Governance Now Visionary Talks Series

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Reading the budget for fine print and asterisk marks

DS Saksena | February 19, 2018


#Budget 2018   #Modicare   #Arun Jaitley   #Economy   #Income Tax  
The general budget 2018-19 documents brought to the Parliament House premises, in New Delhi on February 1
The general budget 2018-19 documents brought to the Parliament House premises, in New Delhi on February 1

Budget 2018, forecast to be a “please all” budget, has come out as a “disappoint all” budget. The public is looking askance at a budget that gives with one hand but takes away with both, the Sensex has gone into a tailspin and the pink papers are issuing dire warnings.

The government, on its part, is finding it hard to explain the contradictions in the budget. A scheme, quickly christened as Modicare (on lines of Obamacare), to provide health insurance benefits of up to Rs 5 lakh to 10 crore families has been announced with a budget allocation of a paltry Rs 2,000 crore. The finance minister has announced that agricultural produce would be priced 50 percent above the cost of cultivation, which has not been defined. Despite devoting most of his budget speech to rural issues and new schemes related thereto, the FM increased the allocation on central schemes from Rs 9.45 lakh crore to only Rs 10.15 lakh crore (increase of 7.45%) while aggregate budget expenditure has increased from Rs 21.47 lakh crore to Rs 24.42 lakh crore, that is, an increase of 13.74 percent, which would indicate that other sectors have benefited more than the rural sector. The budget document does not show the grand schemes announced in the current budget as stand-alone schemes – it appears that these schemes would probably be included in the existing broad-based schemes on health and agriculture.

The imposition of 10 percent tax on share sales has disrupted the share market. One of the tangible benefits of demonetisation was a huge inflow of money in shares via mutual funds, which is bound to diminish should the trend of falling share prices continue. Indeed, it would have been better, if the benefit of indexation was given on share sales. People would then have preferred to hold shares as long-term investments – an agreeable proposition for all concerned. Similarly, a higher cap on 80C savings would have partially solved the government’s perennial fund flow problem. I strongly feel that to offset the effects of inflation and to keep real disposable income at earlier levels, income-tax slabs should have been revised upwards. On the other hand, the government has proposed an increase in tax surcharge from 3 percent to 4 percent, which will be a pinprick for everyone.  

Except for the aforementioned provision, subjecting share sales to long term capital gains tax, the direct tax provisions in the budget are mostly corrective in nature. Senior citizens, particularly retired government employees, have benefited. They will not be taxed on interest up to Rs 50,000 (earlier Rs 10,000) and will get a standard deduction of Rs 40,000. Existing employees will not gain much because the proposed standard deduction would subsume tax-free transport and medical allowances of an almost equal amount and the interest concession is meant only for senior citizens.

Customs duty on certain products, such as mobile phones and televisions, sunglasses, cigarette lighters, toys, bus and truck tyres, select furniture, imitation jewellery and watches has been increased. Customs duty on crude edible vegetable oils like groundnut oil, safflower seed oil has also been increased from 12.5 percent to 30 percent; and duty on refined edible vegetable oil is now 35 percent as against the earlier 20 percent. Additionally, a social welfare surcharge of 10 percent has been imposed on imported goods. The government has stated that much of the increase in customs duties is to promote ‘Make in India’ but the exercise seems to have been undertaken more with a view to garner badly needed finances.

Indeed, no one would envy the predicament of the FM. At a time when the resource position is exceptionally tight and there is little room for manoeuvre, everyone is asking for a discount or freebie. Obviously, the FM can pay Peter only after robbing Paul. Added to this is his compulsion to keep everyone happy in the prelude to the 2019 elections. No wonder, his budget speech was exceptionally cheerful and the FM did not once refer to the red flags so assiduously raised in the economic survey. Probably, the most glaring anomaly is that the economic survey had predicted a downturn of 25 percent in agricultural income while Arun Jaitley cheerfully promised an increase of 100 percent in agricultural income by 2022. This anomaly needs to be resolved, more so because the current budget labels itself as a farmer-friendly budget.

The economic survey listed a number of things which had to be attended to in the coming year namely; stabilisation of GST to facilitate easier compliance, removal of uncertainty for exporters, and expansion of the GST tax base; privatisation of Air-India; and addressing threats to macroeconomic stability, notably from persistently high oil prices, and to provide for sharp, disruptive corrections to elevated asset prices. There is no mention of these constraints in the budget.

However, there is nothing unusual in the divergence in the tone and tenor of the economic survey and the budget. Reacting to the economic survey, released just before the budget, Bibek Debroy, the chief of the economic advisory council to the prime minister, had stated that it would not provide any clue to the budget. Still, it is a pity that the scholarship and research of the economic survey is nowhere reflected in the budget. It would appear that the budget is aimed only at increasing the feel good factor of the poor and middle class without a thought to long-term planning. Disruption of the symbiotic relationship between the budget and the economic survey would have one wonder on the need of having the latter at all.        

In a welcome change, the budget this year has only 50 clauses and runs into 36 pages as against the 150 clauses and 75 pages of the budget 2017. It also does not have any non-monetary clauses. However, one discordant note which runs through all budgets is the neglect of the problem of implementation of the various schemes so liberally announced in successive budgets. The current budget now supports 83 schemes as against 73 in the last year. The budget does not provide any guidelines for implementation of these new schemes and committees are being set up for this purpose. Inadequate finances and hasty implementation may ensure that the schemes would not deliver the desired results.

Looking to the uniformly poor implementation of schemes through the years it appears that the time has come to create a cadre of dedicated rural workers who would ensure that the existing schemes are properly implemented and benefits reach the people for whom they are intended. Perhaps, if the FM is really interested in the welfare of the poor, he would frame schemes for their welfare after consulting with them rather than relying solely on the inputs of the mandarins of North Block who equate expenditure with development.

Another point of concern is the fiscal and revenue deficit projections which are galloping far ahead of their target. The fiscal deficit target of 3.2 percent of GDP has been breached by 0.3 percentage points despite the contrived sale of the government’s stake in HPCL to ONGC which had garnered Rs 36,915 crore. The revenue deficit is touching 2.6 percent of GDP against the target of 1.9 percent, which would mean that the government is profligate to the extent that it is not able to finance its current expenditure.

Even more dangerous is the move to amend the Fiscal Responsibility and Budget Management Act, 2003 (FRBM) to reset the targets of deficit financing. It is best if a nation, like a family, lives within its means. Stating the obvious for long-term financial stability, the FM should have made an attempt to curb government expenditure rather than change the FRBM to validate his government’s extravagance.

Saksena, an IRS officer of  the1979 batch, retired as principal chief commissioner of income-tax, Mumbai.


(The column appears in the February 28, 2018 issue)

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