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Monday, June 25, 2018

Budget 2018 explained: ‘Arun Jaitley’s last budget has no creative incrementalism on show’

Arun Jaitley's Union Budget 2018 EXPLAINED: Here's what our experts — National Editor, Policy, Shaji Vikraman; National Editor, Rural Affairs, Harish Damodaran; Associate Editors Anil Sasi and Sandeep Singh — think of Jaitley's budget. 

Written by Harish Damodaran , Shaji Vikraman , Anil Sasi , Reported by Sandeep Singh | New Delhi | Updated: February 2, 2018 7:32:32 am
Budget 2018: Join our team of experts for real-time analysis and opinion of Finance Minister Arun Jaitley's Union Budget 2018. Budget 2018: Our team of experts analyse Finance Minister Arun Jaitley’s Union Budget 2018.

Finance Minister Arun Jaitley has concluded presenting the Narendra Modi-led NDA government’s final full Union Budget. Here’s what our experts — National Editor, Policy, Shaji Vikraman; National Editor, Rural Affairs, Harish Damodaran; Associate Editors Anil Sasi and Sandeep Singh — think of Jaitley’s budget. If you would like to read real-time updates of what Arun Jaitley said in his Budget speech, click here.

Shaji Vikraman: The Economic Survey just the other day mentioned the need for a creative incrementalism. That wasn’t on offer today. It was much of incrementalism – maybe not a surprise given the track record over the last three years or more. Business is also about sentiment and animal spirits. There isn’t much to prompt many to go out there and  put in capital to work in the near term. Pity when world growth is on the rebound. Can’t help but worry about another lost year perhaps.

Can’t help but worry about another lost year perhaps.

Harish Damodaran: This is a budget that has probably not pleased anyone. Investors are unhappy about re-introduction of long-term capital gains on sales of equity and equity mutual fund units. Grandfathering of gains till January 31 will not help because investors will simply sell to book profits now in order to avoid paying the 10% rate on long-term capital gains. The corporate tax rate cut from 30 to 25% has been limited to companies with turnover of less than Rs 250 crore. The slippage in meeting fiscal deficit targets has not been welcomed either. 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.

There is lot of talk about the Budget being pro-farmer.

There is lot of talk about the Budget being pro-farmer. Jaitley has said farmers will receive MSPs that will provide 50% return over over production costs for crops, but how that is going to be done is not clear. Salaried middle class is also likely to be disappointed; this is a constituency that has backed the BJP most. There are no rate cuts or slab adjustments to reduce tax liability. Reintroduction of standard deduction is also unlikely to enthuse.

Anil Sasi: A big dampener for the stock market was a reintroduction of the Long Term Capital Gains tax on gains of more than Rs 1 lakh in the equity market at a rate of 10 per cent. All gains up to today, however, will be grandfathered. The budget also extended the cut in the corporate tax rate introduced last year from 30 per cent to 25 per cent to companies clocking a turnover of up to 250 crore from Rs 50 crore. A comprehensive package was also offered to the MSME sector, which bore the brunt of demonetisation and hurried implementation of the goods and services sector (GST).

The slippage in this year’s fiscal deficit target was despite the government having exceeded the disinvestment target for the current fiscal, with receipts of around Rs 1,00,000 crore against the targeted Rs 72,000 crore. A target of Rs 80,000 crore has been set for for FY19.

Sandeep Singh: While the budget did not offer anything to the salaried class by way of reduction in tax slab rates or an increase in exemption limit for the salaried class, the finance minister Arun Jaitley introduced long-term capital gains of 10 per cent on gains exceeding Rs 100,000. The announcement led to a sharp response in the markets as the Sensex at the Bombay Stock Exchange fell by up to 464 points immediately after the announcement. The finance minister, however, announced to not impose any tax on gains up to January 31, 2018. “However, all gains up to 31st January, 2018 will be grandfathered,” said Jaitley in his budget speech 2018-19.

Below is the real-time analysis of the Budget as Finance Minister Arun Jaitley read out his speech in the House

12. 51 pm: The Finance minister has concluded his budget speech.

12.50 pm: More bad news for the markets

Reintroduction of long term capital gains tax at 10%  is what the markets and investors feared and that’s happened. Negative for sentiment. – Shaji Vikraman. Sandeep Singh says the introduction of 10% long term capital gains tax on equity gains of over Rs 100,000 has already had an impact on market sentiment. Sensex falls over 450 points.

12. 43 pm: Some relief in your medical bills

The exemption on health insurance premium for senior citizens has been increased from Rs. 30,000 to Rs. 50,000 annually. This is useful given the rising cost of health care, writes Shaji Vikraman

12.40 pm: Bad news for the salaried class – no changes in your income tax

Another disappointment and bad news for consumer sentiment with no change in the income tax rates. The reintroduction of standard deduction after many years of Rs.40,000 a year may not really enthuse tax payers.

12. 39 pm: Elections forcing govt to stop short of announcing lower corporate tax to all?

