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Union Budget 2018-19: An Assessment
Date : Apr 10, 2018

This article analyses the key features of the Union Budget 2018-19 presented on February 1, 2018 and passed in the Parliament in March 2018. Drawing on the impetus provided by reforms – the goods and services tax; digitisation; demonetisation; the Insolvency and Bankruptcy Code (IBC) – and a turnaround in the performance of the economy in the second half of 2017-18, the Union Budget for 2018-19 tries to balance prudence with the political compulsions of a pre-election year. It focuses on the rural economy and agriculture, the social sector (education, health and social protection), senior citizens, infrastructure and the financial sector. The step-up in allocations to these sectors are sought to be financed by augmenting direct tax collections and by sustaining the disinvestment drive. The Budget has deviated from the earlier fiscal consolidation path and aims at achieving the fiscal deficit of 3 per cent of GDP by 2020-21.

Key Thrust Areas of the Union Budget 2018-19

• Boosting the supply chain in agriculture from production to marketing: remunerative minimum support prices; agri-markets and connectivity; horticulture, organic farming; food processing and exports.

• Enhancing rural welfare: expansion of programmes for free LPG connections (PM’s Ujjwala Scheme); electricity (PM’s Saubhagya Yojana); sanitation (PM’s Swachh Bharat Mission); housing (PM’s Awas Yojana); and rural employment.

• Education - leveraging on technology and increasing investment in research and related infrastructure; health – wellness centres; and social protection – health and other insurance for disadvantaged households.

• Promotion of medium, small and micro enterprises (MSMEs) – addressing balance sheet stress and financing constraints; and employment – incentivising women employment in the formal sector; fixed term employment for all sectors; skilling (PM’s Kaushal Kendra Programme).

• Building infrastructure in defence, urbanisation (smart cities mission); tourism; roads; railways; airports; ports and inland waterways.

• Finance: developing the corporate bond market; reforming stamp duty regime for financial transactions; long term capital gains tax; bank recapitalisation; hybrid instruments for foreign investment; strengthening the monetary policy framework with the introduction of standing deposit facility by the RBI.

Annex 1 lists the key policy initiatives laid out in the Budget.

I. Fiscal Deficit

In 2017-18, there is a fiscal slippage of 0.3 per cent of Gross Domestic Product (GDP) in the revised estimates from the budgeted 3.2 per cent. The slippage is even higher for the revenue deficit (RD) at 0.7 per cent of GDP and for the effective revenue deficit (ERD)1 at 0.8 per cent. For 2018-19, the Gross Fiscal Deficit (GFD) is budgeted at 3.3 per cent of GDP, implying a slippage from the targets indicated in the Medium Term Expenditure Framework (MTEF)/Fiscal Responsibility and Budget Management (FRBM) review roadmap (Table 1). The achievement of the target of 3.0 per cent of GDP has been deferred to 2020-21 as per the proposed new regime of the FRBM. The Government has further decided to insert adequately defined “escape and buoyancy clauses” to determine when the targets may be relaxed or tightened as the case may be2. The Government has also decided to do away with the deficit targets on revenue account, i.e. RD and consequentially, ERD.

Table 1: Fiscal Deficit: Actual vis-à-vis Observable Targets (Per cent of GDP)
  2017-18 2018-19
RE MTEF FRBM Review Panel BE MTEF FRBM Review Panel
FD/GDP 3.5 3.2 3.0 3.3 3.0 3.0
RD/GDP 2.6 1.9 2.1 2.2 1.6 1.8
ERD/GDP 1.5 0.7 - 1.2 0.4 -

The decomposition of GFD for 2018-19 shows that although the revenue deficit-GDP ratio is budgeted to reduce in 2018-19 vis-à-vis 2017-18, it continues to preempt almost 67 per cent of the borrowed resources as against 59 per cent in 2016-17 (Table 2).

Table 2: Decomposition of GFD (Per cent)
  2015-16 2016-17 2017-18 2018-19
BE Actual BE Actual BE RE BE
Revenue Deficit 71.0 64.3 66.3 59.1 58.8 73.8 66.6
Capital Outlay 39.1 42.5 41.0 46.3 49.4 42.1 44.6
Net Lending 2.4 1.0 3.2 3.6 5.1 0.9 1.5
Disinvestment -12.5 -7.9 -10.6 -8.9 -13.3 -16.8 -12.8

The fiscal slippage in 2017-18 needs to be seen in the context of the reforms that are underway, especially the GST and its implementation as well as the fact that less than the full year’s collections were available. Nevertheless, it might have implications for macro-economic stability while undermining the confidence of external investors (RBI, Sixth Bi-monthly Monetary Policy Statement, 2018). The fiscal credibility is particularly important from ratings agencies’ perspective, considering that India remains a relatively high debt and high deficit country among similarly rated countries (Annex II). Also, given that India’s combined deficit remains high vis-a-vis its Asian peers, there is a need for radical programme of deep fiscal adjustment requiring close coordination between the Union and the State governments (Joshi, 2017) (Annex III).

While the headline fiscal deficit numbers have been widely analysed vis-à-vis observable parameters, assessing the fiscal deficit with respect to certain unobservable parameters also provide some useful insights. International institutions like the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD) have conducted extensive research in this area and are encouraging economies to adopt and publish fiscal stance after due adjustments for the impact on account of business cycle and other unobserved cyclical factors like asset and commodity prices (Bornhorst et al., 2011; Fedelino et al., 2009; Girouard and Andre 2005). This is crucial, particularly to enhance fiscal transparency as weakening of the fiscal balance can sometimes be masked temporarily by high output/asset price upturns. Conversely, during a recession, the fiscal balance can be overstated on account of cyclical factors.

