The HINDU Notes – 02nd February 2018 - VISION

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Friday, February 02, 2018

The HINDU Notes – 02nd February 2018

📰 Nepal gets a high Rs. 650 crore outlay

But Bhutan continues to be the the largest recipient of the External Affairs Ministry’s allocation

•India’s annual financial allocation to Nepal for 2018-19 has nearly doubled under the Union Budget presented on Thursday.

•The External Affairs Ministry has been allocated a total Rs. 15,011 crore, which indicates a marginal increase of Rs. 1,321 crore over the previous year’s grant.

•For India’s development and diplomatic engagement under the ‘Neighbourhood First’ policy, the Budget has allocated Rs. 5545 crore. Bhutan is traditionally the largest recipient of Ministry’s allocation.

•It has maintained the same position even as the allocation increased by Rs. 71 crore to touch Rs. 2,650 crore.

More for Myanmar

•However, the giant leap in allocation was for Nepal, which received Rs. 650 crore from the Ministry. This year’s allocation is the third consecutive and the largest increase.

•In 2016-17, Nepal received Rs. 332.72 crore, which was increased to Rs. 375 crore last year. At Rs. 280 crore, Myanmar’s allocation too has improved from Rs. 220 crore of last year.

Rehabilitation work

•Former Indian Ambassador to Nepal Ranjit Rae said the budgetary increase was a likely step ahead from the Indian commitment to help Nepal recover from the 2015 earthquake.

•“The budgetary increase indicates it is likely to cover the earthquake reconstruction fund that was in the pipeline for some time and was discussed with the Nepalese leaders,” Mr. Rae said.

•A senior researcher from the Ministry’s think tank, Research and Information System for Developing Countries (RIS), said on condition of anonymity that the Terai road network and railway connectivity plans were also likely to get a part of the increased allocation.

•Large allocation has also been made for the prominent cultural arm of the Ministry, the Indian Council of Cultural Relations (ICCR), which has received an increased allocation of Rs. 20 crore to touch a total Rs. 255 crore.

Funds for varsities

•However, the new initiatives for building infrastructure in Chabahar and the Seychelles have also been granted allocations of Rs. 150 crore and Rs. 350 crore respectively.

•South Asia University, a major educational initiative for the South Asian region, has received Rs. 375 crore and the Nalanda University got Rs. 200 crore.

•Indicating the evolving policies of the government, the Ministry has made no allocation for the Haj.

•The government had allocated Rs. 12.13 crore in 2016-’17. There was no allocation for Haj last year too.

📰 Farmer 'sutra': Jaitley focuses on rural sector

In a pre-election Budget, Finance Minister Arun Jaitley serves up a mix of populism and prudence

•With a clear eye on Lok Sabha election, Union Finance Minister Arun Jaitley pulled out all the stops in the Narendra Modi government’s last full Budget to promise a better deal for farmers, boost the rural economy and make the poor less vulnerable to health exigencies.

•Responding to the distress in the agriculture sector that has reared its head in various States over the past year, the government has decided to offer a minimum support price (MSP) of at least 1.5 times the expenses borne by farmers for all crops. Equity markets were briefly spooked following the move to re-introduce a tax on long-term capital gains on equity shares at the rate of 10% for all gains over ₹1 lakh. No indexation benefit will be granted and the securities transaction tax will continue.

•The BSE Sensex, which had opened at 36,048.99, slipped as low as 35,501 during Mr. Jaitley’s speech before recovering to close at 35,906 points.

Middle class left high and dry

•Notably, the middle class constituency that played a key part in the BJP’s successful 2014 campaign was largely left high and dry. Despite some token measures to boost new jobs such as footing part of the bill for new employees’ provident fund (PF) contributions for three years, Mr. Jaitley offered little respite for the salaried class.

•Citing income tax data to show that individual businesspersons paid less average tax than the salaried class, he reintroduced a flat ₹40,000 deduction from taxable income for the latter in lieu of existing tax exemptions for transport and medical allowance, and extended this relief to pensioners as well.

•But any gain in take-home salaries has been virtually offset by raising the 3% education cess levied on personal income tax and corporate tax. Now, a 4% education and healthcare cess will apply.

