Budget 2018: Bonanza for farmers but not for the industry

The writing was on the wall even before Finance Minister (FM) Arun Jaitley rose to present his government’s last full budget before the next general elections in 2019 (or even earlier).

Given the distress in the farm sector in several parts of the country, especially in Prime Minister Narendra Modi’s home state of Gujarat, Budget 2018 was expected to be populist in its tenor with a bias towards improving farm income and overall rural development. Jaitley didn’t disappoint, even though it meant failure to stick to the government’s previously articulated fiscal deficit target for 2018-19.

To further drive home the point that his government cares for its rural and agrarian support base, Jaitley peppered parts of his speech that pertained to them in chaste Hindi. That the government did a commendable job of wooing farmers was also evident from the feeble noises of protest that emanated from the otherwise noisy opposition benches in Parliament.

Sumant Sinha, chairman and managing director of ReNew Power Ventures, says the budget was along expected lines with its well-placed emphasis on rural economy and agriculture, especially in a pre-election year. “There are many schemes to improve the quality of life of the common man,” says Sinha. “But the FM didn’t give investment figures for a lot of the programmes he announced. So it will have to be seen how the government finances these.”

Jaitley headlined his budget act by announcing a massive Rs 14.34 lakh crore expenditure for creation of livelihood and infrastructure in rural areas, including extra-budgetary and non-budgetary resources to the tune of Rs 11.98 lakh crore. This implies that the budgetary provision for this sector in 2018-19 will be around Rs 2.36 lakh crore, 26 percent higher than last year. The most noteworthy announcement for farmers came in the form of the government decision to offer them a minimum support price of 1.5 times the cost of their produces for crops harvested in the upcoming Kharif season.

The FM also took the route of investing in developing agrarian infrastructure through increased allocation for developing rural markets, bolstering food processing and organic farming and supporting fisheries and animal husbandry.

Union budgets are usually not too big on announcements in the health care and education space. In fact, stakeholders of these two sectors have frequently complained of being neglected in budgets over the years. Cognisant of this fact, Jaitley announced the largest-of-its-kind government-funded health care programme in the world through the National Health Protection Scheme, which will offer 10 crore families a cover of up to Rs 5 lakh per year for secondary and tertiary care hospitalisation.

The government’s estimated budgetary expenditure on health, education and social protection for 2018-19 was Rs 1.38 lakh crore, 13 percent higher over 2017-18. This includes several initiatives to overhaul the education infrastructure in the country by training teachers and establishing new academic institutions.

R Shankar Raman, chief financial officer of engineering conglomerate Larsen and Toubro, says the government had done a commendable job in trying to bridge the divide between urban and rural India and the “haves” and “have-nots”, through schemes to boost infrastructure across roads, railways, aviation, education and health care.  

Infrastructure creation has been another focus area for this government, considering the multiplier effect that it has on the economy through job creation. Jaitley budgeted an outlay of Rs 5.97 lakh crore towards the development of rural and urban infrastructure in 2018-19, up by 21 percent over 2017-18. The increased allocation is mostly towards capacity augmentation under existing projects in the rail, road and aviation sectors.

As has been the trend with the current government, measures to augment India’s physical infrastructure were complemented with a few announcements to support its digital infrastructure as well through plans such as the proposed creation five lakh Wi-Fi hotspots in rural areas at an investment of Rs 10,000 crore.

All this expenditure, of course, comes at a cost. Jaitley admitted that the fiscal deficit for 2017-18 was likely to be at 3.5 percent of GDP (versus the original target of 3.2 percent), and that it was expected to be at 3.3 percent of GDP in 2018-19 (versus the original target of 3 percent).

Suvodeep Rakshit, senior economist with Kotak Institutional Equities, says Budget 2018 appeared to be a balanced one. “The expenditure on agriculture and health care will benefit industry and society in the long term, as will the capex on roads and railways,” says Rakshit. “But there is some uncertainty about whether revenues from the Goods and Services Tax (GST)–post introduction of measures like e-way bill–will pan out as the government expects. My sense is there could be a further slippage of 10-20 basis points vis-à-vis the revised fiscal deficit target (of 3.3 percent) for FY19.”
 
Shankar Raman also says he was concerned since the government’s plans to finance some of these ambitious schemes would only be possible if the “big assumption regarding tax buoyancy comes true”. “The government doesn’t seem to have fully brought into the idea of disinvestment and is executing its disinvestment plans more at a tactical level, and not as part of a vision that it strongly believes in,” he says.  

Captains of industry like Adi Godrej, chairman of the Godrej Group, weren’t too impressed. Terming it as an “ordinary” budget, Godrej says it was disappointing that the corporate tax rate wasn’t reduced for all companies, as the finance minister had promised a few years back.

In Budget 2018, Jaitley reduced the corporate tax rate to 25 percent (from 30 percent earlier) for small and medium enterprises with a turnover of up to Rs 250 crore. The move, he said, will benefit 99 percent of Indian companies that file taxes.

“This will affect Indian industry’s competitiveness vis-à-vis other global markets where the rate of corporate taxation is much lower,” says Godrej.

Supporting Godrej, Shankar Raman says that, unlike smaller enterprises, it was actually the large corporates that had the balance sheet strength to invest in large capital expenditure projects that would create mass-scale employment.

In a bid to shore up revenues to keep the fiscal deficit in check, Jaitley also brought back long term capital gains tax on listed equities (held for more than a year) at the rate of 10 percent and increased the overall health care and education cess on income tax by a percentage point to 4 percent. “It is disappointing to see the tax on future long term capital gains on equities, especially since the government continues to charge other levies such as securities transaction tax as well,” says Godrej.
 
Sinha hopes that just as the erstwhile long term capital gains were being protected by the government through its so-called ‘grandfathering’ clause, gains from the sale of equity through initial public offerings of startups will also be protected and don’t end up getting disadvantaged.   

There is no question that the government and the FM mean well and have made ample provisions in the budget to improve the lives and livelihoods of those living in rural areas. But it is equally true that any democratically elected government always has one eye on elections in the second half of its tenure. The proof of the pudding is in the eating, and the elections in Rajasthan, Madhya Pradesh and Karnataka may be a good barometer to assess if Jaitley has done enough.