Finance Minister Arun Jaitley’s last full Budget before the Lok Sabha elections was predominantly a rural-sector budget with a clear political overtone: to reinforce the Narendra Modi government as one with pro-poor credentials and dissipate mounting pressure to address discontent over falling farm income and economic slowdown.
The slew of measures for agriculture and a new health insurance scheme for the poor come a month after the bruising Gujarat election results and ahead of the eight states that go to polls this year at the cost of a breach in the fiscal deficit target for 2017-18 and a stock market tax reintroduced after 12 years.
On the fiscal deficit, the budget estimate of 3.2 per cent of GDP for this year has been revised to 3.5 per cent — the second year in a row that the government has pushed back its stated fiscal commitment to push through its spending aimed at the Indian hinterland.
For the middle-class, investors and corporates, there was little to celebrate in the subtext of the budget that Jaitley clearly said “is aimed at the agri, rural, health, education, employment, MSME and infrastructure sectors of Indian economy” and is in keeping with the NDA Government’s pursuit of the “New India which we aspire to create”.
There was an additional cess amounting to one percentage point on all income tax payers and large companies. The big dampener for the stock market was the reintroduction of the Long Term Capital Gains (LTCG) tax, with a proposal to tax gains of more than Rs 1 lakh in the equity market at a rate of 10 per cent. All gains up to January 31, however, will be grandfathered.
The budget also extended the cut in the corporate tax rate from 30 per cent to 25 per cent to companies clocking a turnover of up to Rs 250 crore, up from Rs 50 crore. A comprehensive package was also directed at the MSME (micro small and medium enterprises) sector, which bore the brunt of demonetisation and hurried implementation of the goods and services tax. (GST).
Jaitley’s emphasis was clear. In the 35 minutes of his 105-minute speech during which he unveiled his agriculture and health schemes, there were 38 references to the word ‘agri,’ 39 mentions of the word “farm,” 35 references to “rural.” The proposals included a cluster-based models for horticulture and a hike in the minimum support price to one-and-a-half times the production cost for Kharif crops, a key demand of farmers.
Jaitley also announced what is among the world’s biggest government-funded healthcare schemes that will cover 50 crore people, even through the fineprint does not show specifics of the allocation for the scheme. Add to this schemes and allocations to kickstart jobs, more loans under MUDRA and an MSME sector package — the “farm livelihood” package, Jaitley said, had a cumulative allocation of Rs 14.34 lakh crore.
A big positive was the government exceeding the disinvestment target for the current fiscal — the first time since 1998-99 — with receipts of around Rs 100,000 crore against the targeted Rs 72,500 crore. A target of Rs 80,000 crore has been set for for FY19. The sharp surge in rural allocation notwithstanding, the increase of 10.1 per cent in government spending in the budget estimate of 2018-19 over the current year’s revised estimate marks the slowest rate of expenditure growth in each of the last three pre-election years — 2013-14, 2008-09 and 2003-04.
Stating that MSMEs are a major engine of growth and employment, the FM has said he will soon announce measures for tackling bad loans in the SME sector. This comes amid concerns that the initial set of cases taken up under the insolvency and bankruptcy code were overwhelmingly focused on the big corporates.
Besides, in a major boost to the start-up sector, Jaitley changed the taxation structure to expand the definition of “eligible business” to include firms engaged in “innovation, development or improvement of products or processes or services, or a scalable business model with a high potential of employment generation or wealth creation”. Alongside this, the proposals included the introduction of measures to support the VCF/Angel investors coupled with the recognition of hybrid instruments, which are expected to encourage the industry and boost the Government’s flagship Start-up India scheme.
Micro-entrepreneurs will benefit from the 23 percent growth in the flagship MUDRA target while the announcement of a dedicated fund for affordable housing could provide a thrust to the construction sector — one of the largest employers in the country. Market regulator SEBI has been entrusted to prod larger companies to raise one-fourth of their debt requirement from the corporate bond market, a move that should help widen the Indian bond market.
There was also some relief on MAT and carry forward of loss for companies facing insolvency proceedings under the IBC (Insolvency and Bankruptcy Code) process.
Senior citizens got some relief — Rs 50,000 per annum exemption for medical insurance under Sec 80D. Women working in the formal sector would get to take home higher wages, with the Employees Provident Fund and Miscellaneous Provisions Act, 1952 set to be amended to reduce women employees’ contribution to 8 per cent for first three years of their employment against existing rate of 12 per cent or 10 per cent, with no change in employers’ contribution. There were, however, no changes to I-T structure for individuals.
An announcement of a standard deduction of Rs 40,000 (from around Rs 34,000 allowed currently) for transport, medical reimbursement for salaried tax payers ended up as merely a token move for the rest of the salaried class who would be further hit by a 10 per cent tax on mutual fund dividends at the hands of the investor.
Stating that creating job opportunities has been at the core of the government’s policy-making, Jaitley announced that the Government will contribute 12 per cent of the wages of new employees in the EPF for all the sectors for next three years, with a salary cut-off limit of Rs 15,000 per month. In the budget for 2016-17, Jaitley had announced that the government would bear 8.33 per cent of the EPS (employee pension scheme) contribution for the first three years of employment, subject to this salary cut-off.
The facility of fixed term employment — announced for the textiles and leather sectors earlier — has now been extended to all sectors, which would offer a degree of flexibility for employers to lay-off workers on a seasonal basis. The excise duty on petrol and diesel was cut by Rs 2 per litre each on four product categories and replaced by an equivalent road and infrastructure cess of Rs 8 per litre. This essentially means the share of cess in the government’s tax collections goes up while the divisible pool that needs to be shared with states comes down as proceeds from cesses are not shared with states.
The equity markets, which rose during the initial farm announcements, dropped 464 points down at the time that budget speech was wrapped up before making a sharp recovery to finally close down marginally in highly volatile trade on Thursday.
A top government official played down the slippage in the fiscal deficit target as largely “statistical” arguing that GST revenues had been factored in for just 11 months. Under the new regime, the last date for filing of GST returns remains the 20th of the succeeding month even on the last day of the financial year, which means that the tax receipts during the current year was only for 11 months, excluding the indirect tax receipts for March. This spill over, according to government officials, will result in an estimated loss to the Central Government’s tax kitty to the tune of between Rs 35-36,000 crore.
The fiscal arithmetic seems to bank heavily on the stabilisation of GST revenues next fiscal, with Jaitley stating that the Government has revised its fiscal consolidation glide path and that the fiscal deficit target for 2018-19 was now pegged at 3.3 per cent of GDP against earlier target of 3 per cent of GDP.
While Jaitley has budgeted Rs 20,000 crore additional revenue from the LTCG, an earlier study by the Bombay Stock Exchange had concluded that taxes on long-term capital gains could generate Rs 49,000 crore per annum.
There was a 21 per cent increase in infrastructure spending, with Jaitley announcing the expansion of airport capacity by five times to 1 billion trips per year. In November, the Civil Aviation Ministry had announced plans to expand air connectivity by establishing around 100 airports in the country, doubling the current number in 15 years. Jaitley said the Centre’s flagship regional connectivity scheme proposes to provide air connectivity to 56 unserved airports and 37 unserved helipads going ahead.