•Hopes of a respite for consumers on the indirect tax front was also extinguished in this Budget, with the government hiking Customs duties on a range of products, including mobile phones, wearable devices, television display panels, furniture, diamonds, footwear, cosmetics and dental floss. The idea is to push global producers to start making these goods in India but till that happens, consumers will need to foot higher costs.

•A much-anticipated rationalisation of the high Excise duties on petrol and diesel was carried out with an eight rupee reduction in these duties, but consumers would get no relief as a new road and infrastructure cess of ₹8 a litre has been levied to fund infrastructure projects. Unlike excise duties, the Centre is not required to share cess receipts with States.

Fiscal constraints

•The government’s inability to give away too many goodies were largely due to its fiscal constraints, with this year’s fiscal deficit overshooting the 3.2% of GDP target and likely to touch 3.5% on account of GST-related issues. Instead of a 3% deficit in the coming year, the Centre has settled to target the 3.3% mark, deferring the glide path to 3% to 2020-21.

•Mr. Jaitley said the focus of the Budget — farmers, rural India, healthcare and education for the poor — reflects the Modi government’s emphasis on improving the ease of living for India’s common man.

•Comparisons with UPA-1’s last Budget, with its farm loan waiver and the NREGS expansion, would be simplistic.

•This one is actually similar to the Budget unveiled by Jaswant Singh in 2003-04, which talked of improving the ‘lifetime concerns’ of citizens, announced a new health insurance scheme and focused on housing, education and employment too.

📰 Ayushman Bharat: the big budget scheme

Health insurance coverage of up to Rs. 5 lakh a family a year, and setting up of health and wellness centres

•Lakhs of families borrow or sell assets to receive inpatient treatment and the government is concerned about the consequent “impoverishment of poor and vulnerable families”, Finance Minister Arun Jaitley said while announcing the National Health Protection Scheme that will cover over 10 crore poor and vulnerable families, or around 50 crore people.

•Adequate funds will be provided for the scheme, set to be the world’s largest government-funded healthcare programme, he said. A provisional allocation of Rs. 2,000 crore has been made for the scheme in the Budget. Coverage of up to Rs. 5 lakh a family a year will be provided for secondary and tertiary-care hospitalisation.

•Under the existing Rashtriya Swasthya Bima Yojana (RSBY), poor families get an annual coverage of Rs. 30,000. Several State governments have implemented or supplemented health protection schemes that provide varying coverage.

•“My government has now decided to take health protection to a more aspirational level,” Mr. Jaitley said, announcing the proposed National Health Protection Scheme and committing Rs. 1,200 crore for health and wellness centres. Comprehensive health care, including for non-communicable diseases and maternal and child health services, and free essential drugs and diagnostic services are to be provided at the centres.

•These two, he explained, were part of the ‘Ayushman Bharat’ programme to address health holistically, in primary, secondary and tertiary care system, covering both prevention and health promotion.

Industry hails initiative

•Top executives in the healthcare and insurance industry hailed the initiatives. Bajaj Allianz General Insurance MD and CEO Tapan Singhel said people in countries that provided higher health insurance cover had a higher life expectancy. “The same will happen in India now with this announcement. As an insurer, we will deliver exceptionally good services and facilities for people who are covered and make it a great success.”

•He also welcomed the increase in the tax exemption limit for health insurance under Section 80 D for senior citizens and introduction of micro-insurance services for Jan Dhan account holders.

•Apollo Hospitals vice-chairman Preetha Reddy described the Scheme as “nothing short of path-breaking,” while Dr. Reddy’s Laboratories chairman Satish Reddy said Ayushman Bharat was a “game changer”.

•CEO and co-founder of BankBazaar, Adhil Shetty, said the scheme would create tremendous awareness of health insurance, the same way Jan Dhan did for bank accounts. “On life insurance, the Pradhan Mantri Jeevan Jyoti Bima Yojana, including Rs. 2 lakh life cover, is being pushed across a larger base which is a great sign. Rs. 2 lakh critical cover is also being extended to a larger base,” he said.

•The emphasis on bringing more under health cover is a pointer to the focus of policy-makers on ensuring adequate protection against health hazards, said Bhargav Dasgupta, MD and CEO of ICICI Lombard General Insurance.

