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Budget and the growing pains

THE Budget is as much a political document as it is an economic one.

Budget and the growing pains

Cost-effective: Income levels of farmers need to be enhanced significantly.



Sushma Ramachandran

THE Budget is as much a political document as it is an economic one. The country’s annual accounting exercise becomes a way for the government to indicate its thinking on major policy issues. It will be all the more acute this time as it is the last full Budget presentation before the 2019 general election. In addition, as many as eight states will be going to the polls during the year, beginning with three in the Northeast in February. The general expectation is that the Budget will try to please people rather than antagonise them. A government that has been marching ahead relentlessly with economic reforms may now take the time to pause and try to reduce the burden of inflation and taxation on the general public.

The forthcoming Budget is widely expected to have a special focus on agriculture and the rural economy and this is as it should be. At a time when farmers’ distress has led to protests all over the country, efforts must be made to alleviate the problems of this crucial segment of the economy. Even though agriculture now comprises only 16 per cent of GDP, as much as 50 per cent of employment is accounted for by this sector. Income levels of those living in rural areas need to be enhanced significantly and within a very short time frame. One of the suggestions made by economists recently to Prime Minister Narendra Modi was that the emphasis should be on raising incomes rather than increasing crop productivity. That makes eminent sense. Fragmentation of holdings has meant returns from the land are becoming less and less. The cost of inputs like fertilisers and pesticides are subsidised, but even then, account for a huge chunk of farmers’ incomes. Plus credit availability has become the most critical issue right now, with farmers’ suicides having become endemic in some parts of the country.

The Budget is thus likely to have higher outlays for key agricultural sectors, including rural road schemes as well as incentives, to opt for allied activities that are more remunerative than traditional crops, like dairy production, fish farming and horticulture production. Allocations for the MGNREGS, a key programme of the previous UPA regime that has been adopted belatedly by the NDA government, are likely to be raised, given its ability to provide steady employment throughout the year. Credit availability, a major problem for farmers, will also have to be stepped up along with steps to ensure it actually reaches farmers. Demonetisation hurt the rural economy and the Gujarat election showed that voters in non-urban areas are looking beyond the BJP to revive their fortunes. Raising rural incomes is thus not just an economic imperative, but a political one with multiple elections are on the horizon.

As far as taxation is concerned, the Budget has lost much of its sheen since  indirect taxes like excise have been subsumed into the GST. Most of the secrecy surrounding Budget preparation had to do with the changes in these taxes. Customs duties are still under the Centre’s control but even these are altered throughout the year, not just during Budget presentation. Duties on petroleum products, are also out of  GST so there could be some cuts to soften the impact of the recent spurt in  world oil prices.

With populism being the mood of the times, the middle class, especially those in the salaried category, may get the much-needed relief in the form of raising the level for tax exemptions or a higher limit for investment in tax exempt savings instruments. As for corporate tax, Finance Minister Arun Jaitley laid down a road map in 2015 to bring it down to an effective level of 25 per cent within a five-year period. It would be in the fitness of things if this roadmap is followed since India otherwise becomes a high-tax island in this region. Plus, there are worries over the impact of the recent tax cuts in the US which could make it an even more competitive investment destination at a time when investments are lagging here.

This concern and the fact that India will be touching a four-year low in economic growth this year that will make Mr Jaitley’s job difficult in formulating the Budget. Stock markets may be booming but economic data does not support this bullish trend. To revive the economy he will have to give a boost to investments in infrastructure by raising outlays for roads, highways, ports and power. The housing sector has to be another priority as construction is employment-intensive and generating jobs has to become a priority of this government.

The question is; where will the Finance Minister find the resources to ensure fiscal deficit targets for this year and the next fiscal? Clearly, the question has been answered for the current year with the recent announcement of the ONGC  buying government’s 51 per cent shareholding of its sister public sector company, HPCL. This is the first step towards creating an integrated oil company on the lines of global oil majors. The ONGC is an oil exploration and production company while the HPCL is an oil refining and marketing firm. The integration means that the ONGC will shell out Rs 35,915 crore for its share purchase, thus enabling the government to meet its disinvestment target for the current fiscal. Even for 2018-19, it is likely that there will be a major drive to disinvest in public sector entities, thereby enlarging the resource basket. 

Many worries remain, however, for the Finance Minister while he tries to balance the country’s Budget. One is the rising price of oil in the world market and the resulting high import bill and subsidies on petroleum products for mass consumption like kerosene. The second is the continuing issue of farmers’ distress, which is undoubtedly a long-term problem that cannot be dealt with in the Budget alone. And the third is the need to revive investment in key infrastructure sectors as well as manufacturing to ensure that more jobs are generated for the millions of young people who are unemployed. Most of these problems cannot be solved immediately in the Budget. But this is the time to present a policy direction indicating that there is a resolve to deal with all of them.

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