Budget 2018-19: Beginning the 2019 Election Campaign

16 Feb, 2018    ·   5434

Prerana Priyadarshi considers the reasons that make this a populist budget and the pitfalls contained therein

Prerana Priyadarshi
Prerana Priyadarshi
Senior Researcher, Centre for Internal and Regional Security (IReS), and Manager, Operations and Outreach

The 2018-19 union budget is a clear indication that the Prime Minister Narendra Modi led-National Democratic Alliance (NDA) government has started its groundwork for the 2019 Lok Sabha (LS) elections. This budget seeks to revive the Modi government's tagline, "garibo ki sarkar," which had led them to power in 2014. The announcements related to agriculture, healthcare, and Micro, Small and Medium Enterprises (MSME) seem to support this conclusion. Changes to taxation regulations too are neatly tied to government's effort of widening the tax base, commonly understood to be demonetisation's 'final objective'.

The Bharatiya Janta Party (BJP) entered the 2017 Gujarat assembly election with high agrarian distress and rural discontent riding on its back. This was one of the factors that led to a fall in the BJP's vote share from 59.1 per cent in 2014 to 49.3 per cent in 2017. The government witnessed the impact of the agricultural and rural sector's distrust on the Gujarat elections, particularly how it challenged the BJP's pro-farmer narrative that was created in 2014. Budget 2018-19 thus was an opportunity to placate the numerous disillusioned poor and rural voters and restore credibility before next year's LS elections.

In this budget, the government has announced that  minimum support price (MSP) for all unannounced kharif crops will be increased to at least one and half times of their production cost. This step is to safeguard agriculture produce from price fluctuations in the market.

However, the definition of cost is left unclear. It will be important to know how the government will ensure that this does not reward inefficient usage of inputs, and whether it will conduct audits to ensure that the cost is not inflated. This is a risky step that has the ability to introduce an upward pressure on food prices and cause some inflation, but has been taken anyway so the government can pitch itself as pro-farmer.

Another important aspect of this announcement is the mathematics of it: the payment of the differential between mandi price and MSP to farmers, if implemented, could increase the government's burden by over INR 20,000 crore. At this point, it is difficult to ascertain whether  the government has done its calculations, and if the economics of the decision have been taken into consideration before deciding the fiscal deficit figures.

Unemployment was another issue highlighted during the Gujarat elections, and will continue to be a major challenge for the government in the run up to LS elections. In the wake of dipping jobs during its tenure, especially in rural and sub-urban areas, the government has increased the budgetary allocation for rural road construction by 12.4 per cent, which will involve employing rural people in augmenting rural infrastructure. This will increase employment opportunities and can help absorb agricultural labourers. Besides this, 95,000 direct and indirect jobs will be created through the new mega food parks, and another 75,000 jobs will be created for building cold chains and other agricultural infrastructure. Even the Pradhan Mantri Employment Generation Programme is estimated to create 294,000 jobs. The government this year will push to reform the labour laws to maintain continuity with these job-related announcements.

Sabka Sath, Sabka Vikas” is another tagline that the government will be looking to use again during the 2019 election campaign. The announcement of new National Health Protection Scheme (NHPS) seems to be an effort in this direction, given its focus on the economically disadvantaged.

NHPS proposes to provide cover of up to INR five lakh per family per annum for 10 crore families (approximately 50 crore individuals) for secondary and tertiary healthcare and hospitalisation expenses. However, various industry experts feel the actual spend by the government will be much higher than the meagre allocation of INR 2000 crore. Further, the timelines for the scheme's implementation look uncertain as the structure of the scheme is yet to be finalised.

Regardless, this has given the government a talking point for the 2019 elections.

Post demonetisation and the Goods and Services Tax (GST), the government has drawn flak over the sliding growth in the MSME sector. By announcing a reduction in the corporate tax rate from 30 to 25 per cent for entities with a turnover of less than INR 250 crore, the government has sought to neutralise the negative sentiment emerging from the sector. Approximately 99 per cent of companies paying tax will benefit from this announcement.  This decision is also a message to the MSME sector that the government has delivered on its promise made in the 2014 budget to structurally reduce the corporate tax.

Widened Tax Base
The 2018 budget witnessed the reintroduction of long term capital gains (LTCG) tax on sale of listed equity shares and the units of equity-oriented funds with an exemption to the extent of INR 100,000 in a financial year. Further, the gains made till 31 January 2018 are grandfathered, which is a great respite for existing investors as the impact will not be with retrospective effect.

However, the announcement negatively impacts long-term equity investors. Firstly, this is in addition to the Securities Transaction Tax (STT) that an investor already pays on the total consideration paid or received in a share transaction. Secondly, indexation benefit, which would have taken into account inflation from the time an asset is bought till it is sold, is absent.

The introduction of 10 per cent Dividend Distribution Tax (DDT) on listed equity and units of equity-oriented funds is another adverse announcement for capital markets, and impacts the investor community at large. This impact intensifies as there is already a 10 per cent tax on dividend income of above INR 1,000,000 from listed equity shares (equity-oriented funds are exempt) in a financial year resulting in double taxation on the same income.

While these two announcements are not investor-friendly, it opens an additional income stream which is in sync with the government’s agenda to widen the tax base. These taxes will help the government accentuate the poor-rich divide, and help demonstrate how the government is working for the poor by making the rich pay for it.

Budget 2018-19 did not contain surprises considering that it is an election-year budget. It represents the government's efforts to put to rest the criticism that the ruling BJP was not sensitive to farm distress and the marginalised sections of the population. The government has still a year to go to implement these schemes, and if they falter there, it can certainly change the game come election season.