•Mr. Jaitley saud the government would work towards covering all poor households, including SC/ST households, under the Pradhan Mantri Jeevan Jyoti Beema Yojana and the Pradhan Mantri Suraksha Bima Yojana.

•It would expand the coverage under Pradhan Mantri Jan-Dhan Yojana by bringing all 60 crore basic accounts within its fold.

📰 A shot in the arm for Urban Rejuvenation Mission

Rs. 12,169 crore allocation is likely to multiply investment prospects in the real estate sector

•In a boost to infrastructure development in cities, the total outlay for the Urban Rejuvenation Mission, which includes projects under AMRUT and Smart Cities Mission, will be Rs. 12,169 crore, according to the Budget proposals for 2018-2019.

•The Smart Cities Mission, which received Rs. 4,000 crore budgetary allocation in 2017-2018 and Rs. 4,412 crore the previous year, will get Rs. 6,169 crore in 2018-2019, including Rs. 169 crore towards capacity building for urban development.

•This will be used to develop 100 smart cities.

•Under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), the allocation proposed is Rs. 6,000 crore. This will be towards the Urban Rejuvenation Mission of 500 cities. The budgetary allocation for AMRUT schemes in 2017-2018 was close to Rs. 5,000 crore.

•According to a press release, 99 cities have been selected under the Smart Cities Mission with an outlay of Rs. 2.04 lakh crore, projects worth Rs. 2350 crore have been completed, and work for Rs. 20,852 crore is under progress.

•Under the AMRUT programme, the State-level plans of Rs. 77,640 crore for 500 cities have been approved. As many as 482 cities have credit rating and 144 cities have got investment grade rating. Water supply contracts for 494 projects worth Rs. 19,428 crore have been approved for 500 cities and sewage work contract for 272 projects for Rs. 12,429 crore have been awarded.

•Jaxay Shah, national president of the Confederation of Real Estate Developers’ Associations of India, said the public investment in infrastructure in rural areas, smart cities, agricultural marketing and urban connectivity will multiply investment prospects for the real estate sector.

•According to Anuj Puri, chairman of ANAROCK Property Consultants, the total allocation of Rs. 5.97 lakh crore towards infrastructure spending will ensure that the country’s infrastructure meets global standards.

📰 Goodbye to fiscal consolidation

With the rural constituency in focus, the government’s spending road map may cross expected limits

•The Narendra Modi government has taken pride in having restored the economy to the path of fiscal consolidation. The fiscal deficit target for 2017-18 had been set at 3.2% of GDP for 2017-18 and 3.0% for 2018-19. The Budget for 2018-19 puts paid to these objectives for now. The fiscal deficit for 2017-18 has ended up at 3.5%. For 2018-19, the government has set a target of 3.3%. The fiscal deficit target of 3% of GDP has now been pushed to 2020-21.

Missed targets

•Revenue receipts in 2017-18 have grown faster than anticipated (although non-tax revenues have fallen short of target). We can compare the revised estimate for 2017-18 with the actual for 2016-17 and the Budget estimate for 2017-18 with the revised estimate for 2016-17. Tax revenues were higher than anticipated (15% compared to 13%).

•Capital receipts are expected to exceed the budgetary estimate thanks to record disinvestment revenues of ₹100,000 crore (₹27,500 crore higher than targeted). On the revenue side, the government could not have expected better.

•It is the expenditure side that has given way. Revenue expenditure grew by 15% compared to the Budget estimate of 6%. An increase in establishment expenditure accounts for more than 40% of the increase in revenue expenditure. Capital expenditure ended up lower than in the previous year by 3.9%. In the Budget for 2017-18, capital expenditure had been set 10.7% higher. This was flagged as one of the great accomplishments of last year’s Budget and it was expected to boost GDP growth.

•The fiscal slippage in 2017-18, therefore, cannot be ascribed to a lower than projected nominal growth (around 9.5% compared to 11.5%). Expenditure has got out of control or was under-estimated in last year’s Budget. Moreover, revenue, not capital, expenditure is the villain. The revenue deficit for 2017-18 is 2.6% of GDP, way above the Budget estimate of 1.9% of GDP.

