The only summary of Union Budget 2018-2019 you need to read

Let’s say you are a salaried employee. Consider this possibility for 2018-19 – You open a small firm in your senior citizen father’s name, which starts providing professional consulting service to your employer doing through you doing exactly what you do today. You then become an underpaid employee in this firm and claim the ₹5 lakh a year medical insurance benefit from the government, while your father pays tax as a notional imputed tax as a small business firm, after covering your expenses as legitimate business expenses. This is perhaps the only scenario in which you will be paying less tax than the current year.

In every other case, the salaried employee is going to be worse off in 2018-19 than today. While the salaried urban voter perhaps considers savings, cash-in-hand, and such economic metrics as one of the key inputs to her vote, it remains to be seen if the budget translates in sufficient personal gains for the non-salaried voters to retain or convert them as voters. The government is betting on this trade off via a budget which was widely expected to be political in nature.

The budget is still very much political except for the traditional voters and vocal supporters of the Bharatiya Janata Party (BJP) on social media. Many of the nearly 2 crore salaried individuals – translating to about 8 crore household members – will likely not vote out of habit or may continue to support the party irrespective of personal disappointments. Specifically, there are two disappointments – the personal income tax structure remains unchanged, with standard deduction now higher, but subsuming transport and medical allowances. Secondly, the securities markets taxes – the 10% long term capital gains (LTCG) tax over ₹1 lakh and the tax on dividend distribution by equity mutual funds – seem harsh.

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These provisions have three problems. First, the standard deduction limit raise will mean an extra saving of about ₹6,000 a year. Although the LTCGs have been grandfathered, the future trade off point will be ₹60,000 of LTCG per year, at which a salaried person investing in securities markets will start paying more taxes. Second, the taxes come in just as the financialization in the Indian markets was increasing at a record pace – some of it may potentially slow down. And lastly, the initial estimates suggest an upside of ₹20,000 crores from these LTCG measures – that’s not a very big amount for the government to create such poor optics for its most vocal support base.

The disappointment of the pro-BJP meme-making class aside, the budget does four important things.

First, there is a big focus on education, health, and social indicators. An increase of almost ₹15,000 crores over the previous year, the 2018-19 budget of ₹153,000 crores is a big jump. By 2022, the government wants to create an Eklavya Vidyalaya in every block which has a minimum 50% population from scheduled tribes. Providing Ph.D. scholarships to 1,000 students at Indian Institutes of Technology (IITs) and Indian Institute of Science (IISc) is a great idea to promote research and development. The 150,000 centers for health and wellness to be created under Ayushman Bharat program are again a step in the right direction. These centers will provide the primary and parts of secondary healthcare focusing on non-communicable diseases, maternity benefits, diagnostics, and deliver cheap medicines. And the biggest step of them all is the new Modicare – ₹5 lakh insurance cover per family, a significant increase from the current ₹30,000 cover under the Rashtriya Swastha Bima Yojana. Currently proposed for 10 crore poor and vulnerable families, leading to more than 40 crore potential beneficiaries, this will be the largest healthcare program in the world! The government has also made the intention of providing universal healthcare clear – so we are moving in the direction of a single payer model over time for basic healthcare delivery. There’s also a provision to create 24 new medical colleges and hospitals.

Second, the budgetary and non-budgetary support for infrastructure spending will be up from ₹4.94 lakh crore to ₹5.97 lakh crore. There were no surprises on the infrastructure side, as most programs across roads, railways, ports, waterways, and airports are already underway. One significant announcement was the intent to link all rural habitations to a high school, a hospital, and a grameen agriculture market (GAM) under the revamped Pradhan Mantri Gram Sadak Yojana. There will be a provision for 3 crore more LPG connections under Ujjwala, 51 lakh rural and 37 lakh urban houses under Pradhan Mantri Awas Yojana, 1.88 crore new toilets, and more than 3 lakh kms of new rural roads. The government will create 5 lakh rural wi-fi hotspots now that the BharatNet project has scaled up connecting 2.5 lakh gram panchayats. Almost ₹30,000 crores will be invested in the Mumbai and Bengaluru suburban rail networks – that’s a big commitment for urban transport. Much of the Mumbai plans were already announced earlier, but Bengaluru will be keen to know specific projects under this announcement.

Third, there is a lot of focus on job creation based on the learning from the textile sector gains made last year. The Micro, Small, and Medium Enterprises (MSMEs) have practically all been brought under the 25% tax bracket. The government plans to connect the Trade Receivables Discounting System (TReDS) with the Goods and Services Tax (GST) network, which will promote flow based credit for these enterprises. Fixed term employment, currently meant for the textile sector, is being extended to all sectors – a labour reform in disguise of the Finance Bill. The footwear and leather industries will get benefits of deduction on employee emoluments at par with the textile industry. The government will cover 12% of the EPFO contributions for new employees in small industries for a fixed period. New women employees will contribute 8% to the EPFO, while the employer contribution will remain the same. There’s also the ₹7,000 crore budget for the textile sector – the star of the second half of 2017 Indian industrial revival. And finally, the MUDRA loan refinance facility will see increased outlay, retaining the thrust on promoting small entrepreneurship.