Extension of  lower corporate tax of 25% to companies with a turnover of upto Rs.250 crore from the existing Rs.50 crore not extending to all corporates will put off investors and the market. It may have been held back because the govt may not want to be perceived as pro corporate in the run up to elections, writes Shaji Vikraman. Sandeep Singh says the move could benefit a large number of small and medium size companies and may boost investments.

12. 38 pm: How will rating agencies react? 

The revised deficit – a higher one – will be negative from a credibility point of view for rating agencies and investors after the rating upgrade last year from Moody’s, writes Shaji Vikraman.

12. 35 pm: Harish Damodaran – Arun Jaitely’s pro-farm move

A 100 per cent profit deduction to FPOs for five years. Ideally, there should be no taxes on any farm income whether individual or through group entities.

12. 30 pm: Shaji Vikraman – Breaching the fiscal deficit, markets will be unhappy 

This is what the markets and  economists will be unhappy about – breaching the fiscal deficit this fiscal – bond yields have quickly moved up. Ten year bond yield is now at 7.46 %. The revised estimate of 3.5 % for FY 18 is a negative though not unexpected with indications in the Economic Survey too. Sensex down,  rupee weakening and bond yields up. Not a good sign.

12. 25 pm: Anil Sasi weighs in on Jaitley’s airport expansion plan

Finance Minister announced expansion of airports capacity by five times to 1 billion trips per year. In November, Minister of State for Civil Aviation Jayant Sinha had spoken of the government’s plans to expand air connectivity by establishing around 100 airports in the country, doubling the current number, in 15 years at an estimated investment of ?4 lakh crore. 70 of these proposed 100 airports were said to be in places where no air connectivity is there so far, while the remaining will be expansion of existing facilities. Jaitley, in his Budget speech, also said that the Centre’s flagship regional connectivity scheme proposes to provide air connectivity 56 unserved airports and 37 unserved helipads going ahead.

12.22 pm: Great news for the markets!

For the first time divestment targets exceeded. For FY 18, it has topped Rs 1 lakh crore. And now targetted at Rs 80,000 crore. That should be eminently possible with the way markets are now. Investors likely to lap up these offerings in a market short of good quality stock – Shaji Vikraman writes. While the government has met the target for the first time in 2017-18, if the government meets its next year target, it should provide relief on the front of revenue shortfall on other fronts, says Sandeep Singh.

12.20 pm: Shaji Vikraman – Plan to merge three large state owned insurance firms a calculated move

Merging the three state-owned insurance firms – National Insurance, United India and Oriental Insurance is similar to creating consolidated state owned banks and oil companies. A large balance sheet should help leverage funds and should help in the context of the proposal to have the largest healthcare scheme in the world.

12. 17 pm: Sandeep Singh has an alert on the markets — it’s dipped to negative

Sensex slips into the negative for the first time since the start of budget speech. Down 35 points over Wednesday’s closing.

12.16 pm: Shaji Vikraman – Bad news for Indian investors in crypto-currencies 
Crackdown on crypto currencies – in line with global action with more governments and regulators acting on this front. Investors in India whose numbers are growing, too,  are set to take a hit.

12. 12 pm: Shaji Vikraman – Govt’s move on corporate bonds is a very good step

Plan to mandate large corporates to meet one fourth of their funding needs from the corporate bond market is a very good step. Forward looking if govt does not put pressure through its own borrowings.

That should reduce burden on India’s state owned banks which have to lend for large infra projects. And it will be in line with what’s happening globally where the bulk of this funding is through the bond markets. Implementing this, however, will be a big challenge. We need to see how it plays out.

Anil Sasi says the move should help widen the Indian bond market.

12.10 pm: Shaji Vikraman – With private investments yet to kick in, Jaitley’s allocation on roads, rail is right move

The huge capital expenditure on railways at Rs 1.48 lakh crore for FY 19 and on roads is positive in the current scenario where private investment is yet to kick in. 

Moreover, boosting airport capacity five fold is what the doctor ordered. India is one of the fastest growing markets in the airline industry.

12. 07 pm: Nothing to excite the markets so far, says Shaji Vikraman

The proposal to promote ten iconic tourism destinations should boost the hospitality and the airline industries.

12. 04 pm: Sandeep Singh: Higher disposable income to working women

Women contribution of EPF reduced to 8% from 12%. This will provide higher disposable income to working women.

11. 58 am: Anil Sasi – Govt to now tackle bad loans in SME sector

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 are focused on the big corporates.

11. 53 am: Shaji Vikraman – Banks have a reason to cheer!
Small and medium firms, hit hard after demonetisation, will now get a leg up with more funding support and with a plan to address the bad loans of banks in this sector. That’s positive for banks too.

11. 50 am: Harish Damodaran – Will Modi sarkar have to shell out huge premium subsidies?

The universal health cover seems to be the only significant new scheme so far. It’s funding would be interesting to see. The government will have to obviously shell out huge premium subsidy to make it viable for insurance companies.

11. 46 am: Massive health cover, a politically great move… but fiscal costs?