In 2017-18, growth slowed cyclically and this contributed to some loss of tax revenue. Computing the cyclically adjusted fiscal deficit as per the IMF definition3, the business cycle impact on fiscal deficit is estimated to be about 0.17 per cent of GDP in 2017-18. This implies that but for the negative output gap, the gross fiscal deficit would have been 3.3 per cent of GDP and not the headline 3.5 per cent. However, this fiscal leeway gets wiped out if one takes into account the terms of trade benefit that the fisc had enjoyed due to decline in oil prices since 2015-16 on dual grounds: lower subsidies on Kerosene and LPG as well as higher excise on petrol and diesel as low prices were not completely passed on to consumers. While the benefit due to terms of trade effect is estimated at its highest in 2016-17 at 0.62 per cent of GDP, for 2017-18 it is placed at 0.48 per cent4 taking the overall fiscal balance adjusted for cyclical and terms of trade effect to about 3.8 per cent (Chart 1). Going forward in 2018-19, with oil prices rising and output gap remaining close/slightly below the potential, fiscal deficit may not enjoy these terms of trade and business cycle benefits as indicated in the last row of Table 3.


Table 3: Business Cycle and Terms of Trade Effect (as per cent of GDP)
Year Actual Fiscal Deficit Business Cycle Benefit Terms of Trade Benefit Total Benefit
2015-16 3.9 0.24 0.32 0.56
2016-17 3.5 0.13 0.62 0.75
2017-18 RE 3.5 -0.17 0.48 0.31
2018-19 P 3.3 Zero/negative negative negative

II. Receipts

II.1 Tax Revenue

The Union Budget has estimated gross tax revenue to grow by 16.7 per cent in 2018-19 to 12.1 per cent of GDP (Annex IV). Net of devolution of tax revenues to States, net tax revenue is budgeted to grow by 16.6 per cent to 7.9 per cent of GDP. This is the highest budgeted tax-GDP ratio so far, reflecting the formalisation of GST and widening of the tax base (Chart 2).

The budgeted buoyancies for all tax categories of direct taxes are higher in 2018-19 than the average of the preceding eight years (2010-11 to 2017-18) (Table 4).

Table 4: Tax Buoyancy
  Average Tax Buoyancy (2008-09 to 2017-18) Post Crisis Tax Buoyancy (2010-11 to 2017-18) 2017-18 Revised Estimates Budgeted Tax Buoyancy for 2018-19
1 2 3 4 5
Gross Tax Revenue 1.01 1.22 1.34 1.45
Corporation Tax 0.87 0.87 1.62 0.88
Income Tax 1.17 1.37 2.09 1.72
Customs Duty 0.23 0.46 -3.98 -1.46
Union Excise Duty 0.84 1.21 -2.74 -0.54
Service Tax 0.75 0.79 -6.85 -8.66

II.1.1 Direct Taxes

Direct taxes are budgeted to grow by 14.4 per cent in 2018-19, mainly on account of an estimated 19.9 per cent growth in income tax collections. The number of taxpayers has increased post demonetisation. During the current financial year, 6.84 crore income-tax returns were filed as compared to 5.43 crore returns filed during the last financial year, which translates into a growth rate of 26 per cent5. Direct Taxes collections during 2017-18 have helped in making up for the shortfall in non-tax revenue.

The Government aiming to provide relief to salaried taxpayers, has announced a standard deduction of ₹ 40,000/- in lieu of the present exemption in respect of transport allowance and reimbursement of miscellaneous medical expenses. On the other hand, the existing 3 per cent education cess will be replaced by a 4 per cent “Health and Education Cess” to be levied on the tax payable.

The corporate tax rate of 25 per cent for companies whose turnover was less than ₹ 0.5 billion in financial year 2015-16 has now been extended to companies with turnover up to ₹ 2.5 billion. The estimate of revenue forgone due to this measure is ₹70 billion during the financial year 2018-19. The lower corporate income tax rate for 99 per cent of the companies, however, will benefit the entire class of micro, small and medium enterprises as it will leave them with higher investible surpluses. Also, it will encourage higher tax compliance in the MSME sector.

II.1.2 Indirect Taxes

Indirect taxes collection in 2017-18 exceeded 2016-17 collections by 8.7 per cent, despite receiving GST revenues only for 11 months, instead of 12 months. Indirect taxes are budgeted to grow by 19.1 per cent during 2018-19, with GST collections budgeted at ₹7.4 trillion - an increase of 67.3 per cent and 21.5 per cent after adjusting for loss of one month collection (Table 5). On GST, while on one hand concerns have been raised on the significantly high budgeted numbers given that rationalisation of rates is still underway, on the other hand, international evidence suggests that implementation of VAT/ GST have resulted in a higher government revenue-GDP ratio over time (RBI, 2017). About 1.03 crore taxpayers have been registered under GST so far (till February 25, 2018) of which 16.42 lakh are Composition Dealers which are required to file returns every quarter6.

Table 5: GST Collections
  2017-18 (RE)
(₹ billion)
2018-19 (BE)
(₹ billion)
Year-on-Year Growth Rate (Per cent)
CGST 2214 6039 172.8
IGST 1619 500 -69.1
Compensation Cess 613 900 46.7
Total 4446 7439 67.3

Customs duty on certain items have been increased – illustratively, the duty on mobile phones has been increased from 15 per cent to 20 per cent and on certain parts of TVs to 15 per cent. Though the increase in customs duty is expected to incentivise the domestic value addition and the Make in India initiative and may also promote creation of more jobs in the country, it may likely be seen as a protectionist measure attracting retaliatory actions from trading partners.

II.2 Non-Tax Revenue

Receipts from non-tax revenues are budgeted to increase in 2018-19 by 3.9 per cent. Dividend and profits from public sector enterprises (including public sector banks) and surplus transfer from the RBI were lower than the budgeted amount by 25.3 per cent during 2017-18 and are effectively budgeted to increase on the lower base (Table 6). With the merger of the Railway Budget with the Union Budget, the Railways has stopped paying dividend on the capital at charge since 2017-18.

Within receipts from economic services, net receipts from communication services (i.e., spectrum auctions) are budgeted to be significantly higher in 2018-19 than in 2017-18 (RE) - by 58.3 per cent. Notably, net receipts from communication services were budgeted at ₹443.4 billion in 2017-18, but actual receipts (₹307.4 billion) fell short mainly because of deferment of spectrum auctions.

It is observed that non tax revenues provided strong support to central government receipts in 2015-16 (27.0 per cent growth) and 2016-17 (33.2 per cent growth). With non-tax revenues in 2017-18 and 2018-19 being lower than 2016-17, the pressure will be higher on the government to achieve the tax revenue and the disinvestment targets.

