Budget 2019 is the mother of all election budgets, but rates and inflation may rise

This is the mother of all election budgets. A politician might give it nine marks out of 10, but an economist will give it no more than five out of 10. The Sensex initially skyrocketed in populist euphoria but ended with a healthy but not spectacular gain of 212 points.

The budget showers Rs 6,000 per year on each of 120 million small farm owners. This is far less comprehensive than the Rs 8,000 per acre given by the Telangana government to farmers, or the Odisha KALIA scheme giving Rs 10,000-12,500 to not only farm owners but also tenants, sharecroppers and landless workers. However, the central government scheme will supplement state handouts, proving icing on the cake. The first installment of Rs 2,000 per farm owner will be disbursed in the current fiscal year itself, boosting rural incomes and possibly the Bharatiya Janata Party’s election prospects.

The budget will fully rebate income tax on incomes of Rs 5 lakh per year, benefiting 30 million middle-class taxpayers including small businessmen who form the BJP’s core support base. Besides, specified investments up to Rs 1.5 lakh are taxfree, as also interest up to Rs 2 lakh on home loans. The standard deduction is up from Rs 40,000 to Rs 50,000, which will benefit 30 million salary earners. The threshold for levying tax deducted at source on term deposits is up from Rs 10,000 to Rs 40,000, and the TDS threshold for rental income is up from Rs 1.8 lakh to Rs 2.4 lakh.

A new pension scheme has been proposed to benefit at least 100 million unorganized laborers, providing an old-age pension of Rs 3,000 per month. The government will match contributions from workers, which will be as low as Rs 55 per month for 18-year-olds. Interim finance minister Piyush Goyal said the fiscal deficit would remain at 3.4% of GDP in FY19 as well as FY20, so India was on a “glide path” to the target of 3%. Sorry, but the glide seems sideways and not down. The original target date for achieving 3% was as long ago as 2008, 11 years back! On assuming office, the BJP promised to hit 3% by FY18. Clearly, populist pressures have made that impossible despite massive budgetary fudging revealed recently by the Comptroller and Auditor General. This showed massive off-budget borrowing to cloak the fiscal deficit, the chief culprit being overdue of more than Rs 1 lakh crore to the Food Corporation of India.

The states are in bad fiscal shape and the total public sector borrowing requirement is now estimated at 8.2% of GDP. This is undoubtedly raising interest rates, and crowding out productive private sector borrowing. The budget provides no cash for bank recapitalization. In effect, money will be printed to keep the deficit at the budgeted level, and that will stoke inflation.

While the fall in food and fuel prices have made the cost of living look benign, core inflation has already hit a worrying 5.4% and will tend to rise faster after this budget. That has already taken the bond yield to 7.4%, meaning industry faces very high real interest rates, damaging Make in India prospects. The BJP’s promise of lowering the corporate tax rate to 25% has not been fulfilled. Its spokesman says this may happen in the regular budget, but nobody knows which political party will rule then.

The revenue deficit, targeted to become zero long ago, remains at 2.2% of GDP. This means tax revenue is increasingly diverted from capital expenditure to giveaways. India is moving from investment-led to consumption-led growth, and this will hurt long-run growth. The new Fiscal Responsibility and Budget Management target of reducing the ratio of central debt to GDP to 40% by 2025 looks elusive. This may explain why the initial exuberance of the stock market moderated greatly.

The budget last year assumed Rs 80,000 crore from disinvestment, but the Air India fiasco means actuals till now are only Rs 35,000 crore. Nor is it clear how the figure will rise to Rs 90,000 crore next year. If this is achieved simply by Life Insurance Corporation and other public sector undertakings buying up the central government’s shares, that will be mere financial jugglery that evades the fiscal problem.

The budget does not specify what the Reserve Bank of India (RBI) will contribute as a dividend, but some sources say it will be Rs 68,000 crore. There has been a long debate on whether raiding the RBI’s capital reserves is warranted. Some economists including former chief economic adviser Arvind Subramanian have said the RBI has excess reserves that can indeed be used by the government but should be limited to below-the-line uses like recapitalizing banks and retiring government debt and must not finance a spending spree. In fact, it appears that the RBI dividend will be used almost entirely on farmer support. The budget provides no additional sums for bank recapitalization, yet three public sector banks are being graduated out of the prompt corrective action category and will restart lending. The official explanation is that the capital norms in India have been too tight, and have now been relaxed. This caused a fall in the Nifty Bank index.

The interim finance minister insisted that demonetization had been a success, adding heft to other antiblack money measures such as the Fugitive Economic Offenders Act and the Benami Transactions (Prohibition) Act. This had uncovered Rs 1.3 lakh crore of concealed income, led to the seizure and attachment of Rs 50,000 crore of assets, plus benami assets worth Rs 8,500 crore. As many as 338,000 shell companies had been detected and deregistered. Direct tax collections shot up 18% in FY18, and an additional 10.6 million people filed income tax returns for the first time. Maybe so, but does anybody believe black money is really on the run?


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