A massive health cover programme for 10 crore poor households has been announced, which Jaitley claims will be the largest in the world. The financial outlays are not clear yet. Politically a great move, but fiscal costs and how the programme will be funded yet to be known. Rs 5 lakh cover per family per year is huge.

Shaji Vikraman says: The just announced world’s largest healthcare scheme – may stoke worries given the funding requirements and spending it will call for. And the burden on perhaps India’s state owned insurance firms. Need to wait for the details.

11. 45 am: Sandeep Singh weighs in on how the markets are reacting

Markets hold their gains after first 30 mins of FM’s budget speech which focused mostly on increasing farm income and improving rural livelihood. Sensex up 200 points @ 36,164. Agriculture stocks gain sharply. More soon.

11. 40 am: Harish Damodaran says deficit targets will be met

The markets should be relieved that there are no new big social spending scheme announcements so far, which is remarkable in a pre-election year Budget. Clearly, it looks the deficit targets will be met.  

11.30 am: Shaji Vikraman – First political sop in the budget?

Jaitley has announced free gas connection to eight crore poor families – with higher allocation- this should yield political dividends in a year with several state polls including the crucial states of Karnataka and Rajasthan.

11.25 am: Harish Damodaran has a thumbs up for Jaitley

A good move: Favourable tax treatment for farmer producer companies. Details awaited; hopefully these entities will be exempted from tax. If income of farmers is exempt, the same should extend to farmer-owned organisations as well.

11.22 am: Harish Damodaran – What happened to Bhavantar Bhugtan Yojana scheme?

There was expectation of the budget extending the MP government’s Bhavantar Bhugtan Yojana scheme on a nationwide scale, which would involve the government paying the price difference between the MSP and ruling market prices. There seems to be no announcement of that, probably because of the financial implications.

11.20 am: Shaji Vikraman – FM Jaitley appears to be on track so far with the expected focus on the farm sector considering the agrarian distress in the country.

11.17 am: Harish Damodaran – Jaitley needs to clarify on implementation of Swaminathan formula

Jaitley has promised implementation of the Swaminathan formula of setting minimum support prices for crops to give farmers 50% return over production cost from the coming kharif season. How this will be done is not clear as yet.

11. 13 am: Shaji Vikraman – Achieving fiscal deficit targets possible?

Arun Jaitley says the economy is on track for GDP growth of  over 8% – which could mean achieving fiscal deficit targets very well possible. Let’s wait and watch.

11.10 am: Harish Damodaran – India’s first ‘Hinglish’ budget?

This seems to be the first ‘Hinglish budget’. Jaitley is consciously interspersing his speech in Hindi.

11.05 am: Shaji Vikraman – Jaitley begins his budget speech on a positive note – India fastest growing economy 

FM Jaitley starts off with a positive note – on how the Indian economy has reversed course and is now on track to be one of the fastest growing economies of the world -with structural reforms having been undertaken. Jaitley paints a picture of the economy rebounding and back on the high growth track and consolidating gains made so far.

11.00 am: Finance Minister Arun Jaitley has begun presenting his Budget for 2018.

10.50 am: Harish Damodaran on equity – Will long term capital gains be back?

Long term capital gains tax on equities and equity MF transactions is likely to be back. The markets may not take it adversely if this is coupled with removal of dividend distribution tax and reduction in the statutory corporate tax rate from 30% to 25%.  

10.45 am: Shaji Vikraman on fiscal targets – Markets believe defict targets will be met
Would be a huge surprise if the government doesn’t meet its fiscal target of 3.2 % of GDP in 2017-18 and 3% in the coming fiscal. The markets as of now seem to believe that the deficit targets will be met with the benchmark ten-year govt bond yield  today morning at 7.41% down from yesterday’s close of 7.44 %.   

Think there is a chance of a cut in corporate tax rate because of a more settled GST regime in the coming fiscal and also because of likely buoyancy in direct tax collections with growth expected to pick up in FY 19.

10.35 am: Sandeep Singh on the markets – It’s all in the green this morning
The markets opened in the green today. Half an hour before the FM starts his budget speech, the benchmark Sensex at the Bombay Stock Exchange was trading at 36,163, almost 200 points or 0.55 per cent over Wednesday’s closing.

10.30 am:  Anil Sasi, on Fiscal Deficit – Will it be lowered to 3%? Let’s find out
Less than an hour from now, as Finance Minister Arun Jaitley gears up to present its last full budget before general elections due in 2019, the one number that would be watched closely is whether the NDA Government sticks to its commitment on containing the fiscal deficit. The Centre’s fiscal deficit — the gap between its revenues and expenditures — has been budgeted at 3.2% of GDP for 2017-18 and is expected to be lowered to 3% in the Budget estimates for 2018-19.

We have also put together a route map — with five key points — to negotiate Jaitley’s budget speech, as well a look at what previous finance ministers did in their end-of-term Budgets. Click here for our entire reportage of Budget 2018.

We will try and eliminate much of the jargon in our analysis of the Budget, but feel free to read through our glossary of terms that Jaitley is likely to use in his speech.

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