Table 6: Dividends and Profits
  ₹ Billion Growth Rate (Per cent)
2016-17 2017-18 (RE) 2018-19 (BE) 2016-17 2017-18 (RE) 2018-19 (BE)
Dividend and Profits 1230.2 1064.3 1073.1 9.7 -13.5 0.8
From PSEs 518.5 548.1 524.9 69.4 5.7 -4.2
From RBI/ Banks/FIs 711.6 516.2 548.2 -12.7 -27.5 6.2

II.3 Non-debt Capital Receipts

The target for disinvestment has been pegged at ₹800 billion in 2018-19 (BE). In 2017-18 (RE), the Government exceeded the target by ₹275 billion facilitated by buoyant stock markets (Chart 3). Net recoveries of loans and advances are budgeted to decline by 30.2 per cent over 2017-18 (RE). Total non-debt capital receipts, which were ₹330 billion higher in 2017-18 (RE) than BE, are estimated to decline by 21.5 per cent in 2018-19 (BE). With the realisation of budgeted targets for disinvestment in 2017-18 for the first time since 2009-10, there is optimism on the prospects for 2018-19. This will support revenue mobilisation efforts and render the deficit financeable. Any corrections in the stock market may, however, make it challenging for the Government to meet its budgeted target in 2018-19.

III. Expenditure

Total expenditure is budgeted to grow by 10.1 per cent in 2018-19 (12.3 per cent in 2017-18 RE) (Table 7). Revenue expenditure is budgeted to grow at a higher rate than capital expenditure.

The Budget estimates for different expenditure categories deviate from the MTEF Statement (an FRBM document), which was laid before the Parliament in August 2017. Total expenditure is budgeted to be 4.4 per cent higher than in the MTEF statement, mainly on account of higher revenue expenditure, particularly pensions and petroleum subsidies (Table 8). Expenditure projections diverging in the span of five months, i.e., from the MTEF in August 2017 may pose risks to credibility of the fiscal policy stance. With the revenue-capital ratio slated to worsen from 6:1 in 2016-17 to 7:1 in 2018-19, the quality of public expenditure may remain a concern.

Table 7: Expenditure of Central Government
Item Per cent of GDP Growth Rate
2016-17 2017-18(RE) 2018-19(BE) 2016-17 2017-18(RE) 2018-19(BE)
Total Expenditure 12.9 13.2 13.0 10.3 12.3 10.1
Revenue Expenditure 11.1 11.6 11.4 9.9 15.0 10.2
Capital Expenditure 1.9 1.6 1.6 12.5 -3.9 9.9

Table 8: Budget Estimate (BE) vis-s-vis MTEF Statement
(₹ Billion)
Expenditure Items 2018-19 Difference= BE-MTEF
Budget Estimate Projection by MTEF Statement ₹ Billion Per cent
I. Revenue Expenditure 21417.7 19990.1 1427.7 7.1
of which        
(i) Interest 5758.0 5644.0 114.0 2.0
(ii) Pension 1684.7 1443.2 241.5 16.7
(iii) Major Subsidies 2643.3 2630.0 13.4 0.5
a. Fertiliser 700.8 700.0 0.8 0.1
b. Food 1693.2 1750.0 -56.8 -3.2
c. Petroleum 249.3 180.0 69.3 38.5
II. Capital Expenditure 3004.4 3410.0 -405.6 -11.9
III. Total Expenditure 24422.1 23400.1 1022.1 4.4

III.1 Capital Expenditure

Capital expenditure which is growth inducing has been proposed to be raised by 9.9 per cent in 2018- 19 over the revised estimates of 2017-18, marking a decline of 3.0 per cent when compared with BE of 2017-18. Capital Outlay (capital expenditure excluding loans and advances) is budgeted to increase by 12.6 per cent in 2018-19, a marginal rise over BE but sharply higher than 1.6 per cent in 2017-18 (RE). Capital outlay on major infrastructure is estimated to grow by a robust 23.0 per cent in 2018-19 (BE) - as against a decline of (-) 2.1 per cent in 2017-18 (RE) - led by the railways, roads and bridges (Table 9). Expenditure on civil aviation, on the other hand, is in contraction, as it has been since 2016-17, the sector is being encouraged to tap the market through borrowings and asset monetisation rather than rely on budgetary support. The budgeted allocation for communications (growth of 0.5 per cent over 2017-18 RE) may not seem to be in consonance with the objective of gradual transformation towards a digital economy.

Table 9: Capital Outlay
  2015-16 2016-17 2017-18 (RE) 2018-19 (BE) 2016-17 2017-18(RE) 2018-19 (BE)
(₹ Billion) (Percent Change)
1. Total Capital Outlay (Excluding defence) 1467.3 1614.3 1640.1 1846.8 10.0 1.6 12.6
1.1 Major Infrastructure 737.8 1001.2 980.4 1206.1 35.7 -2.1 23.0
Irrigation 0.9 0.8 3.2 6.2 -8.5 285.5 95.3
Energy 19.4 45.3 28.0 52.6 133.2 -38.3 88.1
Indian Railways 350.1 452.3 400.0 530.6 29.2 -11.6 32.7
Roads and Bridges 296.4 437.7 480.3 557.2 47.7 9.7 16.0
Civil Aviation 33.6 27.1 18.4 7.2 -19.4 -31.9 -60.9
Ports and Light Houses 1.9 3.2 1.7 3.3 66.9 -46.5 91.7
Communications 35.5 34.8 48.8 49.0 -2.0 40.4 0.5
1.2 Industry and Minerals 36.2 41.4 42.6 45.0 14.1 3.0 5.5
1.3 Science, Technology and Environment 40.4 52.3 53.2 70.5 29.5 1.7 32.5
1.4 Others 652.9 519.4 563.9 525.3 -20.4 8.6 -6.8

In a partial equilibrium framework, a rise of ₹ 207 billion in capital outlay is likely to increase output by ₹ 434 billion (about 0.2 % of GDP in 2018-19), assuming the capital outlay multiplier to be 2.10 (Jain and Kumar; 2013). It may be noted that amongst its peer EMEs, India’s share of GDP spent on capital expenditure is low despite relatively higher fiscal deficit (Chart 4) (Akin et al; 2017). Actual capital expenditure, however, would be higher than the budget estimates if the internal and extra budgetary resources (IEBR) deployed by the central Public Sector Units (PSUs) and commercial departmental undertakings are considered. It, therefore, needs to be recognised that the Government is now financing important expenditure of capital nature through extra budgetary resources (EBR).

