Budget 2018: Presenting the Budget for FY19 in Parliament on Thursday, finance minister Arun Jaitley put the spotlight on rural India, agriculture and job creation, projected a jump in revenue buoyancy thanks primarily to a stabilising goods and services tax (GST), but still took a pause on fiscal consolidation. The slippage, though bigger than markets expected, wasn’t large enough to raise the hackles of rating firms — an analyst at Moody’s Investors Service, which announced a rating upgrade for India in November, said the Budget was in line with the country’s fiscal consolidation plan and that the “spending announced seemed to be on productive investments”. Jaitley also embraced an expert committee’s suggestion to bring down the Centre’s debt-to-GDP ratio to 40% (from around 49% now). Capital expenditure via the Budget has suffered in the current financial year and is budgeted to remain low in the next year as well, but support from public sector enterprises and other extra-budget public investments are what Jaitley seeks to employ to spur the economy.
Small companies, better equipped to invest now with the Budget according them assorted tax and other incentives, will help fast-track the return of private capex cycle. Profit-making companies, looking to acquire stressed assets under the Insolvency and Bankruptcy Code, could now make them tools for tax planning too, as the Budget reduced the latter’s potential minimum alternate tax liabilities and allowed both carry-forward of losses and depreciation even after ownership transfer.
Thanks to the rise in personal income tax buoyancy (2.11 in FY18 versus an average of 1.1 in the previous seven years) and GST, the Centre’s tax-to-GDP ratio is estimated to be 12.1% next year, besting the peak of 11.9% achieved in the economic-boom year of FY08. The Budget’s overall size is still not accelerating from the recent trend (10.1% growth budgeted for FY19 versus 12.3% in FY18). Jaitely, however, envisages a stepping up of investments in health, education, agriculture and infrastructure, although for many of the relevant schemes, the increase in outlays do not actually exceed the rate of the budget expansion and cumulative figures quoted by him include substantial off-budget funds.
The stock and bond markets reacted to the Narendra Modi government’s last full Budget with some trepidation. After a brief frenzy, the BSE Sensex recovered but closed 0.16% lower than the previous close; the yield for the benchmark 10-year government bond rose 17 basis points to 7.60%. Apart from worries over the fisc, the stock market’s behaviour was also impacted by the government’s decision to impose a 10% tax on long-term capital gains from listed equities, although this blow to investors was tempered by a generous grandfathering of all profits till January 31. The new impost, which will coexist with the securities transaction tax and 10% short-term capital gains tax, will hit both foreign portfolio investors and retail participants — the former no longer have recourse to the Singapore and Mauritius treaties that helped them avoid capital gains tax in India. While mutual funds have been gaining traction among investors in recent years, the Budget slapped a 10% tax on distributed income from equity-oriented mutual funds.
Jaitley chose to limit a much-anticipated corporate tax cut to smaller companies — the tax rate on income of companies with a turnover up to Rs 250 crore will be 25% while larger firms will still shell out 30% of their profits as tax. The relief will be available to 99% of the companies filing tax returns, most of which are in labour-intensive industries; large corporations, mostly capital-intensive and automated, have the facility to reduce their tax outgo to well under headline rate by using assorted incentives.
In the largesse to the farm sector, the government offered to keep minimum support prices for select kharif crops to be one and half times the “production cost”, a move that would help address rural distress and boost consumption but has the potential to fan inflation. Jaitely also announced a mammoth National Health Protection Scheme that could bring 50 crore people under health insurance cover — barring Rs 2,000 crore provided under the existing Rashtriya Swasthya Bima Yojana, the Budget has no outlay for this, though. In steps aimed at boosting job creation, the minister extended the benefit of government contributing 12% of employer’s share of employee’s provident fund for new employees to all sectors for the next three years — the scheme is currently limited to textiles and leather industries. More importantly, the facility of fixed-term employment, which allows textiles and leather units considerable labour market flexibility without harming workers’ interests, has been extended to all sectors.
While fiscal deficit for 2017-18 has been revised to 3.5% of gross domestic product (GDP) from 3.2% targeted, this deficit is seen at 3.3% for 2018-19, against 3% a glide path laid earlier demanded. (Had the Central Statistics Organisation-estimated nominal GDP estimate of Rs 166.3 lakh crore been used for the Budget instead of Rs 167.8 lakh crore, which is in sync with the Economic Survey’s projection, the fiscal deficit for the current fiscal could have been higher at 3.58% of GDP.)
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The Centre’s net market borrowings are projected to be around Rs 4 lakh crore in FY19, down from Rs 4.8 lakh crore in 2018-17, which was up a third from the initial estimate. It has, however, cut the securities against small savings, a costlier way of bridging the deficit — Rs 75,000 crore is to mobilised via this route in FY19, against over Rs 1 lakh crore in the current year. The slippage is an even higher 70 basis points on the revenue deficit target for the current financial year (2.6% versus 1.9%), but this leeway was not enough to generate any additional growth relative to GDP in the Budget’s size and accelerate budgetary spending, least of all capex. However, PSUs, which have helped in a big way to sustain pubic spending in FY18 will critically support public expenditure in FY19 as well. Capex by PSUs was a huge Rs 4.8 lakh crore in FY18, up from Rs 3.9 lakh crore projected — and according to the plan, these firms will invest another Rs 4.8 lakh crore next year. FY19 Budget is estimated at 13% of the GDP, while the the corresponding figure for the previous five years was 13.3%.
Budgetary capital expenditure in FY18, despite the brisk pace in the initial months — up to November, 60% of the targeted Rs 3.1 lakh crore was spent — is being reined in to avoid a bigger fiscal slippage. Revised to Rs 2.7 lakh crore, capital expenditure through the Budget will be just 12.3% of total budget against 14.4% originally budgeted, and for FY19 too, it will be just 12.2% of the year’s budget. Revenue expenditure, however, is not showing any signs of moderation, as food subsidy is estimated to rise 21% to Rs 1.69 lakh crore in FY19 and fertiliser subsidy, by 8% to Rs 70,000 crore.
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The Centre has targeted a 16.6% increase in tax receipts next year, against 15.3% in the current fiscal. GST, which will be the single largest tax revenue source for the Centre in FY19, accounting for 23% of receipts, is estimated to garner Rs 7.4 lakh crore for it in the next fiscal, which means the combined receipts from this tax for the Centre and states in the year will be double that amount, or Rs 1.25 lakh crore a month. Although it is certain that GST revenues will pick up as this comprehensive indirect tax — which is widening the tax base and reducing evasion — stabilises, the estimate seems to be a bit ambitious, given that average monthly GST collections so far have been around Rs 88,000 crore.
Among tax proposals, long-term capital gains tax on listed equities will mobilise a substantial Rs 20,000 crore revenue and the hike in health and education cesses will yield Rs 11,000 crore. These revenue gains will be partly offset by Rs 7,000 crore forgone on the tax cuts for larger sections for corporate India and Rs 8,000 crore lost on introduction of standard deduction of Rs 40,000 for individual taxpayers.
Even though the Centre has crossed the disinvestment target for the current year — against a budgeted Rs 72,500 crore, Rs 1 lakh crore is set to be achieved — Jaitely has set the target for next year at Rs 80,000 crore. If the tax collections fall short and the spending needs to accelerated in the event of a prolonged stagnation in private investments, sale of stakes in firms could come in handy for the Centre next year too.