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The great balancing act by Jaitley on social and fiscal fronts

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The big relief is that Arun Jaitley’s fifth budget largely steers clear of the many traps that ensnare budgets before a series of big elections.

Finance Minister Arun Jaitley may have blotted his copybook by conceding a slippage in his fiscal deficit target of 3.2 per cent of gross domestic product (GDP) for 2017-18.

After all, this is the first time in the last four years that Mr Jaitley failed to meet the fiscal deficit target and announced a revised deficit figure of 3.5 per cent for the current year and a reduction of two percentage points next year.

He may have good reasons for failing to meet the target, thanks to the effects of the goods and services tax (GST), a shortfall in non-tax revenues and overspending under revenue expenditure.

But the big relief is that his fifth Budget largely steered clear of the many traps that ensnare most budgets presented before a series of Assembly elections in 2018-19, followed by a general election in May 2019.

The many social sector schemes and tax concessions announced in the Budget did not have as big an impact on the government’s finances as could be feared in a pre-election Budget.

Indeed, a fiscal slippage of three percentage points in the current year over the target and a modest correction to reach a level of 3.3 per cent of GDP next year suggests that the damage that could have been caused by electoral imperatives has been minimised.

That could well be because the expenditure numbers for many of these social sector schemes appear to be an underestimation. For instance, the Centre’s health outlay next year goes up by three per cent even though a major scheme for an enhanced health insurance coverage was announced. Similarly, the outlays for education and rural development go up by only 3.8 per cent and 1.4 per cent.

On the contrary, Mr Jaitley may have used the same electoral imperatives to boost the government’s revenues and address distortions in the taxation system. Thus, he taxed the rich, imposed long-term capital gains tax on earnings above Rs 1 lakh and gave tax relief to senior citizens and smaller companies below an annual turnover of Rs 250 crore.

In the process, he failed to fulfil his promise of reducing the corporation tax rate for all companies to 25 per cent, but there was merit in his argument that his decision to reduce the tax rate on all companies with a turnover of Rs 250 crore would cover 99 per cent of the corporate tax payers. Moreover, the 7,000-odd big companies that are still left to pay a higher 30 per cent tax rate actually have an effective tax rate of 22-23 per cent, thanks to the many exemptions available to them. Once these exemptions are phased out, the promise of reducing the tax rate for the large companies may also be fulfilled.

Domestic industry also got an indirect benefit from increases in the customs duty on a range of electronic items, whose imports may have undermined local manufacturers. The increased customs duty would be viewed as protectionism, but the move is in sync with the government’s idea of promoting domestic manufacturing.

Yes, he made several announcements of new programmes and schemes for agriculture, rural development, health and education. But these are largely schemes that would not rely on central finances in a big way. Thus, the likely adverse impact of these schemes on the Union government’s finances will be limited.

Which is why, perhaps, the outlay for agriculture and allied sectors has increased only 13 per cent for 2018-19, about three per cent for health, four per cent for education and 1.4 per cent for rural development. Thus, the burden of these social sector schemes may not have to be borne by the central Budget.

On the taxation front, he succeeded in widening the tax base – both in indirect taxes including GST and in direct taxes. This is likely to help the government in the long run in achieving the targets of reducing fiscal deficit to 3 per cent of GDP by 2024-25 and the government debt to 40 per cent of GDP from the current level of 49 per cent.

On the whole, Mr Jaitley’s fifth Budget has a good dose of schemes that offer benefits to farmers, employees, particularly women and health insurance benefits to people. But while presenting a Budget with a significant social impact, he does not allow any major slippage in the fiscal situation.

By Special Arrangement with the Business Standard

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1 COMMENT

  1. Farmers input cost is not taken care by government bcs.he is paying very heavily for canal irrigation and power to irrigate their all type of crops whether it is traditional , horticultural or agroforestry every farming has became unviable

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