Projections for new fiscal

•What do we make of the projections for 2018-19? The Budget projects an increase in tax revenues of 16.6% compared to 15.3% in the previous year, which appears achievable. Total expenditure is expected to grow by 10.1% compared to 12.3%, which could turn out to be an under estimate. Capital expenditure has been set 9.9% higher which is modest given that there had been a decline in the previous year.

•Growth in public investment is tepid. There are no big tax giveaways either in the Budget. Clearly, fiscal policy is not being used to stimulate growth. With inflation running at 5%, the scope for monetary easing too is limited. The government is leaving it to market forces to drive growth in the coming year.

•Will it work? In 2017-18, the Economic Survey argues, growth was dampened by a combination of factors: high real interest rates, disruption caused by demonetisation and the goods and services tax (GST), the twin balance sheet problem and high oil prices. The disruption caused by demonetisation and GST is out of the way. The Survey hopes that the bankruptcy process put in place will resolve the twin balance sheet problem — we have to see how the process plays out. As inflation edges up, we could see monetary tightening. With oil prices projected to be $10-$12 higher in the coming year, growth could be adversely impacted by 0.3%.

•One source of anxiety is overheated asset markets the world over. In India too, equity valuations have been extremely stretched. The Budget has introduced a tax of 10% on long-term capital gains while retaining the securities transactions tax. The reaction of the market thus far has been muted.

•However, should asset prices fall elsewhere, we could see the same happening here. Consumption and investment would fall as a result. The monetary authorities may have to raise interest rates in order to stem capital outflows. In such a situation, fiscal expansion would be required to sustain growth. This would clearly upset the budgetary arithmetic. The budgetary projections for 2018-19 thus hinge critically on nothing going wrong with the equity markets and investors shrugging off the tax on long-term capital gains.

•On the positive side, the ratio of gross tax revenues to GDP, which had been stagnating at around 10% since 2008, has risen to 11.6% in 2017-18 and is projected to rise further to 12.1% in 2018-19, 12.4% in 2019-20 and 12.7% in 2020-21. This shows that demonetisation and GST are beginning to pay off by widening the tax base and increasing the buoyancy of tax revenues. There is reason to be optimistic, therefore, about the medium-term outlook for government finances whatever the problems in the next year or two.

Rural foray

•Many analysts had expected a populist budget in the run-up to elections. Typically, this meant tax concessions to the salaried classes and measures such as loan waivers. These are absent in Finance Minister Arun Jaitley’s Budget. The Budget brings back the standard deduction for tax payers, of ₹40,000. But this is in lieu of transport and medical expenses and is also offset partially by an increase in cess from 3% to 4%. There is little else to cheer for the middle class.

•However, the Budget has tried to reach out to the rural constituency and to the poor through a number of measures. The most notable, perhaps, is the promise of a minimum support price (MSP) for all crops of 50% above the cost of production. Rural distress is pervasive and the fall in the price of groundnut, for example, in Saurashtra appears to have cost the Bharatiya Janata Party (BJP) dearly in the Gujarat elections. The proposal on MSPs is thus shrewdly timed, though it would mean higher prices for consumers.

•The Budget proposes a health insurance scheme that will cover 10 crore poor families with an insurance cover of ₹5 lakh each. Since such a cover would mean an annual premium of at least ₹10,000, it is doubtful that it is backed by actual outlays in the Budget. Moreover, basic health care must be provided through government hospitals and not through insurance that pays for care at private hospitals. This is a disturbing sign that we are going down the American route to health care instead of, say, the Canadian route.

•The Budget also includes several measures for micro, small and medium enterprises (MSMEs). There is a target of ₹3 lakh crore for lending under the MUDRA scheme. The government will pay 12% towards the Employee Provident Fund for new employees in all sectors for the next three years. A lower corporate tax of 25%, hitherto applicable to enterprises with a turnover of ₹50 crore, is now applicable to companies with a turnover of up to ₹250 crore.

•It is clear that a return to a high growth trajectory of 8% is unlikely before the 2019 election. The BJP seems to have reckoned it has the urban middle class with it regardless. It is the rural constituency that needs focus. The Budget for 2018-19 has expenditure items planned accordingly while ensuring that the fiscal deficit stays within reasonable bounds.

