Treading along the 'dangerous' path

When Finance Minister Arun Jaitley arrived at the Parliament on February 1, his task was cut out -- to present a balanced budget.

After the initial euphoria over rural focus, came the jolt. As the numbers were dissected, came out a grim picture. While on one hand the government missed on its fiscal deficit targets, on the other hand, the Finance Minister has yet again pegged hopes on ad-hoc measures for 2018-19 deficit targets. The government is aiming to generate Rs 80,000 crore from divestment drive.

For FY18, total revised estimates for expenditure are pegged at Rs 21.57 lakh crore (net of GST compensation transfers to the States) as against the Budget Estimates of Rs 21.47 lakh crore, breaching the fiscal deficit target by 30 basis points (bps). The new target for the fiscal deficit is stipulated at 3.5%, as against Budget estimate of 3.2%. Moreover, for FY19, there is a mere consolidation of 20 bps.

"The Finance Minister's budget speech had the undertones of a pre-election budget, in our view. However, the actual increase in rural spending is not much. Fiscal consolidation by 20 bps of GDP also means no growth boost," UBS, one of the world's top asset managers, said in a research note.

While the deficit for 2017-18 has been revised to Rs 5,94,849 crore, for next fiscal it has been pegged at Rs 6,24,276 crore, which is 3.3% of GDP. Many, like UBS, have raised concerns on inflation in the economy owing to this.

The government has committed to keep MSPs (support prices) for crops at 1.5 times their cost of production. This implies a potentially higher hike in June 2018. "Our analysis (inside) implies this could mean a 15-20 bps impulse to CPI inflation by itself," says UBS.

Manufacturing ignored

Make In India, one of the pet projects of Prime Minister Narendra Modi, found a mention just twice in the Budget speech. One was the casual reference, wherein Jaitley said, "Initiatives such as Digital India, Start Up India, Make in India would help India establish itself as a knowledge and digital society."

The only push Finance Minister gave to Make in India, was that of increasing customs duty on certain items. The government has proposed to increase customs duty on mobile phones from 15% to 20%, on some of their parts and accessories to 15% and on certain parts of TVs to 15%. This might prove very fatal, at the time the country has been given the vision of going digital.

Though many analysts that DH spoke to suggest that there is lot of over-production in the manufacturing side, and this move might be aimed at clearing inventories. However, if Reserve Bank of India (RBI) data is any indication of the industry mood, the consumer durable credit has been gradually going down. In this financial year it has declined by 13.6%, from Rs 2,080 crore in the beginning of the year to Rs 1,820 crore as of November 24, 2017. Many economists attribute this downfall to the high Goods and Services Tax rates.

Also, there wasn't much in the budget for the manufacturing sector, which has shown a steep decline in growth -- by 330 basis points, from 7.9% in FY17 to 4.6% in FY18. In fact, the growth in the total value added by manufacturing sector has declined by 57% since FY16, when it stood at 10.8%.

LTCG shocks markets

The biggest immediate dampener came from the equities side -- in the form of the introduction of a long-term capital gains (LTCG) tax on equities. Both 30-share index Sensex and 50-share Nifty reacted negatively next day. While Sensex shed 840 points, Nifty fell by 256 points.

Further, sharp revisions in almost all budget items for FY18 raise doubts over the sanctity of FY19BE numbers, according to Market advisory Motilal Oswal. "It is also notable that capital spending is budgeted to fall to 1.6% of GDP in FY19BE – the lowest in the past half a century versus 1.8% in FY17," the advisory says in a note.

The doubts raised by Motilal Oswal have a precedence. With the government estimating Rs 80,000 crore of its revenue to come from divestment, the question in the minds of public is what if the government finds a shortfall there? "We saw shortfall in the revenues of the government happening in 2016-17 due to the dependence on spectrum auction, which attracted less bidders. There has also been some shortfall in non-tax revenues on account of certain developments, including deferment of spectrum auction," Jaitley confessed in his Budget speech.

The receipts coming from one-off inflows like divestments are meant to be considered as financing items, as per the IMF's Government Finance Statistics Manual.

With so much brouhaha over lack of job creation, the budget was eerily silent on the job creation. The data derived from Employees' Provident Fund Organisation (EPFO) accounts suggest that India created at least 5.5 million jobs in the formal sector in FY18, on top of around 4.5 million in FY17, around 25% of the target. As the primary sector of the Indian economy, agriculture provides employment to almost 51% of the total population. However, the sector's contribution to the country's GDP is just 12-13%, conveying lot of disguised unemployment in the sector.

Although, this is a risky and adventurous budget, but Finance Minister seems to have played it smart. He has kept everyone happy, without giving much to them!