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Budget 2018: Everywhere But Nowhere?

The best way to summarize today’s budget is that ‘It is everywhere but nowhere’. Let’s map the key outcomes to the issues & concerns we raised in our pre-budget analysis. Feedback on structural concerns:

  1. Food for all: (For details, click here)
    1. 25%: India’s contribution to global hungry people count of 800 million. India score on Global Hunger Index is at 31.4 (just above Pakistan)
    2. 9.6%: %age of infants who receives an adequate diet (age between 6-23 months) is
    3. Budget outcome: INR 600 crore for nutritional support to all TB patients
  2. Financial Security: (For details, click here)
    1. 5%: Only 5% of an Indian household savings is in financial asset
    2. >50%: %age of unsecured debt in total liabilities. Does this explain the increasing case of farmer suicides at-least partially?
    3. Budget outcome: Kisan credit card to be extended to fisheries, animal husbandry farmers; Credit for agricultural activities: From 10 lakh cr to 11 lakh cr
  3. Health for all: (For details, click here)
    1. 21%: India’ contribution to the disease burden of the world population (WHO 2013) while contribution to total population is 17%. The greatest burden is with maternal, new born & child
    2. Lowest Rank: Among BRICS countries, India ranks lowest in under-5 mortality rate and children <5 who are stunted (severe/ moderate)
    3. Budget outcome: Health cover of up to 5 lakh per family per year for poor & vulnerable. National health protection scheme to cover 10 cr poor families; 24 new govt medical college & hospitals
  4. Education for all: (For details, click here)
    1. 60-70%: There are still multiple states where literacy rates are still so low
    2. Budget outcome: INR 1 lakh crore over 4 years for initiative for infra in education; Training for 50 lakh youth by 2020

On additional concerns that have come up as serious issues in last 2 years

  1. Significant drop in Consumer Sentiments: (For details, click here)
    1. The RBI Current Situation Index has dropped from high of 105 in Sep-2014 to 95.5 in Sep—017 with a negative outlook on general economic condition (-6.2). The primary driver for this has been demonetization coupled with lack of employment generation (perception on employment had net score of -13.6 in Sep-2017)
    2. Budget outcome: For senior citizens, no TDS on FD, Post Office interest up to INR 50,000; Long term capital gain tax at 10% introduced
  2. Lackluster performance of Industry:
    1. GVA growth for Industry as sector, is estimated to be in range of 2.9% (2017-18), compared to 11.7% in 2014-15. Subdued economic sentiment has surely impacted the sentiment of the corporate sector who have been mostly sighing from making major investments
    2. Budget Outcome: Benefit of reduced corporate rate of 25% to firms with 250 cr turnover
  3. Lack of credit available in the system: (For details, click here)
    1. The formal credit institutions and primarily the PSU banks are under severe stress due to high NPA in corporate sector. This has not only reduced available credit and made the banks more cautious
    2. Budget Outcome: Bank recap to help banks lend additional INR 5 lakh crores; FM urged regulators to consider moving from ‘AA’ to ‘A’ grade ratings. This will have relevance for all kinds of investment funds e.g. pension funds, mutual funds etc.
  4. Threat to national security:
    1. The threat of insurgency notwithstanding, the growing flexing of muscle by China and the Dokhlam incident has brought in focus on the need to strengthen the defense portfolio which also would mean greater allocation of fund towards defense
    2. Budget Outcome: Two defence industrial production corridors to be developed; Defence budget hiked by nearly 8% (7.81%)

The challenge that lies ahead that a government is looking at fiscal deficit 3-3.5% of GDP. April-October data of fiscal deficit was reported at 5.25 Trillion INR, equal to 96.1% of budget estimate. Despite the expected divestments lined up and additional direct tax revenue expected from GST, the fiscal deficit is not going to go away and hence the government will have to make a choice where it allocates its funds.

Budget Outcome:

  1. Fiscal deficit target kept at 3.3% higher than current year target of 3.2% but even this year the actual deficit is expected to be higher at 3.5%
  2. Disinvestment target of INR 80,000 crores for 2018-19
  3. Health cess increased from 3% to 4% to fund the National Health protection scheme.

Question is what were the options for the Government?

  1. Think long, increase allocation to the four key structural areas we highlighted initially. Pros: Improves the livelihood and the fundamental economic condition of the country (better health, better education, better livelihood are key long-term fundamentals that can transform the economy). Cons: Impact will come with significant lag and hence no perceptible changes can be seen in short term. 201718 economic survey righty notes Healthy and educated individuals, with the ability to adapt and learn on an ongoing basis, need to be the core of the future labor force
  2. Think 2019, dole out more, increase government expenditure. Populist budget (marginal reduction in tax brackets, sops for central government employees, tax reliefs for corporates etc.). Pros: Boost consumer confidence, increase spend, improve economic sentiment and spurt some growth in the economy. Cons: Will not address the key structural challenges of our economy and hence no perceptible change to be expected on overall economic fundamentals

Overall Budget Outcome: As we said, ‘Everywhere but nowhere’

  1. Salaried class again got a raw deal especially with reintroduction of tax on long term capital gains. The standard deduction of 40K INR fails to excite anyone, as it includes both travel & medical (currently capped at 15K + 800X12- 9.6K= ~25K yearly)
  2. Introduction of cess for health is another inefficiency being built in. To be populist, the grandeur of ‘National Health Protection’ is being introduced (it is needed though) but then at an additional cost to consumer. Even if we ignore it, the challenge lies in execution. In a damning report, CAG had highlighted how cess revenue has remained unutilized primarily for Education, Clean Energy and R&D. So common people ends up paying but then with no perceptible improvements for the target population. That means no economic improvement in real (refer to below figure)
  3. On the four structural issues; ‘Food for all’ looks to be dammed. This is based on assumption that JAM trinity improves the financial security, the new National Health Program works effectively and the 1 lakh crore gets spend judiciously for upgrading education infra
  4. There is no measure to boost consumer confidence and only MSME category of industry gets something to rejoice. Defense and the credit gets a half-hearted support only.

So, as we said, the GoI tried to balance between ‘Think Long’ and ‘Think 2019’ and in process seems to have ended doing nothing other than touching on everything. Pro poor/ farmer stance can be understood from the political compulsion but poor execution of the schemes may mean no real economic benefit for poor.

 

Source:

  1. http://www.businesstoday.in/magazine/focus/just-two-references-to-cesses-in-the-plan-for-2015-16/story/227958.html
  2. http://www.livemint.com/Money/3dHXfKaBJNQ5wyhYZYvtuO/Budget-2018-pushes-for-A-rated-bonds-for-investment.html
  3. https://www.msn.com/en-in/money/union-budget/highlights-of-union-budget-2018/ar-BBIxrBu?ocid=spartandhp
  4. Featured image from http://www.exchange4media.com/media-tv/union-budget-2018-broadcasters-desire-relief-in-entertainment-tax-gst-_88219.html
  5. https://randomwalks.in/2018/01/31/structural-reforms-will-given-miss-need-vs-action-budget-2018/

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