With the National Health Protection Scheme under the ‘‘Ayushman Bharat’’ programme aimed at interventions in the primary, secondary and tertiary care system and the reform of the education system, the expenditure on health and education, together, is budgeted to grow by 4.6 per cent as per the Union Budget 2018-19. In terms of GDP, the social sector expenditure, primarily constituting health and education in India continues to remain woefully below peers (Chart 5).

III.2 Subsidies and Interest Payments

Subsidies and interest payments constitute a major portion of government’s committed revenue expenditure. In contrast to 2017-18 (RE) when major subsidies declined by ₹ 106.2 billion from the budget estimates in a broad-based manner, they are slated to increase by 15.1 per cent in 2018-19 mainly on account of increase in food subsidies by 20.7 per cent. The share of major subsidies is, however, budgeted to remain unchanged at 1.4 per cent of GDP in 2018-19 (BE) (Table 10).

Given the likely hardening of global crude and gas prices, petroleum and fertiliser subsidies, however, may rise. Owing to the farmer distress, minimum support prices have also risen reflecting itself in slight increase in food subsidy. Going forward, the budgetary outgo on major subsidies, however, should fall in the medium term via targeting and better coverage, through the direct benefit transfer (DBT) scheme and digitisation, which could reduce leakages.

Interest payments are budgeted to increase by 8.5 per cent in 2018-19 over 2017-18 (RE). In 2018-19 (BE), interest payments have been estimated at ₹ 5758 billion constituting 26.9 per cent of budgeted revenue expenditure and 23.6 per cent of the total budgeted expenditure of the central government, respectively. They are budgeted to be around 3.1 per cent of GDP in 2018-19 marginally lower than 3.2 per cent in 2017-18 (RE). The buoyancy in revenues are expected to mitigate the interest payment outgo of the Government8.

Annex V presents the key receipts, expenditure and deficit indicators at a glance.

Table 10: Major Subsidies of Central Government
(Amount in ₹ Billion)
Items 2016-17 (Actuals) 2017-18 (BE) 2017-18 (RE) 2018-19 (BE)
  Amount % to GDP Amount % to GDP Amount % to GDP Amount % to GDP
Total Major Subsidies 2,040.2 1.3 2,403.4 1.4 2,297.2 1.4 2,643.4 1.4
i. Food 1,101.7 0.7 1,453.4 0.9 1,402.8 0.8 1,693.2 0.9
ii. Fertiliser 663.1 0.4 700.0 0.4 649.7 0.4 700.8 0.4
iii. Petroleum 275.4 0.2 250.0 0.1 244.6 0.1 249.3 0.1

IV. Financing of Deficit

Gross market borrowing for 2018-19 is estimated at ₹6,055 billion, higher by about 1.1 per cent over the preceding year’s level. Net market borrowing at ₹ 3,991 billion is, however, estimated to decline by 2.6 per cent during the same period on account of higher repayments during the year (Table 11). Switches (gross) of securities (which is cash neutral) and net buyback of ₹ 281 billion and ₹ 719 billion, respectively, are also provided for9. Net market borrowing through dated securities accounting for 63.9 per cent of the GFD in 2018-19 (BE) is lower than 68.9 per cent in 2017-18 (RE). The Union Budget has provided for gross issuance of cash management bills (CMBs) at ₹ 1 trillion for cash management operations and not for funding the GFD. The net issuances of CMB is nil for 2018-19 (BE). Government aims to raise ₹ 50 billion via Sovereign Gold Bonds (SGBs) in 2018-19. Going forward, fiscal slippage concerns and concomitant higher borrowing requirements may have implications for the economy wide cost of borrowing and could crowd out productive private sector investment (RBI, MPR, 2018). Also, the potential interest savings due to reduced reliance on the market may not accrue with higher recourse to NSSF and other small savings.

Table 11: GFD Financing
(₹ Billion)
Item 2016-17 (Actual) 2017-18 (RE) 2018-19 (BE)
1 2 3 4
Gross Fiscal Deficit 5,356.18 5,948.49 6,242.76
  (100.0) (100.0) (100.0)
Financed by      
Net Market Borrowings* 3,381.49 4098.57 3991.20
  (63.1) (68.9) (63.9)
Other treasury bills 170.57 700.07 80.00
  (3.2) (11.8) (1.3)
Securities Issued against Small Savings (net) 674.35 1,026.28 750.00
  (12.6) (17.3) (12.0)
External Assistance 179.97 24.18 -25.89
  (3.4) (0.4) -(0.4)
State Provident Fund 177.45 150.00 170.00
  (3.3) (2.5) (2.7)
NSSF 154.51 -415.54 0.00
  (2.9) -(7.0) (0.0)
Reserve Fund -64.36 6.70 31.14
  -(1.2) (0.1) (0.5)
Deposits and Advances 177.92 168.45 159.10
  (3.3) (2.8) (2.5)
Draw Down of Cash Balances -88.95 -393.79 430.66
  -(1.7) -(6.6) (6.9)
Others 593.23 583.58 656.54
  (11.1) (9.8) (10.5)
*Includes Dated Securities and 364-day Treasury Bills, taking into account the net impact of switching of securities and buybacks.
Note: Figures in parenthesis represent percentages to GFD.

V. Liabilities

Total liabilities-GDP ratio of the Central Government is budgeted to decline to 47.8 per cent in 2018-19 from 49.1 per cent in 2017-18 (RE). Notably, the Government has accepted the key recommendation of the Fiscal Reform and Budget Management Committee, 2017 relating to adoption of the Debt Rule and has decided to bring down Central Government’s Debt to GDP ratio to 40 per cent by 2024-25. Interest payments as proportion of revenue receipts, which is an indicator of debt servicing capacity, is budgeted to decrease marginally from the previous year (Chart 6).

