India Budget 2018
In the words of the Finance Minister Mr. Arun Jaitley-the focus of the budget is ‘ease of living’. Given that this is the last full budget of the government before we head into an election it would be easy to be cycnical about the intent of the government. But that fact remains that as we continue our transition into a market based economy, it is the role of the government to enable equality of opportunity for every citizen of the country and to provide a modicum of support and social security to those on the margins of the society or who have not been able to participate in the growth of the economy.
In that context the focus on providing housing, sanitation, electricity, cooking fuel, health insurance, social security, financial inclusion and education to the marginalized and economically weaker sections is welcome. Of course the responsibility of the government has to extend beyond announcements and outlays. What we need is efficient implementation of the schemes and achievement of the desired outcomes. That said the direction of the fiscal math is rather encouraging though the fine print of the fiscal math needs further analysis. Given the background of what the economy has been through over the past 18 months – demonetization and GST transition – the fiscal slippage this year is understandable. From this starting point the government is targeting a reduction in the fiscal deficit next year and not an increase as might have been our worst fears heading into an election.
From the perspective of the capital markets the grandfathering of historical gains should assuage concerns about the imposition having a retrospective impact. It is disappointing that STT continues to be applicable given that short and long term gains are now taxable. The post-tax long term returns from equity would remain attractive compared to other asset classes. This imposition of 10% tax does not in our view alter the long term attractiveness of the asset class
The commitment to fiscal consolidation has led to disappointing trends in capex as the government likely squeezed spending. The estimate of Rs3 lakh crore for FY19 is at first glance a growth of 10% over the revised estimate for FY18. But the revised estimate for FY18 is nearly 10% lower than the original budget estimate for FY18.
The government has decided to adopt the principle of providing a 50% mark up over cost in arriving at MSP for agricultural produce. This is line with a promise in 2014 election manifesto. This is part of larger set of measures it has announced in the budget as part of its commitment to double farm incomes by 2022. This could cause food inflation to move higher thereby impacting CPI and RBI policy stance going forward. However do note that even as of today the MSP is set keeping in mind a markup over cost, so this is not very disruptive compared to the existing procedure. However this requires monitoring and this could be the cause of the nearly 20% increase in food subsidy estimated in the Budget for FY19 (Rs1.69lakh crore vs Rs1.40 lakh crore). In general the RBI would likely remain more vigilant on inflation given the overall tone of the budget.
The budget estimates gross tax revenue to grow at 16.7% in FY19 vs 13% in FY18. Clearly a recovery is baked into this estimate. Also Tax/GDP ratio is estimated to rise to 13.4% vs 11.7% in FY 18 which could be slightly optimistic. Disinvestment is estimated slightly lower than last year but in FY18 a significant contribution was made to the disinvestment proceeds by the ONGC –HPCL transaction.
With the budget out of the way the focus returns to macro stability, the ongoing growth upturn and valuations.