The Re-Election Budget 2019

Interim Finance Minister (FM), Piyush Goel, standing in for the ailing Arun Jaitley, presented the NDA- II government’s final budget, of the current term. “Popular & not a populist” budget averred his colleague, Commerce Minister,  Suresh Prabhu while former Finance Minister, P Chidambaram (PC), played with words, calling it a “Account for vote” & not a ‘Vote on Account” - a thinly veiled criticism on an “interim budget” announcing  poll sops, masquerading as a policy statement, that could not wait for the formation of a new govt.; however, the 70,000 crore farm loan waiver announced, in the 2009 budget, by  PCs UPA govt. could legitimately invite a return jab. “Machiavellian budget presented by a “vulnerable govt. opined “Michael Kugelman of the Wilson centre.

The FM announced that the fiscal deficit (FD) has been pegged at 3.4% for FY 19 & the next with Revenue Deficit (RD) at 2.2%. Credit rating agencies are not amused at the frequent deviations from the glide path of achieving 3% FD by 2008- as mandated by the FRBM Act of 2003 – first due to the financial stimulus undertaken to manage the 2008 financial crisis & later due to political expediency.  All governments – UPA or the NDA - have resorted to creative accounting that include off balance sheet financing that understates govt. debt, roll over of subsidies etc. leading one to borrow the former Finance Secretary Geethakrishnan’s word “Fudget” to describe the Budget;  Food Corporation of India has unpaid bills of over 1 Lakh crore. Sajid Chinoy, of JP Morgan, has calculated the fiscal deficit of the centre, states & the off balance sheet items to be about 8.2% of GDP for 2017-18. This combined with the muddled nos. emanating from the CSO (Central Statistical Organization) could put India in the elite league of China, whose official economic nos. are always taken with a pinch of salt. Liberating institutions from becoming “caged parrots” is thus essential.

The Budget At a Glance

A-Actual, RE Revised Estimate, BE-Budget  Estimate				Growth
All Figs in Lakh Crore Rupees	FY 2018 A	FY2019 RE	FY2020 BE	FY2019	FY2020
Revenue Receipts	14.35	17.30	19.78	20.5%	14.3%
Revenue   Expenditure	18.79	21.41	24.48	13.9%	14.4%
Revenue Deficit	4.44	4.11	4.70
Revenue Deficit %	2.6%	2.2%	2.3%
Capital Receipts	7.07	7.28	8.07	2.9%	10.9%
Borrowings	5.91	6.34	7.03	7.3%	10.9%
Capital Expenditure	2.63	3.16	3.36	20.2%	6.3%
Total Expenditure	21.42	24.57	27.84	14.7%	13.3%
Recovery of Loans + Other Receipts	1.16	0.93	1.03
Fiscal Deficit	5.91	6.34	7.04
Fiscal deficit %	3.5%	3.4%	3.4%
Interest Payments	5.29	5.88	6.65
Primary Deficit	0.62	0.47	0.39
Primary Deficit  %	0.4%	0.3%	0.2%
GDP	169	187	207

The takeaways

(a)The budget projects an anaemic capital expenditure growth of 6.3%; 70% of the 3.36 lakh crores capital budget is spent in three areas: Defence (1.03L Cr); Railways (0.64L Cr), Roads & Bridges (0.68L Cr).

(b)Borrowings pegged at over 7 lakh crores, in FY 2020, prompted a sell-off of treasury bills by financial institutions, fearing a “crowding out”  effect leading to a rise in gilt yields from about 7.26% to 7.38%. With an “expansionary” fiscal policy, RBI may be forced to adopt a “neutral “monetary policy without any change in Repo rate – a “Long Pause” - despite a chorus for a rate reduction.

(c )Total tax filers between 2013-14 & 2017-18 shot up from 3.79 crore to 6.85 crores while personal income tax filings increased from 3.31 crores to 5.44 crores with  govt. claiming it as a consequence of Demonetization.  Since the govt. has mopped up a gross of Rs 8.74 Lakh crores & a net of Rs 7.44 Lakh crores - post adjusting for refunds, till Dec 2018 - & achieved a  gross growth of 14.8% in corp. Tax & 17.2% in personal income tax – it is conceivable that direct tax projection could be met; the same cannot be said about indirect taxes. The FD, thus would surely be higher than 3.4%.