VI. Resource Transfers from Centre to States in 2018-19

Following the recommendation of the 14th Finance Commission, the States’ share of tax devolution was increased from 32 to 42 per cent of the divisible pool, serving the twin objectives of increasing the flow of unconditional transfers to the States and yet leaving appropriate fiscal space for the Union to carry out specific-purpose transfers to the States. Given the above background, gross transfer to state governments is expected to increase marginally during 2018-19, largely driven by tax devolution and ‘finance commission grants’, even as growth in transfer through different schemes has decelerated sharply. Centre is expected to transfer ₹7,881 billion in the form of tax devolution to the state governments in 2018-19, which is around 17.0 per cent higher than the transfer made a year ago. This sharp increase is expected assuming a buoyant tax collection in 2018-19.

In the Fiscal Policy Strategy Statement, it is highlighted that state governments seem to be moving close to their targeted fiscal consolidation – in part because the centre has guaranteed them a large increase in their indirect tax take, as part of the GST agreement. The transfer of GST compensation cess to states is fiscal neutral as the above amounts have been levied as a cess over the peak rate of 28 per cent on certain specified luxury and demerit goods, like tobacco and tobacco products, pan masala, aerated waters, motor vehicles. This is proposed to be introduced for a period of five years to compensate States for any revenue loss on account of implementation of GST. The amounts are transferred to a non-lapsable fund in the public account called the GST Compensation Fund as per the Section 10 of the GST (Compensation to States) Act, 2017.

Growth in transfer under centrally sponsored schemes, which has a share of around 22.0 per cent in the gross transfer, is expected to decelerate sharply by 5.3 percent in 2018-19 as against a growth of 16.8 per cent a year ago. The transfer to states (per cent to GDP) is expected to increase by 10 basis points in 2018-19 in both gross and net terms (Table 12).

Table 12: Resource Transfer to States
  2016-17 2017-18 (RE) 2018-19 (BE) 2016-17 2017-18 (RE) 2018-19 (BE) 2017-18 (RE) 2018-19 (BE)
Amount Share in Total Transfer Growth
₹ Billion Per cent Per cent
I. Devolution of States’ share in Taxes 6080.0 6730.1 7880.9 61.7 60.3 62.1 10.7 17.1
II. Some Important Items of Transfer 480.5 393.9 544.8 4.9 3.5 4.3 -18.0 38.3
Of which                
a. Externally Aided Projects - Loan 177.6 175.0 200.0 1.8 1.6 1.6 -1.5 14.3
b. Special Assistance 109.0 70.0 150.0 1.1 0.6 1.2 -35.8 114.3
III. Finance Commission Grants 955.5 1014.9 1093.7 9.7 9.1 8.6 6.2 7.8
Of which                
a. Grant for Rural Local Bodies 313.7 390.4 450.7 3.2 3.5 3.6 24.5 15.4
b. Grants for Urban Local Bodies 145.0 172.5 198.7 1.5 1.5 1.6 19.0 15.2
c. Post Devolution Revenue Deficit Grants 413.1 358.2 345.8 4.2 3.2 2.7 -13.3 -3.5
IV. Total Transfer to States [Other than (I)+(II)+(III)] 2289.6 2967.2 3109.9 23.2 26.6 24.5 29.6 4.8
a. Under Centrally Sponsored Schemes (Revenue) 2258.5 2637.8 2777.5 22.9 23.6 21.9 16.8 5.3
b. Under Central Sector Schemes 24.1 317.65 321.9 0.2 2.8 2.5 1219.7 1.3
V. Total Transfer to Delhi and Puducherry 51.1 52.7 65.0 0.5 0.5 0.5 3.1 23.3
VI. Gross Transfers to States/UTs 9856.7 11158.8 12694.4 100.0 100.0 100.0 13.2 13.8
VII. Less Recovery of Loans and Advances 125.8 93.0 96.0 - - - -26.1 3.2
VIII. Net Transfers (VI-VII) 9731.0 11065.8 12598.4 - - - 13.7 13.9
IX. Gross Transfers / GDP (per cent) 6.5 6.7 6.8 - - - - -
X. Net Transfers / GDP (per cent) 6.4 6.6 6.7 - - - - -
Source: Union Budget 2018-19

VII. Other Important Measures with relevance to Reserve Bank of India

VII.1 Bank Recapitalisation

The bank recapitalisation program has been launched with bonds of ₹ 800 billion being issued this year. The programme has been integrated with an ambitious reform agenda, under the rubric of an Enhanced Access and Service Excellence (EASE) programme. This recapitalisation will pave the way for the public sector banks to lend additional credit of ₹ 5 trillion. Recapitalisation is a significant step by the Government in strengthening the balance sheet of banks and should enable banks to scale up credit to productive sectors. Although the bond-based recapitalisation is budget-neutral, it effectively results in increasing the Government’s shareholding in public sector banks through rights shares and this might be perceived as roll-back of reforms by investors.

VII.2 Standing Deposit Facility

The Finance Bill proposes an amendment to section 17 of the RBI Act to enable the introduction of the standing deposit facility (SDF). This will considerably strengthen the conduct of monetary policy as it will provide the RBI the wherewithal to absorb exceptionally large expansion of liquidity without having to provide collateral to market participants. This additional instrument in the toolkit of the RBI will address episodes such as demonetisation and surges of capital inflows, and may even obviate the need for issuances under the Market Stabilisation Scheme which carry fiscal costs.

VII.3 Minimum Support Prices

Minimum support prices (MSP) for rabi crops at least at one and a half times of the cost has been extended to all kharif crops with a view to ensuring remunerative prices for farmers. It may be noted that Rabi MSPs fixed for crop year 2017-18 (market year 2018-19) were one and a half times of A2+FL costs, not overall C2 costs which also include the imputed costs of owned land and interest on owned fixed capital. Further, for all crops (kharif and rabi) taken together, CPI-weighted MSPs were more than 1.5 times A2+FL costs, but only 14 per cent higher over C2 costs10. In addition, there are several proposals that could reduce volatility in food inflation, viz.; higher procurement will stabilise market prices around MSPs; inclusion of tomatoes, onions and potatoes under ‘Operation Greens’; and adoption of cluster based models in a scientific manner at district levels. Although the exact impact of MSP increase on inflation cannot be fully assessed at this stage but it does pose upside risks to inflation outlook (RBI, Sixth Bi-monthly Monetary Policy Statement, 2018).

