Union Budget 2018: Budget shows that formalisation of the economy is yielding results
From a fiscal consolidation point of view, what is encouraging is the fact that the government remains focused on its mission of widening the tax netopinion Updated: Feb 01, 2018 20:37 IST
One of the key themes of the government’s reforms in the recent past has been greater formalisation of the economy. The budget suggests that these measures have started yielding results, in terms of widening of the tax net and buoyancy in direct tax revenues — enabling the government to use this fiscal dividend for larger social and infrastructure spend.
Agriculture and health are the thrust areas of this budget. Especially two announcements are remarkable and promise to be game changers. First is the enhancement of minimum support prices (MSP) for agricultural products to 150% of the cost of cultivation. Along with the institutional measures announced for development of agro markets and Operation Green to address price fluctuations in perishable crops, it will go a long way in realising the government’s mission of doubling the income of the farmers. At a time when the farm sector appears to be under a lot of stress, these are thoughtful measures.
The second big announcement is the National Health Protection Scheme that will provide a robust medical insurance to nearly 40% of India’s population. Sudden hospitalisation has been a major cause of pushing vulnerable sections of population back into poverty. The new scheme will tackle that vulnerability. While on this issue, initiatives towards improving the quality of education and the training of teachers are steps forward.
In the past two years, India’s growth performance has been falling short of our long-term growth potential — as the economy was adjusting to major structural reforms and because of some legacy issues like the overhang of NPAs. The recapitalisation of public sector banks and the rolling out of the Bankruptcy and Insolvency Code are already addressing the issue of NPAs.
Another big push to the infrastructure development through the budget — with a record provision of close to Rs 6 trillion that is almost 20% higher than in the previous year — is an apt growth-booster in the current macroeconomic environment. Allocations for roads, urban infrastructure and railways are expected to provide the much-needed multiplier effect. One would expect this to also crowd-in private capex as India Inc deleverages its balance sheets and capacity utilisation levels move up. The government will be contributing 12% EPF for new employees for all sectors for the next three years. This is a welcome move too, recognising the imperative of creation of formal sector jobs.
On the taxation front, the benefit of lower corporate tax rate of 25% has been extended to medium-scale companies, which is in line with the focus that this government has been attaching to the MSME sector. The FM has brought back long-term capital gains tax on equity investments. However, this has been done in a balanced manner, as the capital gains so far are being grandfathered.
The social and infrastructural spends have meant some slippage from the path of fiscal correction. The fiscal deficit for FY19 is budgeted at 3.3% of GDP, as opposed to the previous glide path target of 3%. Given the needs of the economy, the magnitude of the slippage appears to be within the acceptable limit. It should not disturb the ratings agencies. In fact, a fiscally hawkish stance could have proved to be counterproductive in the current context. From a fiscal consolidation point of view, what is encouraging is the fact that the government remains focused on its mission of widening the tax net.
It has also formally adopted the Fiscal Reform and Budget Management Committee’s target of bringing down the Centre’s debt to 40% of GDP. Apart from tax buoyancy, the government’s commitment to the disinvestment agenda will also help it move towards a sustainable path of fiscal consolidation. Overall, I believe that this budget has managed remarkably well the balance between fiscal discipline and its growth and the social agenda.
Kumar Mangalam Birla is chairman, Aditya Birla Group
The views expressed are personal