Minutes after Finance Minister Arun Jaitley concluded his Budget speech, Finance Secretary Hasmukh Adhia took his seat before the camera on a prominent business news channel to answer questions and discuss the Union Budget.
While it is customary to congratulate the top bureaucrat on the Budget, in this case, the mood in the studio appeared to be significantly darker — fiscal slippage and the levy of the long-term capital gains tax were two of the several worries playing on corporates’ minds.
Charitably termed a ‘Budget for Bharat’ and an ‘Election Budget’, it is one of the less memorable in recent history. It’s better aspects are the policies that Jaitley largely left untouched or made only minor tweaks to.
Fiscal trap and interest rates
The amendment to the fiscal roadmap has become an annual fixture over the last two years, with the government justifying the slippage of 30 basis points for the current fiscal with lower revenues from the Goods and Services Tax (GST). With the markets appearing to largely take the slippage in stride, one might be tempted to take a chalta hai approach to the fact that the fiscal deficit target has been missed by a wide margin for the first time in five years.
What becomes significant, however, is that the fiscal slippage may have a domino effect on domestic interest rates going forward. With the hike in minimum support prices (MSP), oil prices trending upwards and inflation headed back north, analysts are now expecting interest rates to rise 50 basis points in the current fiscal year. Goldman Sachs has since pointed to a 20 basis point upside risk on the already relaxed fiscal deficit target of 3.2 per cent for FY19.
Moreover, the re-aligned roadmap doesn’t appear to have resulted in any significant change in spending patterns for the upcoming fiscal. In macro-economic parlance, the fiscal headroom appears to largely be to fund the indirect tax shortfall, rather than substantial new investments. Many flagship programmes have seen their outlays augmented somewhat.
Technology and connectivity
The Budget demonstrates just how out of touch the government is when it comes to technical evolution and cutting-edge technologies. Of 900 million or so Indian adults, only 400-450 million currently have mobile internet access. The government would do well to note that 500,000 WiFi hotspots with a service radius of 100 ft each do little to solve the larger issue of access.
With the National Optical Fibre Network in place, the government could do far more than currently stated, and instead look at 4G/5G devices and low-cost, free or subsidised mobile internet access by allowing private players to pay-to-play on this immense network. To solve a problem, the solution must largely be mutually exclusive and collectively exhaustive. The current measures outlined are neither.
Crypto-currency and blockchain
This is one of the most significant and far-reaching aspects of the Budget that could have immense consequences on the economy in the next decade.
“The Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system.”
The above is not just a poorly phrased sentence from the Budget speech, but also shows the government’s extreme ignorance to the reality of crypto-tokens. Markets gravitate towards assets that fulfil a need, and crypto-tokens are fulfilling the need for global, decentralised assets, and the fact that they have well over half a trillion dollars in market capitalisation demonstrates there is a need.
Bans and crackdowns simply lead to evasion. The first lack of foresight the government exhibits is viewing crypto-tokens simply in the context of payment systems rather than an inherent store of value. Initial coin offerings have demonstrated that investors globally see these tokens as investment destinations, far more so than mere monetary instruments.
The chief area of concern within the regulatory purview of the government and the RBI should be the point of conversion of these tokens into fiat currency, as well as identifying the source of investments made through cryptographic exchange systems. Both of these aspects can be addressed through effective KYC systems within cryptographic exchanges, several of which are already flourishing in India today.
Whether North Block and Mint Street like it or not, crypto-tokens are comparatively seamless and reflect the new reality of global financial evolution. To ignore this would be both stupid and dangerous.
Government as an operator of enterprise
The government’s commitment to disinvest and streamline was incredibly heartening and is undoubtedly one of the brighter sparks of the current regime. The commitment to expand that programme is one of the smarter parts of the latest Budget.
Disinvestment receipts were the highest for any year to date in FY18, and the decision to list 14 public sector undertakings in a single year signals a commitment towards less government control. While naysayers fall back on the argument that divestment equals pawning off the family silver, the fact is that the silver has long since turned black.
That Jaitley was unafraid to use the privatisation word is good news for eradicating the excess that is characteristic of several public sector companies today.
Lack of evolution in the Railways
The rail network needs to get less bureaucratic, grow faster and needs immense investment and enhancement in freight-carrying capacity and speed. Both of these can only be done with a massive participation of private investment and, sooner or later, the government must actively start considering more private involvement in the railways. It must consider models such as the UK, where the physical infrastructure is nationalised, but rolling stock is private.
While the Finance Minister spoke of Wi-Fi and escalators at railway stations, the fundamental problems of the Railways remain the same — it needs a lot of money and a change in mindset. Without that, we’ll be left funding subsidised alcohol at Railway Officers’ Clubs across the country!
The good stuff
The two bright spots in this otherwise bleak Budget are the government’s proposal to create the National Health Protection Scheme (NHPS) as well as the incredibly sensible, if blasé, approach the government has taken to personal income tax.
NHPS and the welfare state
The NHPS is an excellent opportunity to, once and for all, make India an effective welfare state by removing the poor access to healthcare that has been the hallmark of our social security net. That over 75 per cent of the healthcare market in India is private and consumes many households’ life savings makes this a problem worth solving.
The devil really lies in the detail, but if the State pays healthcare premiums for its poorest 50 crore citizens, it could usher in a huge revolution in terms of access to healthcare. Of course, adequate geographical coverage, timely and cashless settlements among several other aspects will have to be addressed to make the solution workable.
Meanwhile, it doesn’t help that the scheme adds to the long list of fiscal liabilities, and could lead to a bill of as much as $20 billion even at a redemption rate of just 5 per cent of projected beneficiaries, in a given fiscal.
In either case, universal healthcare is a positive pursuit, and the possibilities for this to evolve into the insurance marketplace model over the long run is a realistic possibility.
Personal income tax
India’s income tax rates are fairly reasonable for a country growing at its current pace, and making the medical reimbursement and conveyance a part of standard deduction is a positive step in making life easier for the salaried class. However, the augmented healthcare and education cesses actually increase the overall tax rate.
As per capita consumption in India rises, we have the potential to benefit from the higher indirect tax revenues and become an overall low-income tax economy compared to other developed economies to the Indian citizen’s overall benefit.
Concluding thoughts
What is striking about Jaitley’s final full Budget is how utterly devoid it is of new ideas. An inordinate amount of time of the speech was taken up in recounting purported achievements of the past years or outlining underwhelming statistics such as the fact that only ₹23.5 crore per city on average has been spent so far on flagship projects such as the 100 Smart Cities.
While the NHPS, levy of a long-term capital gains tax and a reiteration of the commitment to privatisation and disinvestment are commendable in moving towards a prosperous market economy, it is far from being one of this government’s better Budgets.
The Budget in its best form is a strategy document — a blueprint for the vision of growth for the nation, and past Budgets presented by this government have, to varying degrees, played that role. The same cannot be said of this year’s documents.
The current Budget falls short of that standard by a country mile!
(The writer is in the PGP class of 2018 at ISB.)