The Finance Minister presented the first budget since the end of demonetization and GST went online. Here are some of the highlights with an economic backdrop:
The government has been successful in broadening the tax base, increasing compliance. Fiscal deficit is projected to be 3.3% for 2018-19, down from 3.5% in 2017-18.
The divestment target has been raised by 10% to INR 80,000 crores. On the other hand, a bank recapitalization program was launched for same amount.
The Finance Minister accepted the recommendation of the Fiscal Reform and Budget Management Committee to target fiscal deficits and lower the Central Government Debt-to-GDP ratio to 40%. Although pledges to maintain fiscal discipline at the Centre are welcome, it would be constructive if the state governments also shared the same sentiment.
The 2017 ratio of gross fixed capital formation to GDP dropped to 2003 levels of 26.5% after reaching a peak of 35.6% in 2007. Growth of credit to medium enterprises has been negative since June 2015. Lowering corporate tax rate to 25% for MSMEs may spur growth in investment.
FDI grew 20% in 2017. One big market is more enticing for a foreign firm to enter. It is easier to scale operations quickly under the GST regime. Getting rid of artificial boundaries between states and the red tape that was the old regime will go a long way in reducing NAIRU (Non-accelerating inflation rate of unemployment).
The economic survey blames the recent uptick in inflation on the oil price rally, 7th Pay Commission rent allowance raise, higher vegetable/fruit prices. Stripped of these items, the inflation is increasing modestly at the rate of 4.3%. Businesses have been slow to pass the incidence of GST to customers.
Creation of a new entitlement program like the National Health Protection Scheme may not bode well for the government’s long-term fiscal health.
Higher custom duties to protect and incentivize domestic manufacturing, risks triggering retaliatory tariffs from some trading partners.
Government has allocated INR 5.97 lakh crores to be spent on building infrastructure which may pay dividends in the long run.
Funds earmarked for various schemes in the agricultural sector – price support, subsidies, crop insurance etc. may affect fiscal health.