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Budget 2018: Jaitley addresses political concerns, but does not let public finances slip out of control

The commitment to budgetary discipline even before an election is what distinguished the Atal Bihari Vajpayee government from the two governments led by Manmohan Singh. However, economic prudence can be a political risk

opinion Updated: Feb 01, 2018 17:14 IST
Union Budget 2018,Budget 2018,budget
Finance minister Arun Jaitley speaks to the media as he enters to present the Union Budget, Parliament House, New Delhi, February 1(Mohd Zakir / HT Photo)

Finance ministers have to perform a high wire act on budget days — with the demands of important political interest groups pulling them to one side and the more prosaic task of balancing the books pulling them to the other side. The task is even more difficult as an important election approaches.

Arun Jaitley has done a good job in signalling political concerns while not letting public finances slip out of control. A spending spree when inflation has begun to rise would have been too risky over the medium term. The commitment to budgetary discipline even before an election is what distinguished the Atal Bihari Vajpayee government from the two governments led by Manmohan Singh. However, economic prudence can be a political risk.

This is the last budget of the Narendra Modi government before the next general elections. The finance minister has quite understandably made spending commitments to help rural voters in a time of agrarian distress. He has also flagged off an ambitious heath coverage scheme that could potentially offer insurance to four out of every 10 Indians. Health shocks are perhaps the single biggest reason why people slip back into poverty.

The tricky issue is how the Modi government plans to meet these spending commitments while promising to bring down the fiscal deficit next year. All budgetary arithmetic is based on brave assumptions. Four such key assumptions deserve attention.

First, nominal economic growth in the next financial year could be at its highest since 2014. This is because real output is expected to gain momentum while inflation is trending up. Higher nominal economic growth should help tax collections.

Second, tax revenues could grow at the fastest pace since the Modi government began its tenure. Income tax collections are budgeted to increase at nearly twice the growth rate of the underlying economy, as more tax evaders cough up their dues. And indirect taxes could do well as the economy recovers and the new goods and services tax (GST) system settles down.

Third, the increase in the overall spending budget has been kept under control despite the impression given in the budget speech. Let this sink in: Total government expenditure is budgeted to increase by only 10.1% in the next financial year. What is important is the shuffling within the overall spending budget. For example, the food subsidy bill will increase sharply (perhaps an early signal that minimum support prices will be hiked before the kharif season) while the budget for the Mahatma Gandhi National Rural Employment Guarantee Scheme has been frozen. The increase in the budgets for education and health are also nothing to write home about.

Fourth, there is some ambiguity about how important schemes such as ensuring that farmers get 1.5 times their costs will be funded. Will it be through higher support prices or through the initiatives taken by state governments such as Chhattisgarh and Telangana to protect farmer incomes? A tangential point is that the Modi government seems to have accepted the view that the quickest way to help farmers is to change the terms of trade in their favour, while increasing farm productivity will take more time. However, higher food prices could unsettle inflation expectations enough to make the Reserve Bank of India increase interest rates earlier than expected.

Infrastructure funding is another grey area. Money will be raised by leveraging the balance sheets of infrastructure organisations such as the National Infrastructure Investment Fund, National Highway Authorities of India and the Airports Authority of India. Purists may balk at the idea of a government leveraging its equity like a hedge fund, but the Modi government seems committed to this risky strategy.

Jaitley has done well to bite the bullet on taxing capital gains on financial assets held for more than one year. The idea that the profits of smaller enterprises should be taxed more lightly makes sense given the fact that their effective tax rates are higher than what large enterprises pay. But the finance minister has also done well to not make any radical changes in direct tax rates. The economy is just settling down after the disruptions of the shift to the GST. It does not need another disruption.

One final point. A pre-election budget is bound to appeal to important voter groups. It is interesting that a slew of measures announced benefit women — free gas connections, more closed toilets, a universal health scheme that could create jobs for women, provident fund concessions. Even the higher spending on agriculture benefits women more than men, given the recent feminisation of agriculture.

It would be a tall claim to say that the budget is oriented towards women — but some of the political signalling seems to have been targeted at a neglected constituency.

First Published: Feb 01, 2018 16:37 IST