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Finance Minister Arun Jaitley presented the Union Budget for 2018-19 on Thursday while dealing with multiple pressures. The current fiscal year, 2017-18, was a year of severe disruptions, including especially the introduction of the goods and services tax or GST, and Jaitley pointed out that he had lost at least a month of indirect tax revenue as a consequence. General elections are fast approaching, and the agricultural sector needed support. Jaitley thus chose to deviate from the path of fiscal consolidation to which he had previously committed; the fiscal deficit for the ongoing year will be 3.5 per cent of gross domestic product (GDP), and for the coming year is targeted to be 3.3 per cent of GDP as opposed to the original target of 3 per cent. The sovereign bond market reacted sharply as a result, with 10-year government securities spiking up by 18 basis points to 7.61 per cent. Pressure is expected to grow on the Reserve Bank of India to increase interest rates in response to higher yields.
The finance minister also introduced a 10 per cent tax on long-term capital gains over Rs 100,000. Gains till January 31 were grandfathered in, and many retail investors would be kept out of the net, thanks to the floor before the new tax kicked in. The equity markets dropped sharply during and immediately after the FM’s speech, but partially made up their losses over the course of the day. The Sensex closed 58.36 points down at 35,906.
The focus of the Budget was on the farm sector and on less-advantaged groups such as the poor and senior citizens. In a big new initiative, the government said it would introduce health insurance for 500 million Indians called the National Health Protection Scheme. Under this scheme, 100 million vulnerable families would be provided health insurance cover of up to Rs 500,000 a year; Jaitley said it would be the “world’s largest health care programme”, and that it was progress towards universal health coverage, a campaign promise of the Bharatiya Janata Party in 2014. Senior citizens were provided tax sops, including a higher exemption on their interest income on deposits with banks and post offices and a higher deduction limit for health insurance and medical expenditure.
Jaitley said that, in 2018-19, Rs 14,340 billion would be spent on rural infrastructure, in order to connect farmers to markets. The allocation to food processing was doubled to Rs 14 billion; an “Operation Green” for horticulture, on the lines of “Operation Flood”, was announced; and the FM hinted at policy allowing more farmers to access the minimum support prices (MSPs) for their output than currently. He also promised the implementation of a campaign commitment by Prime Minister Narendra Modi that farmers would receive an MSP of 50 per cent over their costs.
The finance minister did not fully follow through on his earlier commitment to reduce corporate income tax to 25 per cent for all private corporations. Instead, the revenue cap for companies that could partake of the lower, 25 per cent, level of tax was raised to Rs 2.5 billion from Rs 0.5 billion. Jaitley said this would cover 99 per cent of companies. The direct tax system for individuals became more progressive, with a standard deduction of Rs 40,000 being introduced in lieu of medical and transport deductions; meanwhile, cess on income tax was increased from three to four per cent.
The Budget also included a lengthy list of increases in Customs duties. The finance minister indicated that these were in order to protect industries that were labour-intensive, and was part of the Make in India push.
The Budget demonstrated the government’s priority was building hard rather than soft infrastructure. Outlays for education and health did not increase greatly, in spite of the new health programme that was announced. Instead, expenditure on transport was supposed to increase from Rs 1,070 billion to Rs 1,340 billion; IEBR of Indian Railways was budgeted to go up from from Rs 800 billion to Rs 934.4 billion. Defence expenditure was budgeted to remain reasonably static at Rs 2,820 billion in the Budget Estimates for 2018-19, as compared to Rs 2,670 billion in the Revised Estimates for 2017-18. While the outlay on rural development was marginally higher in the Revised Estimates than the Budget Estimates — Rs 1,350 billion vs Rs 1,280 billion, reflecting the fact that Rs 550 billion was spent on the Mahatma Gandhi National Rural Employment Guarantee Scheme as opposed to a budgeted figure of Rs 480 billion, there was no major increase in the scheme budget this year. Urban development also saw largely static outlays.
Jaitley had pointed to lower than expected non-tax revenue, particularly thanks to the postponement of telecom spectrum auctions, as one reason for a difficult fiscal position in 2017-18. However, disinvestment came to the finance minister’s rescue, with Rs 1,000 billion coming from stake sales as opposed to a budgeted amount of Rs 725 billion. For the coming financial year, the finance minister plans to raise Rs 800 billion through disinvestment — less than what was raised in 2017-18, but ambitious by any other standard. The FM committed also to “strategic disinvestment” — in other words, privatisation — of various state-controlled companies including Air India.
The finance minister struck an optimistic note about future revenues, pointing out that in the current financial year, up till January 15, the growth in direct taxes was 18.7 per cent. This buoyancy, higher than in previous years, has helped the government not miss its fiscal deficit target by too much. He also argued that the “effective taxpayer base” — those who filed returns as well as those who did not but paid TDS or advance tax — increased from 64.7 million at the beginning of 2014-15 to 82.7 million at the end of 2016-17. This might suggest an easier fiscal situation going forward.