Feb 1, 2019
The government demonstrated admirable restraint in adhering to the fiscal deficit targets and staying within the glide path, while coming forward with meaningful relief for the struggling rural sector, tax relief for the middle class and a wider set of corporates and outlining a vision for the future.
Highlighting Progress Achieved to Date
The Finance Minister highlighted the meaningful progress achieved over the past five years via meaningful structural reforms and initiatives, including structurally low inflation, an institutionalized process for bad loan recovery that has recovered 3 lakh crores already, a healthier public sector and corporate banking sector, transparent and consumer friendly regulations in the real estate sector, and successful implementation of technology led initiatives.
In the past five years, India has become universally recognized as a bright spot in the global economy, taking the mantle of fastest growing large economy from China, emerging as one of the top investment destinations for FDI in the world, while rising five notches to the sixth largest economy in the world.
Notably, the FM highlighted that households today are spending ~40% less on household goods due to structurally lower inflation over the past few years. Equally importantly, the government has succeeded in restoring fiscal stability and fiscal balance, bringing the fiscal deficit from 6% to 3.3%, the CAD to 2.5% of GDP.
The F.M. highlighted a corruption free regime, and measures such as RERA and Benami property Act bringing transparency to real estate, transparent auctions for coal and spectrum. The F.M. highlighted additional measures related to provision of sanitation, a tripling in construction of rural roads, and electricity for all households by 2019 March.
Direct Income Support
The highlight of the budget was the expected relief package for struggling farmers. In a historic measure, the budget assures delivery of direct income support of INR 6,000 per year to farmers owning up to 2 hectares. The income support will be transferred directly into farmer bank accounts in three instalments.
An expected 12 crore farmers will get direct benefits, from Dec 1, 2018, with the first INR 2000 to be sent soon to the accounts, costing the government INR 75,000 cr per year. The government committed to meet the emergent needs of farmers during harvest season as well.
Notably, no relief measures were announced for non land owners, which leaves open a gap between owners and non owners. Interestingly, the spade work on the ownership records has been substantially done, so the rollout could be reasonably quick.
Sticking with Fiscal Discipline
While the details of the programs and the financial math will fructify in coming days, the key takeaway was that the government has chosen to stick with a path of fiscal responsibility, sticking to a fiscal deficit target of 3.4%, despite expectations that fiscal prudence would be abandoned. The BJP demonstrated laudable fiscal restraint, when their personal interests would have been better served with greater ostensible largesse. Sticking to the path of fiscal discipline will no doubt lead to foreign investors and debt holders in particular heaving a sigh of relief.
A Social Security Like Pension Program for Workers
Noting that half of India’s GDP originates from 42 crore workers in unorganized sectors such as construction, agriculture, rickshaw drivers, home workers etc, the government announced Noting that half of India’s GDP originates from 42 crore workers in unorganized sectors such as construction, agriculture, rickshaw drivers, home workers etc, the government announced measures to provide a social security like pension program in old age for such workers.
In addition to health coverage, and life insurance coverage, the govt proposed a mega pension program with monthly income at retirement. An 18 year could contribute as little as Rs 100 per month to get an old age pension of INR 3,000 per month. The government would provide contribution matching in the pension account every month. The government estimated 10 crore workers could benefit from the scheme over the next 5 years, in what could eventually become the world’s largest pension scheme. The scheme will be implemented in the current fiscal year itself.
Key Structural Reforms and Benefits
The F.M. noted a number of key achievements:
• Average Indians are now able to avail the benefits of air transport. With over 100 operational airports, domestic passenger traffic has doubled over the past five years, with associated job creation.
• India is the fastest highway developer in the world, building 27 km of highways each day.
• India now leads the world in mobile data consumption, with a 50 times increase in mobile data over 5 years, and the lowest cost of voice and data in the world.
• Mobile manufacturing companies have gone from 2 in India to 268, with hundreds of thousands of common service centers digitally delivering service to rural areas and creating digital villages, with a goal of building 1 lakh digital villages over the next 5 years.
• The FM announced initiatives for electronic tax filing and random audits, eliminating face to face contact between assessor and assessee, and doing away with the decades old opportunities for corruption. The majority of returns will be accepted as filed without scrutiny, and technology used to make the process assessee friendly.
• The FM noted that bank nationalization 50 years ago left a large part of the country out, but Jan Dhan Aadhaar and Mobile have been game changers for the economy, with 34 crore Jan Dhan Bank Accounts opened, Aadhaar universally implemented, and poor and middle class receiving benefits directly.
• Finally, tax collections have risen from 6.38 lakh crores to 12 lakh crores with an 80% rise in returns filed to 6.85 crores in the tax base.
Middle Class & Corporate Tax Relief
The government finally announced meaningful measures for the middle class, allowing rebate of full tax payable for individuals with income up to 5 lakhs. The immediate impact of this would be an additional ~10,000 in the pockets of the middle class, pending additional details. The standard deduction was raised by 10,000, to 50,000.
Universal farmer support income seems to be an idea that is here to stay, with both the largest parties promising to move ahead on rolling out farmer income support. An umbrella pension for unorganized workers along the lines of the U.S. social security, has also now entered the discourse and seems likely to be a key initiative that is likely to gain traction. In doing so, the BJP has succeeded in nullifying the perceived advantage of competing schemes such as the Rythu Bandu by offering a similar scheme at the national level.
The government clearly demonstrated fiscal discipline and the bond market moved up a marginal 12-15 bps to 7.38%. Again, clarity on policy will emerge post elections, but the bond market seems to be buying the fiscal math for now.
On equity markets
Markets have now made four attempts at breaking through 10,968, and failed. On the other hand, markets have sold off three different times, and bounced back resiliently. Clearly, the front line, large leadership stocks are showing strength and resilience, while the broader market has been beaten down quite badly. The upshot, leadership, quality growth with earnings delivery and strong balance sheets are continuing to perform well.
The Indian economy remains a dichotomy. A wave of next gen structural reforms has set the stage for decades of high growth. Meanwhile, a large cross section of the country is dependent, and arguably accustomed to sops, and prudent management requires managing a fine balance between the needs of the bottom of the pyramid rural worker with the urban economy.
The budget in our opinion, achieved a balance, and is market friendly, consumer friendly and business friendly. Net net, the budget has solidified farmer income support and national social security as two key packages that will garner increased popularity and are likely here to stay. India remains a consumption driven economy, much as the U.S. has been for the past 40 years, and is following in the footsteps of giants, while holding the mantle of the world’s fastest growing large economy.