A Budget before the Elections
The budget presented by the Finance Minister (FM), Mr. Arun Jaitley, had all the elements of an election budget with greater focus on farmers, rural India and other social segments. Thus, while we cannot say that the budget managed to please all, at the same time, no bad news is good news for those skipped in this budget.
To begin with, the government's objective of doubling of farmer income by 2022 was on the FMs radar, as the budget unleashed its focus on the big rural theme, which was along expected lines. Thus, the government has proposed to keep the Minimum Support Price (MSP) for the all unannounced crops of Kharif at least at 1.5x of their production cost, a step aimed at giving a push to farmers' income. This proposal of the government has the potential to be inflationary in the current backdrop, which is already witnessing challenges from strengthening crude oil prices. Greater-than-expected upward pressure on inflation can threaten the interest rate cycle, which is currently in pause mode, and push it towards an upward trajectory, which could be detrimental for corporate / economic growth.
Amongst other measures, setting up of an Agri-Market Infrastructure Fund, doubling of allocation for the Ministry of Food Processing and focus on liberalization of agricommodities exports are all steps to aid the rural economy. Institutional credit target for the agriculture sector has been raised from Rs 10 lakh crore in FY18 to Rs 11 lakh crore for FY19. We believe that the government's focus over the next 4-6 quarters, in the run-up to the General Elections 2019 and several State Elections in between, would be on providing maximum opportunities in the rural areas by spending more on livelihood, agriculture and allied activities and construction of rural infrastructure.
Apart from rural, other key segments which the FM focused on in the budget were Education and Health. In fact, to step up investments in research and related infrastructure in premier educational institutions, including health institutions, the FM has proposed to launch a major initiative named ''Revitalising Infrastructure and Systems in Education (RISE) by 2022'' with a total investment of Rs 1 lakh crore in next 4 years through Higher Education Financing Agency (HEFA). Notably, more than Rs 30,000 crore has been earmarked to HEFA for FY19 as per the budget documents compared to Rs 250 crore in FY18.
In the Health sector, the government has proposed to launch a flagship National Health Protection Scheme to cover over 10 crore poor and vulnerable families (approximately 50 crore beneficiaries) providing coverage up to Rs 5 lakhs per family per year for secondary and tertiary care hospitalization. This is expected to be the world's largest government funded health care programme.
Various measures were also announced for another important segment of the Indian economy from the point of view of employment generation and contribution to economic growth – the Medium, Small and Micro Enterprises (MSMEs) segment. These included a 23% increase in lending target to Rs 3 lakh crore under the Pradhan Mantri Mudra Yojana and government's continued contribution towards EPF for all the sectors. Also, the benefit of 25% corporate tax rate, which was limited to companies with turnover of < Rs 50 crore, has been extended to companies with turnover of up to Rs 250 crore. This is expected to benefit the MSMEs, which account for ~99% of companies filing their tax returns, simultaneously providing them with some relief from the recent disruption caused by the implementation of GST.
On the Infrastructure front, the budget allocation has been hiked by ~22% for the Ministry of Railways and by ~52% (on a smaller base) for the Ministry of Civil Aviation. Also, considering that 'Housing for All' has been a key agenda of the current government, it got a further leg up in the budget, chiefly through the Pradhan Mantri Awas Yojana, which saw a nearly 5x jump in allocation from ~Rs 6,000 crore in FY18 to Rs 31,500 crore in FY19 (including Internal & External Budgetary Resources).
All of the above announcements are aimed at giving a push to the rural economy, which in turn will lend a helping hand to revive the economy from the current sub-7% growth.
Apart from the above, there were some other important announcements to be noted in the budget.
The fiscal deficit for FY18 has been pegged at 3.5%, which is a 30bps miss from the government's intended target of 3.2%. Moreover, the fiscal deficit target for FY19 has been fixed at 3.3%, a 30bps deviation from the FRBM target of 3%. However, considering that the importance of enhanced public spending cannot be compromised at a time when private capex is showing little signs of revival, the government has opted to lead and choose growth over fiscal prudence for now.
On the taxation front, not much relief was provided on either the corporate or the personal income tax fronts. But, considering the pressure on government fiscal and the preference accorded to rural, health, education, housing and infrastructure spending, coupled with the uncertainties w.r.t. revenue collection targets (post-GST implementation), the FM was left with little options. Thus, while on the corporate tax rate front, MSMEs have been put in a favourable position in terms of tax rate as discussed above, not much was in store on the personal income tax front. While Standard Deduction has been re-introduced at Rs 40,000 for the salaried class in lieu of the present exemptions w.r.t. transport allowance and miscellaneous medical expenses, the Senior Citizen category of tax payers received some attention. However, on the flip-side, cess on corporate and personal income tax has been increased by 1% to 4% now.
Thus, netnet, while these changes would have little positive impact on the tax paying middle-income group, it is nonetheless an attempt to aid the consumption recovery in the economy. However, the big announcement, which was the most discussed but least expected, became a reality in this budget. Long Term Capital Gains (LTCG) has been introduced at 10% without indexation in the budget, while maintaining status quo on Securities Transaction Tax (STT) prevalent on equities, which was a surprise.
However, notably, only long term capital gains exceeding Rs 1 lakh will be taxed and all gains up to January 31, 2018 will be grandfathered. The grandfathering clause prevented a sharp knee-jerk reaction in the market. Further, a 10% tax on distributed income by equity oriented Mutual Funds has also been proposed in the budget. While these announcements are a negative for domestic equities considering that the investor will have to pay a 10% tax hereafter from a zero tax earlier, notwithstanding the short-term impact, any adverse impact of these on the medium-tolong- term inflows into direct equities or mutual funds is unlikely. The Short Term Capital Gains (STCG) tax has been maintained at 15%.
In conclusion, it was another fine balancing act by the Finance Minister in the backdrop of a challenging business / economic environment and with an eye on the busy election calendar ahead. Also, in our view, the Finance Minister did bite the bullet by sacrificing fiscal prudence in the interim to spur economic growth, despite the fiscal constraints.
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