A budget to live with

In the lead up to the budget speech, it was anticipated that the Finance Minister, Mr Arun Jaitley, would have had one eye on the upcoming Assembly elections this year and the Lok Sabha in 2019.

The most common phrase bandied about from prognosticators was that this was going to be a “populist” budget with many sops. The FM was also dealing with lower revenue receipts and a higher than expected fiscal deficit for this time of the year. He was therefore going to have to walk a fine line in terms of making sure that various constituencies were satisfied and at the same time sticking close to the commitments he had made over the years on fiscal deficit.

The overall take-away is that he has managed to pull off well the balancing act. The decision to not stick to the fiscal deficit targets that he set for himself for FY18 and FY19 is as much a political statement as it is an economic one. He has decided that it is far more important to breach the norms in the short term to ensure that growth is not stifled and that there is potential headroom for job creation. Increasing the interest burden of the country at a time when oil prices have been creeping up steadily could well be an unintended consequence.

As is usual with the budget speech, there were many schemes that were announced and one can look forward to being introduced to new acronyms. Let me now begin by commending the government on three material areas.

Infrastructure Spending

The first is the continued push on spending on hard infrastructure like roads. In the medium to long term, this will have a very positive impact on reducing the overall cost of logistics in India and enabling remote locations to be brought into the economic mainstream and will have a positive impact on long-term economic growth.

Healthcare Coverage

The second is the move toward universal healthcare coverage for the poor through the introduction of essentially the world’s largest health insurance scheme – one that covers up to Rs 5 Lakh of healthcare expenses. They key watch-out here will be whether the healthcare delivery system will be able to live up to the challenge. However, this will have a big psychological benefit and ensure that the burden of medical expenses is not an anchor that continues to push people below the poverty line.

Job Creation

The third is the focus on job creation sectors like agri-businesses and textiles. Directed fiscal incentives should enable the formal sector to look at investments in these areas more seriously. The focus on farms and the rural economy is necessary if we want the entire country to grow and not have the benefits restricted to specific sections of society. The one area that could have benefited from a similar treatment would have been tourism, which also has significant job creation potential.

A Budget to live with

There are two areas that one can pick a bone with the set of announcements. The first is the introduction of the long terms capital gains tax on investments. I understand that given the fiscal situation, any and all sources of income are fair game but in an environment where you are seeing more and more families pulling money out of the informal economy and channeling them through regulated investments, curbing this trend seems unnecessary. Whether the FM likes it or not, this move will be very contentious.

The second is the complicated jugglery around putting in place a standard deduction for the taxpayer while also introducing a cess. Whether or not the two cancel out in many cases is immaterial – this could be perceived as being a move against the salaried middle-class.

Overall, the FM has given the country a budget that it can live with. He will be hoping that growth in the upcoming year will be in the 7.5% range so that all the numbers tie out and that he can get back on the fiscal glide path that he committed to when he took over the job.

(The author is Chairman Bain & Company India. Views expressed here are personal)