📰 Promise and delivery: on Union Budget 2018

Arun Jaitley’s Budget will be judged by whether it can bridge the gap

•If the Union Budget is construed as an annual tug-of-war between populism and fiscal prudence, arguably it is the latter that prevailed in the past four budgets tabled by the NDA. However, populism seems to have gained an upper hand in Arun Jaitley’s latest effort. Despite exceptional buoyancy in direct tax revenues (18.7% growth in FY18) and record disinvestment proceeds (₹1 lakh crore), shortfalls in GST mop-ups and dividend receipts have forced the Finance Minister to ease off on fiscal consolidation as mandated by the FRBM Act. The Budget has reported a fiscal deficit of 3.5% (of GDP) for FY18 and pegged it at a high 3.3% for next year. The Economic Survey prepared the ground for a deviation, yet the actual numbers surprised the markets. Armed with a war chest of ₹24.4 lakh crore in budgeted receipts for FY19, Mr. Jaitley has homed in unerringly on the root causes of distress — unremunerative farm incomes, unemployment, lack of social security nets and the squeeze on the middle-class taxpayer.

•With this in mind, Mr. Jaitley has announced a laundry list of ameliorative measures. While his intent is clearly welfarist, resource constraints have forced him to rely significantly on extra-budgetary resources and external agencies to give life to many proposals. If they fail to materialise, it can lead to a gap between promise and delivery. Consider agriculture. After asserting that minimum support prices (MSPs) should cover all crops and assure farmers 1.5 times their production cost, food subsidy allocations for FY19 have been upped by a relatively modest ₹29,041 crore. A ‘fool-proof’ mechanism has been mooted to avoid market prices falling below MSPs, but it is left to the Niti Aayog to work out the modalities. Setting up farmers’ markets is similarly a great idea to free small farmers from the tyranny of Agricultural Produce Market Committees (APMCs), but the project gets a mere ₹2,000-crore allocation.

•The ambitious rural package in this Budget brings in free gas connections to three crore new households, free electricity connections to four crore homes, two crore new toilets under the Swachh Bharat Mission, higher micro-irrigation coverage, and so on. But of the massive outlay of ₹14.34 lakh crore required to bankroll these grandiose plans, as much as ₹11.98 lakh crore is expected to be met from extra-budgetary resources. A similar template has been used in social sector schemes. The National Health Protection Scheme, to provide a ₹5 lakh health cover to 10 crore households, is a much-needed social security intervention to benefit poor households that rely overwhelmingly on private health care. But there is little clarity on modalities. The entire clutch of proposals on improving learning outcomes, providing universal health coverage and alleviating the lot of minorities and girl children is expected to be funded through a mere ₹16,000-crore increase in allocations to ₹1.38 lakh crore. Infrastructure appears to be one of the few sectors where the funding problem has been addressed, with PSUs bankrolling a significant proportion of the ₹5.97-lakh crore outlay for FY19.

•While being liberal in its announcements for rural India, the Budget has been frugal in its giveaways to the middle class and the corporate sector. Expectations of an increase in the basic exemption limit on income tax have been belied; instead, a standard deduction of ₹40,000 is back for salaried taxpayers. While it is only fair that the salaried pay income tax on their net income (after expenses) as the self-employed do, this deduction (which also replaces transport and medical reimbursements) is too small to establish real parity. The clamour for an across-the-board cut in the basic corporate tax rate from 30 to 25% has also been ignored, with the cut limited to mid-size companies (up to ₹250-crore turnover). Though this will benefit the overwhelming majority of corporate tax filers, how this impacts the competitive edge of India’s largest companies in the global context will be debated. Especially so, since the U.S. recently slashed its corporate tax rate to 21% and European nations average 20%. For the salariat and the corporate sector, the increase in education cess will offset some of the gains from these tax cuts. Senior citizens have benefited, particularly from the tax relief on interest from bank deposits and post office schemes, which has been hiked from ₹10,000 to ₹50,000 a year. These interest payouts are also exempt from the vexatious TDS provisions. This relief renders senior citizens far less vulnerable to steadily dwindling interest rates on bank deposits and small savings schemes; it also helps them to continue relying on fixed-income instruments to cover living expenses. This relief may reverse the unhealthy trend of risk-averse savers shifting wholesale from bank deposits to market-linked options such as equity mutual funds, in search of higher returns.

