Yours sincerely

The last budget of the present government will burnish Modi’s legacy as a compassionate reformer

It will be a mistake to dismiss the Union Budget 2018-19 as a balancing act, giving away with one hand and taking with the other. It is a carefully crafted document with lot of thought. With the focus on widening the tax base out of the way, the attention has turned to ensuring social equity. The economy that was inherited four years earlier was beset with systemic weaknesses. As a result of crony capitalism in the garb of socialism practiced over the last many years, 1% of the population is holding more than three-fourths of the nation’s wealth. Demonetization, a uniform indirect tax regime and legitimizing insolvency over supplying unlimited credit are efforts in repairing the damage. The transition to a formal economy has commenced:  indirect and indirect tax collections have increased so far. It would have been surprising if the improved fiscal position had not emboldened the government to address the income inequality gap. The latest budget should be considered another step in the direction, following the Housing for All, Ujjwala scheme of last-mile electricity access without cost and the Saubhagya mission of free LPG connection. The last two programs get more allocation to increase coverage. These initiatives are not doles that the previous regime was known to distribute, the most infamous being the rural employment guarantee scheme promising predetermined minimum wages not linked to productivity. The budget for the current fiscal had in fact increased the outlay, with a rider that the work resulted in the creation of tangible assets.

The beneficiaries of universal healthcare and he recipients of 1.5 times the cost of crop production can be counted just like the outcome of the flagship Swacch Bharat by the number of facilities created. The prime minister’s horizon is never short term as is evident from the recall of high value notes and the roll-out of the goods and services tax. Their impact will reverberate over the long term. The target for the affordable housing scheme is 2022, the 75^th year of independence. Second, their irreversible nature ensures that Narendra Modi’s legacy survives. Withdrawing ModiCare or diluting the formula to calculate the compensation for farm output cannot be without severe repercussions. Importantly, the social outreach is not by printing more money. Two-thirds of the world’s largest medical insurance cover will be financed by budget allocation as well as the 1% increase in cess on income tax and one-third of the cost will be borne by the states. There are chances of PSU divestment exceeding the target of Rs 80000 crore for the next year if the current year’s experience is any guide. No wonder the slippage in the fiscal deficit target is just 0.3 percentage points at a time when crude oil prices have shot up to US$ 70 a barrel as against an average of US $50 a barrel for nearly half of the current fiscal year and the strengthening rupee is hampering export realization.     

The two areas of concern are inflationary pressure due to the slightly higher fiscal deficit and taxing long-term capital gains from equity instruments. Usually, the markets are the best indicators of the soundness of the budget math. Bond prices slipped, with yields going over 7.50%. The volatile stock market benchmark appreciated more than 250 points intra-trade after the announcement of medical reimbursement up to Rs 5 lakh per year per poor family and closed marginally lower. The more-than-4% plunge of the Sensex and the Nifty in the next three days was largely due to the fear that the US Federal Reserve is set to ramp up rates as US bonds fetched near 3% yields with the tightening of the labor market. US stocks plunged even more steeply. There is acceptance, particularly after the cycle of drought and normal and excess rainfall, that unless government spends on social welfare, rural economy and infrastructure, Corporate India will not be  in a position to generate revenues and taxes. Equity investors have enjoyed spectacular returns over the last year due to global liquidity. Structural changes leave the domestic economy in a fine form to sprint ahead unencumbered. The 10% tax on gains above Rs 1 lakh after a year across the equity universe is balanced by the dividend distribution tax on equity schemes. After aggressively pursuing to bring foreign investors registered in Mauritius, Cyprus and Singapore in the tax net, it was essential to erase the image of India, with a marginal securities transaction tax, as a place to dump laundered money. Hiking the turnover limit to be eligible for a lower corporate tax of 25% to Rs 250 crore is a nod to the animal spirits of the small and medium enterprises.  Undoubtedly, the last full-fledged budget of the current dispensation shows Modi’s compassionate side after cracking down on illegal wealth and encouraging tax compliance.    

-Mohan Sule