Jaitley presents expansionist budget that sees India missing its fiscal deficit target

New Delhi: Union budget 2018 will be remembered for its political finesse. Presenting the last full budget of the National Democratic Alliance government – 2019 will be a so-called vote on account because elections are scheduled for May of that year – finance minister Arun Jaitley pressed all the buttons he had to press, and addressed all the constituencies he had to address. The result is an expansionist budget that sees India missing its fiscal deficit target for the first time since this government came to power in 2014. The government expects to miss next year’s target as well. Still, the slippage isn’t much, and can be condoned simply for that reason – that it isn’t too much and that the government seems committed to the path of fiscal prudence.
It is clear that we are in the midst of an agrarian crisis that has taken a toll on the rural economy. The budget has addressed part of this – the farm crisis – in the most direct way possible: by promising returns of 50% over the cost of production (by increasing the minimum support price, or the price at which the government picks up grain from farmers). It has also announced a spend of Rs 14 lakh crore on rural infrastructure, which, it hopes, will set off a virtuous cycle that will, among other outcomes, create jobs (back of the envelope calculations show a full year of work for around 10 million people being created). The focus on the farm and rural economy didn’t come as a surprise, though. What did was the government’s intervention in the health insurance space.
Budget 2018 announces the launch of what people (including some in the government) call Modicare, the world’s largest public health insurance programme which will cover, up to Rs 5 lakh, 500 million poor people from 100 million poor families. At one level, this can improve the quality of life of poor families – health emergencies is one reason why some poor families stay poor, and why some families that escape poverty, fall back into it. At another level, it provides a safety net in a country that was once considered too large (in terms of population) for safety nets. And at still another, it helps increase productivity (poor health is widely considered one reason for low productivity). A programme of this magnitude can get the best rates from insurers as well as healthcare providers. If it’s structured and implemented well, the not-so-poor could soon be beating down its doors a few years from now asking to be included.
Education and infrastructure are the two other areas of focus in the Union budget with, notably, spend of Rs 1 lakh crore being earmarked for the upgradation of educational infrastructure and systems.
There is little in the budget for the middle class, other than the increase in ceiling on tax-free reimbursements related to transport and medical bills that will translate into a maximum benefit of Rs 5000 a year. That’s more than offset by the increase in the cess (the tax on the tax). Indeed, with the increase in import duties, several products will now become costlier. And there is even less for business (although there were no shocks either) apart from the clear commitment of the government to structural reforms that will eventually not just make it easy to do business in India, but also reduce the cost of doing so.
The contents of Union budget 2018 are a good indication of what the Bharatiya Janata Party under Narendra Modi considers its main political constituencies. Indeed, it is so politically sophisticated that opposition benches in Parliament didn’t cause as much disturbance as they usually do during the finance minister’s budget speech, and some political analysts see its contents as further proof that the BJP-led National Democratic Alliance is considering early Lok Sabha polls, a theory that has picked up momentum in recent weeks.
The big question about the Union budget concerns the money.
It isn’t clear where money for the increased minimum support price for crops or the health insurance scheme will come from or whether states will pitch in. The government seems convinced it will generate enough money to fund its health insurance scheme but there doesn’t appear to be enough allocation for it anywhere in the books (at current market rates the annual premium itself could work out to Rs 2 lakh crore).
The numbers also assume a significant increase in tax receipts, especially from income tax, and while current trends indicate that this is within the realm of the possible, it is still a stiff target. Much of the spend on rural infrastructure is to come from so-called extra budgetary resources but this could mean state-owned corporations borrowing from the market, effectively crowding out private borrowers. Then, this has been this government’s preferred approach to funding large infrastructure projects, urban and rural. Finally, the higher fiscal deficit and the increase in minimum support price could result in higher inflation which, in turn, could cause the Reserve Bank of India to increase the policy rate.
Such quibbles, and details (which will emerge over the following days and weeks), shouldn’t take anything away from the budget. It is exactly the kind of budget India needs at this stage. And, in a year with eight state elections, and ahead of the 2019 Parliamentary polls, it is exactly the kind of budget the BJP needs.