	Figs in Lakh crores (A-Actuals, RE-Revised estimate, BE-Budget estimate)
Revenue Receipts	2014-15 A	2015-16 A	2016-17 A	2017-18 A	2018-19 RE	2019-20 BE
Corporate Tax	4.28	4.53	4.84	5.71	6.71	7.6
Income Tax	2.58	2.87	3.49	4.08	5.18	6.07
Other Taxes				0.1
Total Direct Taxes	6.86	7.4	8.33	9.89	11.89	13.67
Revenue Receipts Growth %
Corporate Tax		5.8%	6.8%	18.0%	17.5%	13.3%
Income Tax		11.2%	21.6%	16.9%	27.0%	17.2%
Other Taxes
Total Direct Taxes		7.9%	12.6%	18.7%	20.2%	15.0%

(d)While the GST receipts are growing at 9%, the govt. projects a revenue growth of 21%, in the budget, which needless to say is unachievable. Likewise, the “Union Excise” budgeted at 2.6 Lakh crores, accruing from petroleum, is unlikely to be achieved if the product is brought under GST.

	Figs in Lakh crores (A-Actuals, RE-Revised estimate, BE-Budget estimate)
Revenue Receipts	2014-15 A	2015-16 A	2016-17 A	2017-18 A	2018-19 RE	2019-20 BE
Central GST	1.88	2.88	3.81	2.03	5.03	6.1
UT GST				0.01	0.03	0.03
IGST				1.77	0.5	0.5
GST				0.63	0.9	1.01
Union Excise				2.59	2.6	2.6
Service Tax	1.68	2.11	2.54	0.81	0.09
Taxes excluding Customs	3.56	4.99	6.35	7.84	9.15	10.24
Customs	1.88	2.1	2.25	1.29	1.3	1.45
Total Indirect taxes	5.55	7.11	8.78	9.13	10.45	11.69
Revenue Receipts
Central GST						21.27%
Taxes excluding Customs		40.17%	27.25%	23.46%	16.71%	11.91%
Total Indirect taxes		28.11%	23.49%	3.99%	14.46%	11.87%

Election Budget

The “Modi” chorus in Parliament, after the announcements, by the ruling coalition members is a reflection of their belief that the “political budget” laced with freebies is sufficient to entice the electorate to re-elect the coalition in the general elections, tentatively poised for May 2019. The 3 large population segments targeted - accounting for about 25 crore citizens or about 125 crore if family members are counted too- are as follows

Agriculturalists: The budget announced Rs 6000/- to be transferred vide DBT (Direct Benefits Transfers) into the bank account of the 12 crore small & marginal farmers – defined as those having less than 2 hectares or 4.94 acres of land - in 3 instalments of Rs 2000/- each.  The first instalment shall hit the bank accounts before Mar 31^st 2019, lending itself to criticism that it is a bribe paid from the public exchequer for securing a private vote for the BJP.

An amount of Rs 20,000 cr has been budgeted in the current year & Rs 75,000 crores for the next, effectively increasing the fiscal deficit by 0.1% this year & 0.3% the next. Critics acknowledge that the farm distress is a reality & an intervention was necessary but criticise govt. action on following grounds:

(1)Telangana & Odisha have better income support schemes. Telangana Government’s “Ryuthu Bandhu” scheme arranges for the transfer of Rs 8000 per acre, across 2 instalments - coinciding with the Rabi & Kharif crop sowing season. Odisha’s KALIA scheme (Krushak Assistance for Livelihood & Income Augmentation) assures financial assistance of Rs 10000 per family to vulnerable cultivators & landless agricultural labourers – either due to old age, disability, disease etc.

 Rahul Gandhi lambasted the scheme since it translates into a paltry Rs 500/- per month or Rs 16.67 per day or as Yogendra Yadav averred “less than Rs 3.5/- per a family member, per day,  that cannot buy even a cup of tea.”

 (2)While the economic situation of landless labourers, share croppers & tenant farmers is worse off than small & marginal farmers, they have been excluded from the scheme. Under KALIA though, financial assistance of Rs 12500 is provided to each landless agricultural household for funding agricultural allied activities like goat rearing units, duck units, fishery kits for fisherman, mushroom cultivation, bee keeping, mini layer units etc.

Salaried Employees: BJP is traditionally well entrenched in urban areas due to the support of the middle class through a measured outreach program strengthened by articulate spokespersons on national media. The Modi govt. has kept this segment in good humour, throughout this term, & strengthened the relationship further by offering an income tax rebate of Rs 12500 under sec. 87A. While the benefit is meant to target the small tax payers in the 2.5 - 5 Lakh slab, a good tax planner can help a citizen up to a salary of 8.15 lakhs or beyond (if he avails of an additional housing loan & interest payment thereof) to pay zero tax. About 3 cr tax payers shall benefit under a giveaway of Rs 18500 cr.

