Good for farmers, little for growth PDF Print E-mail
Friday, 02 February 2018 04:31
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No subsidy/tax cuts, unclear MSP policy & slipped fisc send GSecs up, will hit GDP


Given the large levels of farm distress due to price crashes in the face of bumper harvests, the government has pressed all the right buttons. An Operation Green, along the lines of Operation Flood, will ensure, over time, more processing facilities for 290 mn tonnes of fruits and vegetables that, despite being more than foodgrains production, never got any form of protection through, say, procurement. The plan to upgrade 22,000 rural haats into mandis—a Rs 2,000 crore corpus fund will be set up for this—is important because India does not have enough mandis and farmers are forced to sell in big cartelised ones. Allowing lessee cultivators to also access crop loans is a good idea,and it is unclear why this was not allowed so far. The talk of how agriculture exports can treble to $100bn suggests the government will finally stop curbing exports when domestic food prices rise.

The move which got the biggest support, that of giving farmers an MSP—and to extend this to all crops, not just the handful today—that equals 1.5 times their cost, is either worrying or sleight of hand. One measure, A2 +FL, does not include the paid-out costs of land and labour while C2 does. The FM, however, didn’t say which cost he would use (see graphic). In the case of wheat, MSPs are 38% of C2 and so need to be raised accordingly. They are only 19% in the case of barley, 25% in the case of gram, 14% for lentils and a mere 4% for paddy. In other words, expect a surge in inflation and a bankrupting of government since, if the crops are not procured, farmers are to be compensated for this—for most crops, post-harvest prices are always significantly lower than MSPs. The other possibility is the government will use A2 +FL—at a time when farmers are up in arms, this means MSPs will have to be lowered based on the 50% norm.

There are lots of concessions for jobs creation in the form of a 30% tax deduction of the wages paid for new employees, the government paying the full 12% employers contribution to EPFO for three years and, most important, fixed-term employment has been extended to all sectors—while hire and fire was the preferred choice, fixed-term jobs solve the issue for new employment. A final view on the budget, naturally, depends on whether it stimulates growth and whether it is fully funded. A big plus, the result of both demonetisation and GST, has been the stunning increase in direct tax buoyancy. At two, in FY18, this is a growth not seen in the last decade and, in the case of personal income tax, the 2.6 buoyancy is even better and led to a Rs 90,000 crore increase in FY18, a number most felt was unachievable when it was proposed. The rise in GST is equally impressive since, with GST taking a while to stabilise and with just eight months of taxes this year instead of the usual nine, most expected a shortfall. As compared to a monthly collection of Rs 88,000 crore in July-Dec, Rs 111,000 crore has been assumed for the full year. Since that means a monthly collection of Rs 120,000 crore in Jan-March, markets are a bit worried—it is, though, true, that collections for all taxes peak in Jan-March. Reaching FY19’s targets, then, depends on the government being able to pull off similar magic again.

What has also worried bond markets—a 20bps rise in yields in one day is quite unusual—is that the massive health insurance scheme for 50 crore persons (40% of the population) is woefully underfunded. While the scheme should cost around Rs 30,000 crore, just Rs 2,000 crore has been provided for in the budget right now. Given the government’s emphasis on the usefulness of Aadhaar to cut wasteful subsidies, the inability to reduce subsidies is unfortunate. And, with the massive increase in direct tax buoyancy, there was a definite case for tax cuts for both middle-class Indians as well as for the corporate sector — the latter was not just a budget promise, it was also required to ensure Indian taxes were on a par with those globally. Doing this for firms with a turnover of less than Rs 250 crore is good for them, but with the bulk of profits and investment coming from the big firms, ignoring them looks a bit like 1970s-style socialism.

That the FM did not cut rates is odd since, if he wanted, he could have raised a lot more money—just lowering government share to 51% in 69 listed PSUs will fetch Rs 2.7 lakh crore, so money is not the overriding concern. And with Rs 7.6 lakh crore stuck in tax disputes, creating a genuine tax settlement panel would both give valuable money and improve India’s ease of doing business ranking. A 20% increase in infra-spend—the growth is 7.2% based on just budgetary resources — sounds a lot but, given the slowing of private capex, is inadequate; there is little to suggest any push on getting private infrastructure investors back. Uncertainty over the budget proposals has already sent bond yields up by 20bps on Thursday and by 136bps over the past six months. And to think RBI has been roundly chastised for not cutting rates by 25-50bps.



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