Budget preparation and presentation in India is no ordinary affair. More by design than by accident, budgets are expected to meet everyone’s desires and wishes. This year’s exercise was no exception. Different industry bodies wanted sops specific to them, investors wanted lower taxes and fiscal improvement, the common man wanted lower inflation and better public services. The immediate aim of the government was to recoup the erosion in its rural support-base that was witnessed in the recently held elections in a few provinces. There was also a political need on the part of the government to demonstrate that its flagship long-term initiatives for improved governance, tax compliance, social and economic infrastructure and expansion in the envelope of the formal economy that normally require several electoral cycles to come to full fruition are also showing results.
If the experience of the newly developed countries in Asia and elsewhere is any guide, the process of the India’s transition into an economy with a lesser number workforce dependent on agriculture should necessarily involve larger spending on rural education, health and infrastructure, especially road and digital connectivity, leading mainly to higher agricultural income and productivity.
The sweep of this budget is indeed wide, as a consequence. There is hardly any major aspect of the social and economic lives that has been left untouched. At one level, there is nothing unusual about it, given the country’s vast number of poor, dispossessed and oppressed on the one hand, and its underdeveloped and inefficient social security and infrastructure, on the other. At another level, it recognises the society’s still-prevailing rent-seeking cultural mores, which expect the State to be on one’s side from cradle to grave. A significant section of the population and political class still expect that it is the State’s responsibility to expand employment by directly hiring more hands. But, if the experience of the newly developed countries in Asia and elsewhere is any guide, the process of the India’s transition into an economy with a lesser number workforce dependent on agriculture should necessarily involve larger spending on rural education, health and infrastructure, especially road and digital connectivity, leading mainly to higher agricultural income and productivity. It will be apposite to view and evaluate the budget from this perspective, among others.
The aggregate allocation for the rural, agriculture and allied sectors is higher by 24% vis-à-vis the previous year. The financial infrastructure and support for agricultural activities are also sought to be strengthened. While the target for institutional credit for agriculture has been raised to a record Rs. 10 lakh crores, the operations of all the 63,000 functional primary agricultural societies(PAC) will be modernised by way of computerisation and integration with the core banking systems of their respective district central cooperative banks. The latter-mentioned step can be transformational for the agricultural cooperative system of the country.
While the setting of MSP higher at 1.5 times the production cost of all notified crops is possibly intended to be viewed as the government’s response to the widespread rural distress caused by fluctuating agricultural prices, the budget has done well to announce the modernisation of the country-wide markets for agricultural produce and linking the latter to the commodities exchanges.
The high increase in the coverage of crop insurance is also noteworthy. Setting up of three funds for irrigation and diary processing will hopefully address the lack of investment noticed in these areas for a long time. More than being a milestone, the completion of rural electrification in 2018 is also a recognition that significant regional disparities in this regard have finally been addressed. The hike in the allocation for rural housing by more than 50% is positive, least of all for its employment generating potential in the adjoining areas.
While the setting of MSP higher at 1.5 times the production cost of all notified crops is possibly intended to be viewed as the government’s response to the widespread rural distress caused by fluctuating agricultural prices, the budget has done well to announce the modernisation of the country-wide markets for agricultural produce and linking the latter to the commodities exchanges. Greater participation of farmers in the emerging country-wide market for agricultural commodities, and hedging price risk – possibly through an institution such as PAC – in the commodities exchanges can reduce the dependence on MSP in future.
In most states, small farmers continue to be at the receiving end of the bargain at the mandis run by APMCs, but dominated by middlemen. The budget seeks to expand the coverage of National Agricultural Market (e-NAM) from the current 250 markets to 585 APMCs, which will not only reduce the stranglehold of middlemen, but will also be one more important step toward creating a country-wide market for major agricultural commodities.
As expected, the fiscal targets for the current as also for 2018-19 will be missed. Although the deficit for 2018-19 has been pegged at 3.2% of GDP, it is likely that it will be higher at least 3.5% - same as the revised estimate for the current year - for a very simple and obvious reason that next elections will be in 2019, if not earlier. Thus, for the last two years in a row, the fiscal path will deviate from its target trajectory. This will create more uncertainty in the government securities market, which has already been in a bear phase for the last several months and has been the worst-performing in Asia.
Yield on government securities rose by about 40 basis points since December, 2017 and the immediate reaction of the market after the budget presentation was one of nervousness, pushing up the yields all across the curve by 5-10 basis points. By all indications, the government’s average borrowing cost in 2018-19 will be higher by about 50 basis points compared to 2017-18, although the quantum of market borrowing is planned to be lower.
Although the deficit for 2018-19 has been pegged at 3.2% of GDP, it is likely that it will be higher at least 3.5% - same as the revised estimate for the current year - for a very simple and obvious reason that next elections will be in 2019, if not earlier. Thus, for the last two years in a row, the fiscal path will deviate from its target trajectory.
Moreover, the banks, which hold an overwhelming majority of government securities, will make significant valuation losses when they close their books on March 31, 2018, reducing their ability to lend more, all else being the same. The fiscal slippage will also mean that the confidence of investors arising out of the country’s first ratings upgrade in years last November will receive a jolt. A volatile government securities market will also not provide the best environment for introducing important reforms announced in the budget for corporate bonds. A good thing amidst all this is that the government intends to use the ratio central government debt to GDP at 40% as the macroeconomic anchor for its fiscal policies and operations in future.
On the whole, however, this is a good budget which will promote growth and investment. Its rural and social sector proposals, the most attention-catching and hotly-debated of which is the Rs. 5 lakhs a year assistance to 10 crores families for medical treatment, will likely reduce distress and deprivation, and eventually result in higher and balanced economic activity in the country.
(The writer is a former central banker and consultant to the IMF)