All Figs. in Lakhs of rupees	Earlier	Now	Explanation
Salary	8.15	8.15
Standard Deduction	0.4	0.5
Deductions under  Sec 80C	1.5	1.5	EPF. PPF with a 15 year lock in, Tuition fees, Housing Loan principal, NSC,ELSS with a 3 year lock in, Senior Citizens Savings Scheme, Life Insurance premium, Bank FDs for 5 years & above, 5 year term deposits with post offices, ULIPs with a 5 year lock in, Sukanya Samriddhi scheme, Stamp Duty & registration charges, School fees for kids
New Pension Scheme Sec 80CCD(1B)	0.5	0.5
Medical Insurance for Family Sec 80D	0.25	0.25	Family is self, spouse & children; if one of the family members is over 60 years the deduction can go up to Rs 30000. If one of the parents is over 60 another Rs 30000 can be claimed; thus a total of Rs 60,000 can be claimed as deduction
Medical Insurance for elderly parents: Sec 80D	0.3	0.3
Deduction on Interest income: 80TTA	0.1	0.1	While TDS deduction was applicable on interest income over Rs 10k which has now been increased to Rs 40K, deduction is retained at Rs 10,000
Total Taxable Income	5.1	5
Tax	0.145	0.125
Education Cess 4%	0.0058
Rebate under Rec 87A		0.125
Total Taxable Income	0.1508	0

Prior to the scheme announcement  super senior citizens -aged above 80 years - & senior citizens –aged between 60 to 80 years - were exempt from  tax upto an income of 5 lakhs & 3 lakhs respectively; the differential tax slabs based on age is thus effectively removed. 

The other benefits

(a)Notional rent imposed on a 2^nd dwelling has been revoked to encourage the upper middle class to make an additional investment in housing;

(b) No capital gains, upto 2 crores, imposed if house sold & re-invested; instead of restricting benefit of reinvestment to one new house, benefit extended to 2 houses

Both the benefits for the farmers & the small tax payers – with amounts ranging from Rs 6000 to Rs 12500 would boost consumption; stocks of consumer staples & textiles would see a spurt. Irrational exuberance of discretionary consumption auto stocks especially 2 wheelers is likely. Burdened with huge inventory real estate stocks, ideally, should  not see as much of an interest as banks, housing finance stocks, paints  & home furnishing stocks . 

The urban middle class will thus root for the Modi re-election.  

Unorganized workers: India has about 42 crore workforce in the unorganized sector of the total of 50 crores. For workers with a monthly income under Rs 15000 per month, a pension of Rs 3000/- per month on retirement, at age 60 years, has been announced. About 10 crores workers are expected to avail of the scheme by contributing Rs 55, per month, if he joins scheme at 18 years & Rs 100/- if at 29 with a matching contribution from the govt.  An amount of Rs 500 cr has been committed in the budget. Just like the Amma canteen in Tamil Nadu or Ayushman Bharat – the health insurance scheme launched by the govt. – this scheme, despite low spends, has tremendous propaganda value; after all the pension payment for a worker aged 29 today would start off only after 31 years in 2050.

Workers registered under EPFO (Employee Provident Fund Organization) are paid a minimum pension of Rs 1000 per month today& the above announcement could trigger a demand from them to at least match the benefit promised to unorganized workers.

Gratuity limit has been increased from 10 lakhs to 20 lakhs enhancing goodwill.

Conclusion  

Modi’s foes would chafe at his disdain for institutional integrity & lack of respect for conventions.  But there is no denying that he is the sharpest political mind that India has seen for many years. With a meagre spend of Rs 20,000 crores & a promised spend of about Rs 94000 crores (Rs 75000 crores for farmers, Rs 500 crores unorganized workers & Rs 18500 crores for salaried employees) he has captured the mind space of 12 crore farmers, 10 crore unorganized workers & 3 crore salaried & five times the no. of you include the family members of the beneficiaries. If he hasn’t yet, his untiring grass root cadre will do the job or he will, with his uncompromising direct communication style. “Modi Brahmastra” sing his admirers & “jumla” cry his opponents but he could win at the hustling, unless leaders on the other side of the aisle display imagination & aptitude to design a fiscally prudent UBI (Universal Basic Income).