This is unabashedly a Budget for Bharat. It’s a good stance, as agriculture and the rural economy remain the foundation for India’s overall growth story. With two of three citizens living in villages, their income and consumption patterns are indeed critical to increasing demand for industry. At the beginning of his speech, Finance Minister Arun Jaitley said the Budget is focused on "consolidation and agriculture, infrastructure and healthcare”. He has walked that talk. In his last full-year Budget before the 2019 general elections and ahead of eight state elections this year, Mr Jaitley has made a slew of farm-focused announcements, raising the minimum support price to 1.5 times the production cost for Kharif crops, a key demand of distressed farmers. He also announced what is arguably the world's largest government-funded healthcare scheme and free gas connection for 80 million poor families. Senior citizens will also bless Mr Jaitley as they have got a bunch of goodies: Rs 50,000 per annum exemption for medical insurance under Sec 80D, etc is a big relief. All this is fine in an election-year Budget, though the omission of anything substantial for the middle class was surprising. The standard deduction of Rs 40,000 (from around Rs 34,000 now) allowed for transport, medical reimbursement for salaried tax payers can at best be termed a token gesture. The 10 per cent tax on mutual fund dividends at the hands of the investor will hit the middle class. India Inc’s big boys will be disappointed as expectations were running high that the 25 per cent corporate tax rate will be extended to them as well. The FM, however, stopped at only those with turnover of up to Rs 2.5 billion. What came as a big surprise was the 3.5 per cent fiscal deficit for FY18, even though a fiscal slippage was expected given the adverse lingering impact of demonetisation and patchy implementation of the goods and services tax. But very few expected the 3.5 per cent figure, particularly after the government reduced its additional borrowing from Rs 50,000 crore to Rs 20,000 crore.
Given the imperative of establishing the Budget’s credibility, the fiscal policy should ideally have targeted a reasonable fiscal consolidation. A new glide path for deficit reduction is not going to be good for bond markets. If yields go up, interest rates paid by firms and households too will rise. Much is, however, being made out of the decision to tax capital gains exceeding Rs 1 lakh without indexation benefit. This tax was inevitable and justified. Here’s why. Assuming similar taxation norms as with other assets, a study by the Bombay Stock Exchange indicated that taxes on long-term capital gains could generate Rs 49,000 crore per annum. Even if the amount accruing from the securities transaction tax is removed, the long-term capital gains tax would still generate over Rs 40,000 crore. Also, for some strange reasons, equity gets favourable tax treatment compared to other assets. For example, profits on real estate transactions for property owned for less than two years are added to the sellers’ annual income and charged at whatever income tax rate is applicable. The Budget has done well to announce a clear timeframe for the reintroduction of LTCG taxation so that there are no sudden shocks to the financial markets. Overall, it’s a fairly balanced economic document. The only concern is it looks broadly like an expenditure budget. One wonders where the additional money will come from.