Right focus on agri & infra with tight fiscal control. Big targets for spectrum and PSU sales, little on subsidies
Spectrum sale target implies Rs 240,000 cr of auction bids versus Rs 109,000 cr last time, divestment needs to grow 2.4 times ... but higher GDP means tax collections may give a bit of a cushion
Given the state of the economy and the rural distress, finance minister Arun Jaitley has pressed all the right buttons, the most important of which was sticking to the fiscal deficit. Had he not done so, bond markets which are worried about the exceptional amount of government paper on offer—including UDAY bonds—would have panicked and, with rates rising, any interest rate cut would have been impossible. So, there is a massive expansion for agriculture and irrigation from Rs 25,988 cr in FY16 to Rs 54,212 cr in FY17 which includes the cost of an ambitious crop insurance scheme; and, to stimulate capex, between roads and railways, there’s a whopping Rs 2.18 lakh crore which tots up to 1.5% of GDP.
How Jaitley has stuck to his 3.5% target is more than a bit of smoke and mirrors since he has also provided R93,000 crore (not including defence) for salaries and pensions on account of the Pay Commission. The agriculture number, for instance, includes Rs 15,000 crore of interest subsidy shown under a different head earlier and the railway number includes substantial borrowings from LIC and multilateral agencies.
Once you strip out the annual telecom licence fees and the deferred payment from an earlier auction, the Rs 98,994 crore of receipts implies the next auction will fetch Rs 2.4 lakh crore—as per bid terms, a fourth has to be paid up-front—as compared to Rs 1.09 lakh crore last year! Similarly, raising divestment levels to Rs 56,500 crore means the markets have to rise substantially and the government will do a U-turn in its PSU policy and begin strategic sales—keep in mind this is the same government that continues to pump in money into the loss-making Air India and believes MTNL and BSNL can be turned around. Between spectrum and divestment, the FY17 increase adds up to 0.5% of GDP, roughly the number Jaitley needed to shrink his deficit by—so a slip here, and the budget’s done for. The projections on income tax collections are equally optimistic, perhaps because of the amnesty scheme. There could, of course, be a cushion in the excise duties and service tax where collections could surpass the target given how nominal GDP is expected to rise 11% versus FY16’s 8.6%.
While giving statutory status to Aadhaar is good news, what is worrying is that there is little action on subsidies. Though the Survey had talked about huge fertiliser subsidy waste—a fourth of urea subsidies are wasted on inefficient users and just a third goes to small/marginal farmers—only a pilot is planned for direct benefit transfers. Nor has there has been any attempt to use cash transfers for food subsidies—the decision to automate 60% of ration shops will save money by weeding out fake customers only if the accounts are, by then, all linked to Aadhaar numbers. As a result, we are still in a situation where there is a lot more being spent on agriculture by way of subsidies than by way of investment—in other words, this is still reform in baby steps. And unless the existing FCI-MSP system is dismantled and replaced with cash transfers, it is difficult to see how farmers can be benefitted across the country—the budget, however, talks of spreading MSP including through online procurement which defies logic.
In the case of LPG, while covering 1.5 crore more households this year and 5 crore in another two years, is welcome, this will make subsidies balloon unless there is a very sharp cut in the benefits for the middle-class and the rich—all that the government has done so far, however, is to say it will not give the subsidy to those earning more than Rs 10 lakh a year, or just the top 2-3% of the population.
After close to two years of wasting time on freeing up natural gas prices, as a result of which exploration came to a halt, the budget’s talk on this is welcome, but even now this is restricted to a policy for ‘calibrated marketing freedom’ being under consideration. In other words, while there are also welcome steps in simplifying taxation, the overall impression is of a government reluctant to change the status quo—why else would it raise MNGREGA outlays when it is obvious that PMGSY is far more efficient and has less leakages? Banks remain a weak work-in-progress with the recapitalisation cycle lagging the NPA-recognition one, and reiterating the taxman’s known position on retrospective taxation—pay the principal, we will waive the penalty and interest—only reaffirms the view that the government is boxed in by its suit-boot-ki-sarkaar tag and cannot move ahead in addressing genuine investor grievances. If this is what happens in the third budget, it is difficult to see how things can get much better as we get closer to the general elections.