Budget 2018: THE FInance minister was adversely positioned to present a landmark Budget. As the 2018 Budget comes against the backdrop of a difficult situation post-demonetisation, GST implementation, Gujarat election results and the upcoming general elections in 2019, it was expected that the Budget would be based upon the principle of inclusive growth and meeting the medium- and long-term objectives set by the government. Since this year is a transitional one regarding the taxation regime, the Budget 2018 should have accorded high importance to priority expenditure areas. As per my reading of the things, the Budget has given priority to agriculture, MSME, infrastructure and affordable housing. Reviving business confidence, private capex recovery and manufacturing — all have got lower attention.
The FM had an opportunity to reclaim fiscal credibility, work on the reform agenda, regain community confidence and secure sustainable long-term growth. However, I don’t think all of this has been achieved in this Budget. On the other hand, this is also a Budget where the government has considered setting up a truly welfare state — with a wide social security net for the common man with huge social spending in the areas of health, education, employment and sanitation. He has made some compromise on fiscal prudence. This was largely due to the GST rollout and its GST collections so far this year. The gross fiscal deficit is projected to be at 3.3% of GDP for 2018-19, vis-à-vis 3.5% in 2017-18. Growth in tax collections is being pegged at 17.5% (20% growth in GST, 20% growth in personal income tax and 10% growth in corporate tax); total expenditure growth has, however, been aggressive at `24.4 lakh crore with capital expenditure being pegged at `3 lakh crore with 9.9% growth.
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Key notable announcements were the increase in infrastructure spending of 20%, large allocation for farm crop procurement, rural infrastructure; government disinvestment target of `80,000 crore is a bit lower than expected, given the likely achievement of `1 trillion stake sales in FY18. The focus remained on the common man, especially the salaried class, making life slightly simpler for them and this included a number of proposals and deductions in taxable income. From the industry’s point of view, the Budget maintained the general rates of GST. It maintains tax rates for large corporates but increases their surcharge from 3% from 4%; minor changes in tax rates for NCLT cases facilitating the Insolvency and Bankruptcy Code.Sectorally, the Budget has positive implications for rural plays — agriculture (hike in MSP, food subsidy allocation increase of 20%), tyres (increase in custom duty), infrastructure (electrifying 4,000-km of railway lines in FY19, completing 9,000-km of highway construction in FY18, expanding Mumbai transport system and 99 Smart Cities), and health insurance. The Budget is neutral for banks and negative for NBFCs.
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For the capital markets, the negatives were the re-introduction of capital gains tax on dividend distribution tax and higher fiscal deficit figures leading to higher bond yields. Now, there will be 10% tax on long-term (one-year-plus) capital gains (more negative for mid-caps where HNIs were active; to be grandfathered with effect from January 31, 2018) and a 10% tax on MF distribution. The 3.3% fiscal deficit for FY19 (vs 3.5% in FY18e) was also a bit higher than expected — coupled with the off-budget financing, this will lead to even higher bond yields. This is clearly negative for bond markets, equities and NBFCs that rely on wholesale borrowing.