Fourth, the government is betting big on agriculture. Starting next kharif season, the government is now promising a 1.5 times the input costs as fair remuneration for the farmers in the form of minimum support prices (MSPs). There’s also a provision for connecting 22,000 GAMs with the national agriculture market, for better market access and increased aggregation and lot size rationalization. Finance Minister Jaitley also made an interesting comment about such GAMs bypassing the local Agriculture Produce and Marketing Committees (APMCs) and ability to sell across the country. This comment should be tracked closely as it can be another big stealth reform if the hold of APMCs in the agriculture marketing is reduced. Jaitley also spoke about better import and export management, investments in agriculture logistics, and use of futures and options for agri-commodities. All of these are important measures, but the details of what and how are more critical than the announcements themselves. There are specific provisions for a host of agriculture value chain areas like organic farming, bamboo cultivation, fisheries, animal husbandry, and food processing. Jaitley mention an Operation Green dealing with commonly used perishables which will be managed better through agri-logistics investments. All in all, a significant part of the budget speech was devoted to agriculture and rural India – how the government translates these announcements into results remains to be seen.

For the international investors, the Finance Ministers made the right noises. He intends to keep the fiscal deficit at 3.3% of the GDP. He also wants the central government borrowing limited to 40% of the GDP, accepting it a key operational target. The expenditure of ₹21.57 lakh crore net of GST compensation to the states is not very high compared to the budget estimates. Overall, while the current year fiscal deficit was at 3.5%, the expectations around a revised but controlled glide path for the metric seem to have been well-managed. Jaitley also threw in announcements around consolidation and listing of government insurance firms and a commitment to complete the Air India divestment by June, enough to keep the institutional investors happy about the general reform trajectory.

Ultimately, the government will have to demonstrate how it implements the various announcements. Especially in the agriculture sector, the government has to ensure that there are no pies left hanging in the sky. Currently there are 23 crops on which the central government declares MSPs. When the government says ‘input costs’, does it intend to use the input costs of actual physical inputs, or also add the imputed costs of farmer labour, opportunity cost of not renting the land, and interest paid by the farmers? If it is indeed the latter, how will the government manage the increased food inflation in an election year? Is the government planning for better supply side logistics to address this problem and if yes, how? What happens if the market prices are below MSP – will NITI Aayog work on a price difference program (akin to the Bhavantar Bhugtan Yojana in Madhya Pradesh)? None of these questions were answered in the budget today. In fact, some of the issues were not even identified in the main budget speech, so there is some work to be done here.

Similar is the case for the 22,000 GAMs that Jaitley spoke about. Agriculture is a concurrent subject, so it is not clear how the central government will identify and empower these GAMs. Most states have not implemented the model APMC act, so letting GAMs bypass or compete with APMCs will run into rough political weather in most states, where APMCs are instruments of local political patronage.

Even for Modicare, what was not stated was how the government will fund the premiums. Today the Rashtriya Swastha Bima Yojana has a ₹365 a year premium for coverage of ₹30,000. With near 17-fold increase in coverage, where will the cost of premiums come from? Will these be borne by the beneficiaries in some ratio? Or will the state governments be asked to cover past of these costs? The actual program design will have to be studied carefully to understand the fine print.

Finally, there are the usual irritants to deal with, which with remarkable continuity manifest themselves as duty rejig. The basic and additional excise duties on petrol and diesel have been replaced with a new road cess. This basically tells the state governments to either control their value added tax (VAT) on petroleum products or let these products flow into the GST net. The central government will no longer have much room to cut the excise duties when the petrol prices head north of ₹80 per liter. Components of mobile phones and other electronics will be costlier now with greater import duties. This is ostensibly to promote ‘Make In India’. In reality, no major factories working end to end may come up in the country in the short term, but the prices of mobile phones – the most aspirational symbol of an upwardly mobile society – will go up on April 1, 2018 pronto.

If this were 2015 or 2016, this budget would be alright. But given this is the last full budget before the Lok Sabha election, the budget comes across as neither populist nor political enough. And that’s strange going into the 2019 polls. The budget puts even more pressure on Narendra Modi, the campaigner, to work harder as the election cycle kicks off with Karnataka in a couple of months time.

Overall budget rating – Good in aspiration, poor in optics, and far too much left for the rest of the year to translate the budget into intent!

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