VIII. Overall Assessment

Summing up, the Union Budget for 2018-19 is confronted with a tight trade-off between the rigours of fiscal consolidation and the demands for stimulating the economy. While the waning of the drag from demonetisation and GST implementation will have favourable effects on economic activity and boost tax revenues, terms of trade losses associated with the hardening of international crude prices could restrict fiscal space. Meanwhile, sizeable outlays on agriculture and infrastructure will impose pressure on revenues, necessitating adherence or even overachievement of disinvestment targets that are in some sense autonomous to the decision to divest and contingent upon market conditions.

Turning to revenues, GST collections could benefit from delayed buoyancy as the system stabilises and this could encourage further reforms in the form of moving towards a simpler and more equitable rate structure. The increase in customs duties on selected items is essentially a revenue raising effort. On direct taxes, while the proposal to extend the rate of 25 per cent to companies with turnover up to ₹2.5 billion will entail revenue losses, the benefit to MSMEs from the supportive tax regime could increase buoyancy and compliance. The surge in the number of tax assesses, especially new ones, augurs well for raising the tax-GDP ratio to at least the levels of peers. Against this background, achieving the disinvestment target assumes crucial importance and will warrant a strategic approach that takes advantage of market conditions and investor appetite.

As regards the interaction of the Budget with the financial system, recapitalisation of banks could lend tailwinds to the recent recovery in bank credit and, in turn, support overall growth. The introduction of the Standing Deposit Facility is a big positive for macroeconomic and financial stability.

Finally, the emphasis on the rural economy is welcome and it is a step forward in the vision of doubling farm incomes by 2022 set out by the Government. This would revive rural demand and set the stage for a durable upturn in growth. The push towards digitisation, delivery of Aadhar enabled public services and the focus on employment will make the revival of growth inclusive and equitable.

References

Akin, Cigdem, Carrasco, B., Mundle, S. and Sen Gupta, A. (2017), “Fiscal Responsibilty and Budget Management Act in India: A Review and Recommendations for Reform”. ADB South Asia Working Paper Series. July.

Bornhorst, F., Fedelino, A., Gottschalk, J., and Dobrescu, G. (2011), “When and How to Adjust Beyond the Business Cycle? A Guide to Structural Fiscal Balances”.

Technical Notes and Manuals 11/02. Washington DC: International Monetary Fund.

Fedelino, A., Ivanova, A., and Horton, M. A. (2009), “Computing Cyclically Adjusted Balances and Automatic Stabilizers”. Technical Notes and Manuals. Washington DC: International Monetary Fund.

Ghosh, S., and Misra, S. (2015), “Quantifying the Cyclically Adjusted Fiscal Stance for India”. Macroeconomics and Finance in Emerging Market, 9(7), 1-17.

Girouard, N., and Andre, C. (2005), “Measuring Cyclically Adjusted Budget Balances for OECD Countries”, OECD Economics Department Working Paper No. 434.

Government of India. (2017), FRBM Review Committee Report. January.

---------. (2017), Medium-term Expenditure Framework Statement. August.

---------. (2018), Medium Term Fiscal Policy Statement, Union Budget 2018-19. Ministry of Finance, Government of India.

---------. (2018), Press Information Bureau. April 2.

---------. (2018), Press Information Bureau. February 27.

---------. (Various years), Union Budget Documents . Ministry of Finance, Government of India.

International Monetary Fund, (2017), Methodological and Statistical Appendix. Fiscal Monitor: Tackling Inequality. October.

Jain, R., and Kumar, P. (2013), “Size of Government Expenditure Multipliers in India: A Structural VAR Analysis”. RBI Working Paper Series. September 18.

Joshi, V. (2017), “India’s Economic Reforms: Reflections on the Unfinished Agenda”. Fifteenth L. K Jha Memorial lecture. Reserve Bank of India. December 11.

Misra, S., and Trivedi, P. (2016), “Structural Fiscal Balance: An Empirical Investigation for India”, RBI Occasional Papers, Vol. 35 and 36 - No. 1 and 2: 2014 and 2015.

Parkyn, O. (2010), “Estimating New Zealand’s Structural Budget Balance”. New Zealand Treasury Working Paper 10/08.

Reserve Bank of India. (2017), State Finances: A Study of Budgets 2016-17.

---------. (2018), Sixth Bi-monthly Monetary Policy Statement. February 9.

---------. (2018), Monetary Policy Report (MPR). April 5.

---------. (2017), Union Budget 2017-18: An Assessment. May 9.

Sovereign Ratings List. (2018), Retrieved from countryeconomy.com: https://countryeconomy.com/ratings. February 2.

Turner, D. (2006), “Should Measures of Fiscal Stance be Adjusted for Terms of Trade Effects”. Economics Department Working Paper, No. 519.


Annex I

Key Policy Initiatives

Agriculture and social sectors: Budget speech emphasizes the government’s commitment to doubling farmers’ income. Budget proposes to launch new schemes or extend existing schemes in agriculture and social sectors. Important measures are as follows:

• Minimum Support Price (MSP) and Operation Green: Minimum support prices (MSP) for rabi crops at least at one and a half times of the cost has been extended to all kharif crops with a view to ensuring remunerative prices for farmers.

• Irrigation: Augmented the scope of Long Term Irrigation Fund already set up in NABARD. Ground water irrigation scheme under Prime Minister Krishi Sinchai Yojna- Har Khet ko Pani will be taken up in 96 deprived irrigation districts where less than 30 percent of the land holdings gets assured irrigation presently. An amount of ₹26 billion has been allocated for the purpose.

• Rural livelihood and housing: Establish a dedicated Affordable Housing Fund (AHF) in National Housing Bank, funded from priority sector lending shortfall and fully serviced bonds authorized by the Government of India; Substantially increase allocation of National Rural Livelihood Mission.

• Health and Social Protection: The budget announced a flagship National Health Protection Scheme providing coverage for secondary and tertiary care hospitalization upto 5 lakh rupees per family per year for 10 crore poor and vulnerable families. The budget highlights that this will be the world’s largest government funded health care programme.

