Union Budget 2018 – An analysis by Dr.K.S.Murthy

An analysis by Dr.K.S.Murthy, based on the lecture delivered by Mr.Swaminathan Anklesaria Aiyar on 3rd February 2018 at Sri Shanmukhananda Sabha:

The economic survey gave discouraging picture since the financial budget has left much to be desiredaccording to the stock market. In view of this, V.Sankar Aiyar Memorial Committee featured Mr.Swaminathan Anklesaria Aiyar to analysethe position consequent to the Union Budget presented by Honorable Finance Minister Shri Arun Jaitley on 1st February 2018 in the Parliament.

Covering the Budgets since 1969, Mr.Aiyar said that the current budget is the latest political event before the next election and is not economic eventof the year. The Government has decided in principle to change the fiscal year to the calendar year. FM is obliged to give away a lot of freebies for the governmentnot to be voted out. There is no relationship to freebies given and electoral outcome. This Budget is notable for what it did notdo and it is a positive development. There were no changes but modest increase and certain sharing out. Total budget spending out was 10.1% which is less than projected growth of GDP or nominal GDP of 11%.

  • Budget did not:produce interest free farm loans; announce series of new subsidiaries and freebies,realizesubsidiaries for petrol and dieselor grant the middle class higher income tax exemption.
  • Universal healthcare for all which created excitement and people calling it Modi Care (like ObamaCare – universal coverage of everybody, insurance-based system in USA).
  • Budget provided mere 2000-cr and the total estimate outlay is about 12,000-cr. There is a proposal to increase public health spending by 1% of GDP (175,000-cr) and spending 10,000-cr extra. This is supposed to cover limited hospitalization costs for limited number of diseases. Cost has been brought down by putting the limitations and it is not clear whether it will cover diagnostic, x-ray, MRI, blood, plasma, automation, kidneys etc.
  • In case of logistic scheme, the coverage is Rs.5 lacs (Rajasthan scheme up to 3.75 lacs with a premium of Rs.500). The sums and coverage involved are limited.
  • Major thrusts: The focus is on rural spending because of rural distress and farmers’ agitations. The other is employment.
  • Schemes like infrastructure, rural structure and new schemes put together and it is expected to create 351-cr of employment. The increase in total budget spending is not even faster than the rate of GDP growth. Infrastructure growth is 6 lac-cr.
  • New schemes are Operation Green for vegetables,perishablesalong the lines of operation flood. Further, 10,000-cr for fisheries and animal husbandry.
  • Upgradation of 22,000 rural marketing centers linked to national platform and free from restrictions like EPMCR to enable farmers send their produce directly to bulkbuyers so they need notsell only to their agents. If the state governments agree, this could be a positive step as they deal with APMCI.
  • New innovations are marginal ad are not going to be the game changers.
  • Minimum Support Price:basically, for rice and wheat. Farmers are diversifying in a big way growing wide variety of crops. Prices are volatile for potatoes and onions.Government announcing MSP for all kinds of crops and now edging towards fixed prices for all crops. In 2006, Swaminathan Committee went into the rural areas to explore how agricultural prices could be fixed. Taking into account actual cost, trends (national and international), ways of producing economies, it comes to different price levels for different crops. They simplified to take actual input costsplus imputed costs of the farmer’s level and add 50% margin on top of that for MSP. It is apparent that there is no proper analysis to go about. Do we have the same rate of return in every single industry? Regardless of what your industry is and fix 50% margin after covering all the costs. Incentive structure in a cost plus thing is wrong and more so with agriculture.
  • KCR practiced an idea in Telangana: Gavea flat sum of incentive money per acre to control cost besides benefitting a small fellow to ward off distance. This is the better way of doing and hoped the government will revise the policies.
  • Flaws of budget: Fiscal slippage; returning to import substitution policy which failed in the past. Fiscal deficit to come down in stages to 3% of GDP as on 2008 and revenue deficit should go down to zero. The FM put off that target to achieve due to something either with budgeting or implementation.
  • FRBMA (Fiscal Responsibility and Budget Management Act) would be passed to build about 3% by 2021 while giving up revenue deficit. Total revenue debt to GDP is about 47% which will be brought down to 40%. Economy is picking up with 7.5% growth; world economy is moving as also our export in such boom conditions.
  • Fiscal management is a serious question apart from minimum support license. There is a wide increase in import duties on several items. Average import duty was 10% in early 2000 and we are going in the opposite direction. Duties have gone up from10% to 15% (in some cases 20%, 25% and 50% in few cases) on items like electronics, mobile phones, furniture, auto parts, processed foods, perfumes, toys etc. and before the budget the increase in duties on electronicsand food items were 30% thereby we are reverting to old import substitution days.
  • Make in India scheme has become protect in India scheme. After infant industry protection, it grows up and looking at the long list, this argument does not apply. Nobody has changed the labor laws to allow flexibility of labor. Now fixed term labor contracts allowed for labor intensive industries like textiles and footwear and alsoextended to all the industries. Moving to informal from formal sector (committed to PF, ESI) has been a problem.
  • Crashing Sensex by 800 points is nothing to do with budget, besides S&P Dow Jones (2.84%) Indices crashing due to global (trends)phenomena. Some people thought it was due to tax proposals. Long term capital gains for long time. Bond and interest rates by Central Bank kept much lower for many years due to prices going high and now they are beginning to rise.
  • Indian debt market is driven by foreign influence. Equity market (mutual fund) is dependent on stock market and bond market is dependent on foreign investments. This is yet again a global phenomenon and there is going to be a drag on the economy.
  • Prime Minister promised with conviction he was going to give jobs to people in the remotest corners of India and he could not succeed in meeting the rate of job creation regardless of government statistics and this will continue to be a major issue in the next year.
  • Increase in tax on personal and corporate tax is from 3% to 4%. For the salaried class, standard deduction given was Rs.40,000 besides number of assorted tax breaks for senior citizens. On balance, unremarkable change to the question of corporate tax. To become competitive with other Asian countries, import duties were reduced from 30% to 25%. Effective rate of tax paid by the big companies is 24% (South East Asia at 20%). Earlier there was clarity and direction of globalization, now there are muddles of ideas, part of uncertainty which is going to affect stock market.
  • Mudra scheme: 10.38-cr loans sanctioned so far totaling 4.6 lac-cr. This has not been translated into industrial dynamism. Rates of industrial growth has been low, lack of clarity on how well these loans are usedand earlier payment for nonperformance. No strict monitoring of the scheme for better financing of small and medium sector in a responsible way.
  • Disinvestment was planned to be 32,000-cr, which is going to be one lac-cr. Assets available without labor force can be sold. Asset recycling is promising. Having built the roads, lease them to private sector for long term, collect the money for building new force and new roads. FM is silent about asset recycling and did not chose this way. In his speech, one of the things he said was that they have created 7 million new formal centers while there are already formal centers estimated to be 40 million.

Mr.Aiyar concluded that he doesn’t like some parts of budget such as MSP, fiscal slippage, protectionism and is happy with the measures to boost employment, on the rural side APMC market to push vegetables and perishables. Global trends and good growth in the coming years is going to depend upon substantial revival of export growth. The budget is expecting 50% growth of exports. Only with exports demand, people would be willing to invest.

Question-Answer discussion: Mr.Aiyar fielded questions of the participants with viable answers, clarified doubts and misconceptions and offered advice. Dr.V.Rangaraj, Vice-President proposed vote of thanks to the speaker and audience.