subsidy outlay to Rs 1.69 lakh cr which is 58 percent of total subsidy in the Budget. But the stance of neutrality on fuel subsidy is significant at a time when crude oil prices are high. There is some indication that the market prices may be allowed to rise along with the international price movement of crude which can mean higher inflation for the country. Alternatively, the assumption could be that it expects prices to cool down thus obviating the need to support this market.
There are some interesting takeaways from the numbers that have been presented in the Budget. The first is that tax revenue is going to dominate in a big way which will be a vindication of both demonetisation and GST that has increased the number of taxpayers. The big assumption made here is that this will result in a higher collection multiple too which will keep the Budget number robust.
Second, the non-tax revenue has been assumed to move up very gently especially the dividend component which would imply that the transfer of surplus of RBI would be subdued. Should the RBI payout more this time compared with around Rs 30,000 cr last year, it would be a bonanza for the government.
Third, the government is evidently pepped up by the success of disinvestment and targeted Rs 80,000 crore which is higher than what was budgeted last year but still less than what finally occurred at around Rs 1 lakh crore. The clue to the success of this program would be the behaviour of the stock market. Implicit is the assumption that the market will be buoyant enough to allow the disinvestment department to expedite the issuances.
Fourth, the gross borrowing programme of the government is to be around Rs 6 lakh crore. It is interesting that this number has been maintained over the years, with the net borrowings at Rs 4.62 lakh crore. There is growing dependence on cash withdrawals which is quite high at over Rs 40,000 crore. Quite clearly the government is working to ensure that the market does not receive any shock and rates are not affected.
Fifth, the government has spoken about lowering the debt to GDP ratio to 40 percent. This is going to be a challenge because presently the ratio is 48 percent with outstanding liabilities at Rs 89.58 lakh crore and GDP at Rs 187.2 lakh crore (for FY19). The bank recap bonds have added considerably to this number and hence the government will have to work towards borrowing progressively smaller amounts in net terms to lower the ratio. This would be a tall task and take 4-5 years to achieve unless the denominator grows at a rapid pace, which does not look likely presently.
Given these implications and the data points mentioned here, how can the Budget be judged? It has followed the steady state giving emphasis on the social sectors and agriculture while contributing its bit to infrastructure. There have been no concessions given to the tax payers, except at the margin to senior citizens, nor has there been any compromise on subsidies. The rural economy continues to be the focus with the NREGA programme now at an all-time high of Rs 55,000 crore. It can be deduced that the government has highlighted its role in these two segments – social and infra (focus on roads, railways and rural) through the Budget.
For the private sector, it has worked on improving the environment for doing business and streamlining processes outside the Budget. The tax breaks have been provided to the SMEs, rather than large enterprises. This message from the Budget is that it would be directed more to areas where the private sector is not involved, which is probably the right way to go.
Updated Date: Feb 02, 2018 13:05 PM