• Education: To improve the quality of education, the budget proposes training of 13 lakh untrained teachers; increasing digital intensity in education and moving gradually from “blackboard to digital board”, setting up Ekalavya schools for tribal students on par with Navodaya Vidyalayas. It proposes stepping up investments in research and related infrastructure by an initiative called RISE (Revitalising Infrastructure and Systems in Education) with a total investment of ₹ 1,000 billion in the next four years.

Infrastructure and MSMEs: Important measures pertaining to infrastructure and MSMEs include the following:

• Tourism: Tourist amenities at 100 Adarsh monuments of the Archaeological Survey of India will be upgraded. Ten prominent tourist sites will be developed into Iconic Tourism destinations by following a holistic approach.

• Highways: To raise equity from the market for its mature road assets, NHAI will consider organizing its road assets into Special Purpose Vehicles and use innovative monetizing structures like Toll, Operate and Transfer (TOT) and Infrastructure Investment Funds (InvITs).

• Railways: Railways’ Capex for the year 2018-19 has been pegged at ₹1485 billion primarily for capacity creation - 18,000 kilometers of doubling, third and fourth line works and 5000 kilometers of gauge conversion.

• Aviation: New initiative NABH-Nirman to expand airport capacity more than five times to handle a billion trips per year.

• Information Technology and Digital India: NITI Aayog will initiate a national program to direct our efforts in the area of artificial intelligence, including research and development of its applications. Digital India program allocation doubled to ₹ 30.7 billion in 2018-19. ₹ 100 billion for creation and augmentation of telecom infrastructure.

• Medium, Small and Micro Enterprises (MSMEs): Leverage financial information database for improving MSME financing leveraging on increased formalization of MSMEs due to demonetization and GST. The budget also proposes to onboard public sector banks and corporates on Trade Electronic Receivable Discounting System (TReDS) platform and link this with GSTN.

Building Institutions and Improving Public Service Delivery:

• The Government will bring out an industry friendly ‘Defence Production Policy 2018’ to promote domestic production by public sector, private sector and MSMEs. Measures will be undertaken to develop two defense industrial production corridors.

• Evolve a scheme to assign unique ID for enterprises (along the lines of Aadhar for individuals).

• Develop a National Logistics Portal as a single window online marketplace for all stakeholders.

• Capital of the Food Corporation of India will be restructured to enhance equity and to raise long-term debt for meeting its standing working capital requirement

• It is proposed to allow strong Regional Rural Banks to raise capital from the market to enable them increase their credit to rural economy.

• To promote gold as an asset class, Gold Monetization Scheme will be revamped to enable people to open a hassle-free Gold Deposit Account.

• The Government will review existing guidelines and processes and bring out a coherent and integrated Outward Direct Investment (ODI) policy

Financial sector:

• Bank Recapitalisation: The bank recapitalisation program has been launched with bonds of ₹ 800 billion being issued this year. The programme has been integrated with an ambitious reform agenda, under the rubric of an Enhanced Access and Service Excellence (EASE) programme.

• Bond markets: The Government announced that SEBI will consider mandating, beginning with large Corporates, to meet about one-fourth of their financing needs from the bond market. Rating requirement for bond issue will move from ‘AA’ to ‘A’ grade. The Government will also undertake reform measures with respect to stamp duty regime on financial securities transactions in consultation with the States and make necessary amendments the Indian Stamp Act. These steps have potential benefits (positives) for the bond markets.

• Amendment of RBI Act to enable Standing Deposit Facility: The Finance Bill proposes an amendment to section 17 of the RBI Act to enable the introduction of the standing deposit facility (SDF).

• The Government will establish a unified authority for regulating all financial services in International Finance Service Centers (IFSCs) in India.

• The Government does not consider cryptocurrencies as legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system.

Tax Proposals:

• Long term capital gains (LTCG): Currently, long term capital gains (LTCG) arising from transfer of listed equity shares, units of equity oriented fund and unit of a business trust are exempt from tax. The budget proposes to tax long-term capital gains exceeding ₹ 1 lakh at the rate of 10 per cent without allowing the benefit of any indexation. All gains up to 31st January, 2018, however, will be grandfathered. The gains from equity shares held up to one year will continue to be taxed at the rate of 15 per cent on short capital gains. The budget proposed to introduce a tax on distributed income by equity oriented mutual fund at the rate of 10 per cent to provide a level playing field across growth oriented funds and dividend distributing funds.

• Reduction in tax rate: Tax rate has been reduced to 25 per cent for companies who have a reported turnover of up to ₹2.5 billion in 2016-17.

• Increase in customs duty to incentivise ‘Make in India’ initiatives: In a departure from recent policy to reduce customs duty, the budget announced undertaking an increase in customs duty to incentivize domestic value addition in certain sectors, like food processing, electronics, auto components, footwear and furniture.

• Excise duty: Road and infrastructure cess on petrol and diesel increased from ₹6 per litre to ₹8 per litre. Adjustment is made on basic excise duty (decrease of ₹2 per litre) on these items so that the net impact is nil.


Annex II


Annex III

General Government Overall Balance of Emerging Market Economies

General Government Overall Balance (per cent of GDP)
Serial No. Country 2016 2017
Latin America
1. Argentina -5.8 -6.6
2. Brazil -9.0 -9.2
3. Chile -2.9 -3.1
4. Colombia -3.0 -3.2
5. Mexico -2.8 -1.4
6. Uruguay -4.0 -3.0
7. Venezuela -17.8 -18.5
Africa and Middle East
8. Egypt -10.9 -9.5
9. Saudi Arabia -17.2 -8.6
10. South Africa -4.0 -4.5
Asia
11. China -3.7 -3.7
12. India* -7.1 -5.9
13. Indonesia -2.5 -2.7
14. Malaysia -3.0 -3.0
15. Philippines -0.4 -1.0
16. Sri Lanka -5.4 -5.2
17. Thailand 0.6 -1.4
Europe
18. Hungary -1.8 -2.6
19. Poland -2.4 -2.7
20. Romania -2.4 -3.0
21. Russia -3.7 -2.1
22. Turkey -2.3 -3.2
*: RBI internal staff calculation (data for 2016 is based on Revised Estimates and for 2017 is based on Budget estimates, respectively of 29 states and Union Government).
Source: International Monetary Fund, Fiscal Monitor, October 2017