•The imposition of 10% long-term capital gains tax on profits from shares and equity mutual funds could dampen market sentiment in the near term, but is unlikely to have any structural impact on domestic equity flows. Equities are favoured by the relatively affluent savers and alternative financial instruments such as bonds and fixed deposits invite far higher tax incidence. Moreover, the bulk of new allocations flowing into Indian equities in the last two years have come from retail investors, most of them saving for the long term. It is unlikely that they will beat a hasty retreat from shares or mutual funds just because of a modest levy. Overall, the Budget has a sense of direction that is difficult to find fault with. If some of the proposals seem half-hearted or are not taken to their logical end, it may be the result of revenue constraints. It is to be hoped that as the revenue base improves and GST collections stabilise, future budgets can put the finishing touches on the welfare proposals.

📰 The question of credibility

The entire fiscal adjustment path has been reworked in this Budget

•There were considerable expectations from the Budget. Given that this is the last full-year Budget by this government and the first one after the revenue uncertainties arising from implementation of the goods and services tax (GST) reform, there were apprehensions about the slippages as well. Indeed, there are electoral budget cycles in every democratic polity and considering the dissatisfaction shown by rural electorate in the recent Gujarat elections, there were definite apprehensions about fiscal laxity.

Focus areas

•The Finance Minister devoted a considerable part of his speech to elaborate the focus areas in the Budget. These include strengthening the agriculture and rural economy, provision of good healthcare for the poor, taking care of the senior citizens, creation of infrastructure, and working with the States to improve the quality of education. A careful analysis of the allocations to various sectors, however, does not show any significant departures from the past except in the case of allocation to food storage and warehousing which is set to increase by 19.4% due to the assurance of minimum support prices at 150% of the cost. The total expenditure in 2018-19 is estimated to increase by about 10.2% over the revised estimate of the previous year, and the increase in capital expenditure is estimated at 9.9%. In fact, direct spending on social and economic services by the Union government is estimated to increase by only 7.8% and 6.7%, and increase in the grants to States for Central schemes is estimated at 13.8%. Thus, the objectives of improving the wellness of the people, removing the farm distress, improving the quality of education and augmenting infrastructure are supposed to be achieved by using extra-budgetary funds.

•The most important worry, however, is on the fiscal front. A close examination shows that there have been substantial slippages in all the deficit numbers. In fact, even for the year 2016-17, the fiscal deficit works out to 3.7% as against 3.5% shown in the Budget if the GDP estimate put out by the Central Statistics Office on January 31 is taken. The revised estimate of revenue deficit in 2017-18 works out to 2.6% as against the Budget estimate of 1.9%, and the slippage in primary deficit is from 0.14% to 0.38%. Much of this has happened not because of revenue shortfall or increase in capital expenditure. In fact, despite shortfall in indirect taxes, the tax revenue net of devolution to the States shows an increase of 3.4% over the Budget estimates. Similarly, even as non-tax revenues realisation was less due to the inability to generate spectrum fees and lower dividends from the banks, total revenues available with the government was higher than the Budget estimate by over 3%. The slippage happened even as capital expenditure was compressed by 12% due to a sharp increase in revenue expenditure. The capital expenditure in 2017-18, as also that budgeted for 2018-19, at 1.6% of GDP is perhaps the lowest since 2014-15. Thus, the slippage was mainly on account of higher than budgeted spending in revenue expenditure, particularly the grants given to the States for Central schemes, which was higher by 25.8%.

•The Economic Survey had emphasised the need for ensuring macroeconomic stability in view of both domestic and global developments and in this the importance of fiscal discipline is stated to be paramount. However, this Budget has reworked the entire adjustment path. The estimated fiscal deficit for 2018-19 is 3.3%, and in addition, the government will issue bank recapitalisation bonds amounting to ₹80,000 crore. Proper accounting demands that this should be a part of the fiscal deficit as when the shares of public enterprises are sold, these are taken as non-debt capital receipts, but when the bonds are purchased by the government, they are not counted for the deficit! The Finance Minister states that he accepts the key recommendations of the FRBM Committee to bring down the debt-to-GDP ratio to 40% and the fiscal deficit target will be the key operational parameter, but does not adhere to the 3% target for the next year and 2.5% for the subsequent years set by the Committee! The medium-term fiscal plan states that the 3% target will be reached only in 2020-21. Fiscal management in the country suffers from credibility crisis.

