Union Budget 2018-19 has a lot of significance, given that it was the first budget post the implementation of GST last year. Also expectations and excitement were running high to the run-up to the Budget due to the subdued economic growth, challenging fiscal condition, upcoming eight state elections this year and general election next year. With GST still settling down, the market was also anxious about the path of Fiscal Consolidation in an election year.
Against this backdrop, we believe that the Finance Minister has managed to create a reasonable balance by meeting populist demands as well as supporting economic growth by focusing on fiscal discipline and reforms. Thus, as expected, the budget focused on farmers, agriculture, rural development and infrastructure while making all attempts to follow a fiscal prudence path. It was a relief to note that the government did not succumb to demands for free cash incentives, farm loan waivers or universal basic income. Further, it remains to be seen if the announcement to keep MSP for all unannounced kharif crops at least at 1.5x of their production cost will lead to a significant growth in MSPs and/or thus higher inflation in 2018-19.
Fiscal Deficit - Headline numbers on expected lines
The government revised the fiscal deficit target for 2017-18 to 3.5% from its earlier target of 3.2%, and have pegged it at 3.3% for 2018-19. Although this is higher than the earlier targets, this is well within market expectations. However, there are at least three reasons why 2018-19 Union Budget numbers could see significant revisions. Firstly, an expected growth of 19% in indirect taxes implies a sharp jump in tax buoyancy and ~27% growth in monthly run-rate of GST collections, both of which appear ambitious. It is to be noted that gross taxes are budgeted to cross 12% of GDP for the first time ever. Secondly, fuel subsidy is unchanged at Rs25,000 crore, which poses a risk of Rs25,000-30,000 crore slippage. And thirdly, there are no allocations for the flagship National Health Protection Scheme, which coulmd cost as much as Rs50,000 crore. It is to be noted that capital spending is budgeted to fall to 1.6% of GDP in FY19 – the lowest in the past several years and lower than 1.8% in FY17.
Reintroduction of long-term capital gains tax (LTCG)
There were no sweet surprises for the salaried class, except reintroduction of standard deduction of Rs40,000 replacing medical and conveyance allowance. The Budget also disappointed investors by reintroducing long-term capital gains tax of 10% on sale of listed securities on gains of over Rs1 lakh, without allowing the benefit of indexation. Thankfully FM has introduced the grandfathering clause which in essence means that long-term capital gains on old purchases would be capped at the high of 31st January 2018. On the other hand, short term capital gains tax of 15% and securities transaction tax remains unchanged, India probably being the only country to keep LTCG along with STT. Long-term capital gains were made tax exempt in 2004.
Tax rate cut to 25% for MSMEs
In a positive move, FM proposed to cut the corporate income tax rate to 25% for companies with a turnover of upto Rs250 crore, which will help smaller companies and lead to greater investment and jobs creation. This will benefit 99% of all companies that file taxes, with MSMEs gaining the most. On the other hand, there were fewer indirect tax changes following the launch of GST.
Rural and Infrastructure – core focus of Budget
Our economy can only prosper if its core foundations – the rural economy, agriculture and infrastructure – are strengthened. The Budget of 2018 does exactly that with several propositions such as the National Health Protection Scheme, the world’s largest government-funded healthcare programme covering 10 crore poor and vulnerable families. It is a huge leap in transforming the slackening healthcare ecosystem of our country. However, the infrastructure, such as healthcare facilities and medical personnel, needs to be scaled up to cater to the ever-increasing medical needs of our population.
Target to double farm income by 2022
FM announced a bundle of farm-centric measures, including plans to raise the minimum support prices (MSP) for kharif crops to 1.5x the production cost and raising farm bank credit to Rs11 lakh crore in 2018-19. These steps are in keeping with the government’s promise to double farmer income by 2022. Moreover, an agricultural market and infra fund with a corpus of Rs2000 Crore will be set up to strengthen the market connectivity. Additionally, Rs10,000 crore each is to be set aside for Fisheries and Aquaculture Development Fund as well as for Animal Husbandry Infra Fund.
Push towards Rural Infra
In the push to rural segment, the government plans to give 8 crore women LPG connections, 4 crore poor people to get power connection, construct 2 crore toilets in next fiscal year under Swach Bharat Mission and further 50 lakh houses in urban areas. For creation of livelihood and infrastructure in rural areas, FM announced total allocation of Rs14.34 lakh crore for 2018-19, including extra-budgetary and non-budgetary resources of Rs11.98 lakh crore. This expenditure will create employment of 321 crore person days, 3.17 lakh km of rural roads, 51 lakh new rural houses, 1.88 crore toilets, and provide 1.75 crore new household electric connections besides boosting agricultural growth.
Housing for All
Meanwhile, the PMAY scheme launched in 2015 aimed at developing 51 lakhs houses during 2017-18 as well as in 2018-19, imply the construction of more than one crore houses exclusively in rural areas. This bodes well for the rural housing sector and the vision of ‘housing for all’ may just turn to reality in the forthcoming future. The government will also establish a dedicated Affordable Housing Fund in National Housing Bank, funded from priority sector lending shortfall and fully serviced bonds authorized by the Government of India.
Infrastructure development to continue at healthy pace
On the Infrastructure side, this government has been increasing its provisioning every year. Further, it has been monitoring its investment and focusing on implementation. The government announced an allocation of Rs5.97 lakh crore for 2018-19, up by over Rs1 lakh crore from the current fiscal, with all-time high allocation for railway and road sectors. The focus continued towards Roads, ports, railways and power. National Highways exceeding 9,000 km would be completed in 2018-19 while under the phase-I of the Bharatmala project, 35,000 km of highways would be constructed at an estimated cost of Rs5.35 lakh crore. Further 99 smart cities have been identified with an outlay of Rs2.04 lakh crore. In addition, over Rs1.48 lakh crore is to be allocated for railways in next fiscal, redevelopment of 600 major railway stations to be taken up, airport capacity to be hiked to handle 1 billion trips every year and regional air connectivity scheme to connect 56 unserved airports.
Conclusion - a fine balance between social and economic growth
Overall, we believe that the government has managed to do a fine balance with a right mix of focus on agriculture, rural economy, infrastructure and MSMEs. This would not only help in boosting the economic growth, but it would also help in improving consumption demand in the economy. The progression of monthly GST collections would have a significant bearing on budget mathematics given the assumed 19% growth in indirect tax collections. Some of the sectors which we believe would benefit from the budget are consumers (FMCG), 2-Wheelers, tractors, rural financing companies, EPC and construction, Capital goods, building material, consumer durables.