Annex IV

Tax Revenues
  As percent of GDP Growth (%)
2016-17 2017-18 (RE) 2018-19 (BE) 2016-17 2017-18 (RE) 2018-19 (BE)
1 2 3 4 5 6 7
Corporation Tax 3.2 3.4 3.3 7.0 16.3 10.2
Tax on Income 2.4 2.6 2.8 26.8 21.0 19.9
Customs Duty 1.5 0.8 0.6 7.1 -40.0 -16.8
Union Excise Duty 2.5 1.7 1.4 32.5 -27.4 -6.3
Service Tax 1.7 0.5 0.0 20.4 -68.8 -100.0
Gross Tax Revenue 11.2 11.6 12.1 17.9 13.4 16.7

Annex V

Budget at a Glance
(Amount in ₹ Billion)
Items 2016-17 (Accounts) 2017-18 (Budget Estimates) 2017-18 (Revised Estimates) 2018-19 (Budget Estimates) Variation (%)
Col. 4 over Col. 2 Col. 5 over Col. 4
1 2 3 4 5 6 7
1. Revenue Receipts (i+ii) 13,742.0 15,157.7 15,054.3 17,257.4 9.5 14.6
  (9.0) (9.0) (9.0) (9.2)    
i) Tax Revenue (Net to Centre) 11,013.7 12,270.1 12,694.5 14,806.5 15.3 16.6
ii) Non-tax Revenue 2,728.3 2,887.6 2,359.7 2,450.9 -13.5 3.9
of which:            
Interest Receipts 162.3 190.2 135.5 151.6 -16.5 11.9
2. Capital Receipts 6009.9 6,309.6 7123.2 7164.8 18.5 0.6
  (3.9) (3.8) (4.2) (3.8)    
of which:            
i) Net Market Borrowings 3381.5 3,482.3 4098.6 3991.2 21.2 -2.6
ii) Recoveries of Loans 176.3 119.3 174.7 122.0 -0.9 -30.2
iii) Miscellaneous Capital Receipts 477.4 725.0 1,000.0 800.0 109.5 -20.0
3. Total Receipts (1+2) 19,751.9 21,467.4 22,177.5 24,422.1 12.3 10.1
  (12.9) (12.8) (13.2) (13.0)    
4. Revenue Expenditure 16,905.8 18,369.3 19,443.1 21,417.7 15.0 10.2
  (11.1) (10.9) (11.6) (11.4)    
5. Capital Expenditure 2,846.1 3,098.0 2,734.5 3,004.4 -3.9 9.9
  (1.9) (1.8) (1.6) (1.6)    
8. Total Expenditure (6+7) 19,751.9 21,467.4 22,177.5 24,422.1 12.3 10.1
  (12.9) (12.8) (13.2) (13.0)    
of which            
i) Interest Payments 4,807.1 5,230.8 5,308.4 5,758.0 10.4 8.5
ii) Defence 2,517.8 2,623.9 2,671.1 2,827.3 6.1 5.8
iii) Major Subsidies 2,040.2 2,403.4 2,297.2 2,643.4 12.6 15.1
9. Revenue Deficit (4-1) 3,163.8 3,211.6 4,388.8 4,160.3 38.7 -5.2
  (2.1) (1.9) (2.6) (2.2)    
10. Effective Revenue Deficit 1,506.5 1,258.1 2,496.3 2,206.9 65.7 -11.6
  (1.0) (0.7) (1.5) (1.2)    
11. Gross Fiscal Deficit (8-(1+2ii+2iii)) 5,356.2 5,465.3 5,948.5 6,242.8 11.1 4.9
  (3.5) (3.2) (3.5) (3.3)    
12. Gross Primary Deficit (11-6i) 549.0 234.5 640.1 484.8 16.6 -24.3
  (0.4) (0.1) (0.4) (0.3)    
Note: Figures in parenthesis are per cent to GDP

* Prepared by Smt. Kaushiki Singh and Shri K. Mate, Research Officers, under the overall guidance of Smt. Sangita Misra, Director, Fiscal Analysis Division, Department of Economic and Policy Research, Reserve Bank of India. The views expressed are of the authors and do not pertain to the Institution they belong to. Usual disclaimers apply. The previous article on Union Budget 2017-18 was published in the Reserve Bank of India Bulletin, May 2017.

1 Effective Revenue Deficit is the difference between revenue deficit and grants for creation of capital assets signifying that amount of capital receipts that are being used for actual consumption expenditure of the Government.

2 Fiscal Policy Strategy Statement, 2018-19

3 These have been computed based on HP and BK based potential output estimates and using revenue elasticities, both aggregated and disaggregated, as estimated for India using the IMF, OECD and ECB approach in Ghosh and Misra (2015) and Misra and Trivedi (2016).

4 Terms of trade effect have been estimated by (1) subtracting the excess excise in petrol and diesel in these years from its long term trend and (2) by adding the estimated additional subsidy that GoI would have given based on the average long run elasticity of subsidies to oil price gap. While the methodology remains as in the literature, it may be noted that terms of trade benefit has generally been computed for oil exporting countries during oil price rise (Parkyn, 2010 and Turner, 2006). However, given that India is an importer of oil, terms of trade benefit is associated with oil price decline.

5 GoI, Press Information Bureau, April 02, 2018

6 GoI, Press Information Bureau, February 27, 2018

7 Average of three years viz., 2013-14 to 2015-16 has been taken for Central Government capital expenditure and fiscal balance for the countries depicted in the graph. The data has been sourced from ADB Statistical Database; Central Bank of Mexico; Central Bank of Sri Lanka; Budget Management Department, Philippines; Central Bank of Peru and Union Budget Documents, India.

8 Medium Term Expenditure Framework Statement, 2017

9 It may be noted that subsequent to budget announcement, the GoI, in its press release dated March 26 2018 has announced a reduction in financing via market borrowing by ₹500 billion, with ₹250 billion each to be financed by buybacks and National Small Savings Fund (NSSF).

10 A2 + FL includes all expenses in cash and kind on account of hired labour including human, bullock, machine, seed, insecticides, pesticides, manure, fertilizers, irrigation charges and miscellaneous expenses and imputed costs of family labour (FL). C2 includes A2+FL costs as well as imputed costs of owned land and interest on owned fixed capital.


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