•On the taxes front, the most important issue is the proposal to levy the long-term capital gains tax above ₹1 lakh at the rate of 10% for instruments bought after January 31, 2018. Those who advocated the levy were clear that the tax policy should not affect the investors’ choice of financial instruments, which meant that the treatment should be uniform for equity and debt-based instruments. This would require uniform application of the tax to all instruments and the abolition of securities and commodities transaction taxes. There is a case for the tax to be neutral between all forms of investments including immobile properties. In that sense, what has been attempted is a half-way house.

Too loaded

•Furthermore, when the reform required that the tax policy should not be loaded with many objectives, the Budget goes on to use the instrument to promote post-harvest activities in agriculture, employment generation and incentivising micro, small and medium enterprises. On indirect taxes, increase in custom duties to facilitate “Make in India” is a retrograde measure. We have been advocating moving away from protectionism in global forums, but want to protect the domestic producers through higher import duties. This may make some producers happy, but will not increase the competitiveness.

📰 Fiscal glide path pushed back to 2021

Bond yields rise as the government misses deficit target of 3.2%; analysts expect yields to remain elevated

•The last full budget of the Narendra Modi-led Bhartiya Janata Party government before the general elections due in 2019 missed the fiscal deficit target of 3.2% for 2017-18. This was attributed to revenues to be received under the Goods and Services Tax (GST) for 11 months, instead of 12. The revenue for March will be received in April.

•The shortfall in GST revenue was Rs. 50,000 crore.

•Finance Minister Arun Jaitley, in his budget speech, said the fiscal deficit for 2017-18 would be Rs. 5.95 lakh crore, which is 3.5% of GDP. The fiscal deficit for 2018-19 is pegged at 3.3%.

•“In order to impart unquestionable credibility to the government’s commitment for the revised fiscal glide path, I am proposing to accept key recommendations of the Fiscal Reform and Budget Management Committee relating to adoption of the Debt Rule and to bring down Central Government’s Debt to GDP ratio to 40%,” Mr. Jaitley said in his budget speech.

•In the post-budget media interaction Mr. Jaitley said meeting the fiscal deficit target should not be a problem because the government would receive revenues for 12 months.

•“We were getting the GST revenue for one month less this year. The March revenue will be received only in April. That statistical factor should be borne in mind when we calculate the difference between 3.5% and 3.2%. That really amounts for a substantial part of that,” Mr. Jaitley said.

•The government said the fiscal deficit target for next financial year would be 3.3% and 3.1% for the year after and then 3% for 2020-21.

•Bond prices slumped as the government missed the fiscal deficit target with the yield on 10 year government bond shot up 17 bps to end the day at 7.6%. Yields are expected

•“The government’s decision to stray from the fiscal glide path of getting to a level of 3.2% this year and 3.0% the next could also weigh on market sentiment, especially when we are in the middle of a selling mania,” economists at HDFC Bank said in a note to its clients.

•“Therefore, we expect the bond yields to remain elevated and trade in the range of 7.45% to 7.55% in the near-term,” it said.

Government borrowing

•The government pegged its net market borrowing at Rs. 4.62 trn in FY19 (excluding buyback and switches), which is in line with what the market had estimated.

•Mr. Jaitley said the country had seen average growth of 7.5% in the first three years of the current government’s reign and GDP growth at 6.3% in the second quarter signaled a turnaround of the economy and ‘firmly on course to achieve 8% growth’.

•“We hope to grow at 7.2% to 7.5% in the second half. IMF, in its latest ipdate, has forecast that India will grow at 7.4% next year. Manufacturing sector is back on a good growth path,” he said.

•“The services, mainstay of our growth, have also resumed their high growth rates of 8% plus. Our exports are expected to grow at 15% in 2017-18. We are now firmly on course to achieve high growth of 8% plus,” Mr. Jaitley said.

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