A budget for the ballot

Prime Minister Narendra Modi once again demonstrated his consummate mastery of political messaging, masterminding a Budget plan which – even if it is technically valid for just three months – managed to touch virtually every section of the electorate which had been showing signs of disenchantment with the regime. Effectively, Modi has managed to fire the first salvo in his re-election campaign even before the Opposition managed to get its act together.

In the absence of Finance Minister Arun Jaitley, away on medical leave, stand-in Finance Minister Piyush Goyal delivered a budget packed with sops for farmers, the tax-paying middle class and the urban worker at the bottom of the pyramid, while upping allocations for other marginalised sections of society, including the Scheduled Castes and the Scheduled Tribes. He even managed to pack in a ₹750-crore fund for protection of cows, signalling that that particular line of politics will continue to be vigorously pushed in the cow belt.

Goyal’s Interim Budget is ‘interim’ only in name, for it includes tax giveaways which mandate a change in the Finance Bill and introduces new heads of spending which will continue into the next government and the next Budget.

The biggest of such spends was a farm income support scheme. Titled PM KISAN (Pradhan Mantri Kisan Sampada Yojaana), it will directly transfer ₹6,000 per year to farmers with landholdings of less than 2 hectares (4.9 acres). The dole will be paid in three instalments of ₹2,000 each. The total outlay will be a whopping ₹75,000 crore (over $10.5 bn), of which ₹20,000 crore will be spent in the current fiscal, since the scheme has been backdated to December 2018.

The other big spend was a tax break totalling ₹18,500 crore, targeted at the bottom end of the taxpayer league – those earning up to ₹5 lakh per year, who will now not have to pay any tax. With investments in designated savings, those earning up to ₹6.5 lakh per year need not pay any tax. There were other sops too to soothe the urban middle class, including relief on tax on notional income from a second self-occupied house, deferment of a plan to levy notional rental income on unoccupied property by another year, as well as an increase in threshold limits of tax deducted at source on income from bank and post office deposits. All taxpayers will also get a ₹10,000 increase in the standard deduction allowed on income computed for tax. While the farm income scheme and, to an extent, the tax breaks, were expected, Goyal’s third trump card – a pension scheme for workers in the unorganised sector – was not. The Pradhan Mantri Shram Yogi-Mandhan will provide a monthly pension of ₹3,000 to workers earning less than ₹15,000 per month who join the scheme. The pension will kick in after the beneficiary reaches 60 years of age and will be funded by matching contributions from the beneficiary and the Centre. This scheme, too, was backdated to December, to ensure that the 48 crore workers (and voters) in the unorganised sector get the message.

All these benefits, of course, came at the price of fiscal slippage. The Centre will miss its fiscal deficit target for the second year in a row, with FY 2018-19 expected to close with a fiscal deficit of 3.4 per cent of GDP, a figure which will carry over to the next fiscal as well. While the slippage is a marginal 0.1 per cent of GDP over the revised target of 3.3 per cent, it is considerably higher than the originally planned 3.1 per cent.

The arithmetic of the fisc, however, appears dodgy. The hand-out spree will be funded by a very sharp increase in government borrowings, which are set to surge from ₹5.7 lakh crore to a whopping ₹7.1 lakh crore next fiscal. The 3.4 per cent number has been arrived at by assuming a nominal GDP growth of an unrealistically high 11.5 per cent, and increased dividends from the RBI and government-owned banks. The RBI alone is expected to pay ₹68,000 crore as dividend, with other bank contributions taking the tally to ₹82,911 crore.

This has two implications for India Inc., which otherwise had little to cheer in Goyal’s Budget, since corporate tax remained untouched, Customs duty protection for certain sectors failed to materialise and infrastructure spending, other than on roads, stayed muted. One, it will crowd out some private sector borrowing. Two, and more significantly, it may force the RBI into postponing an interest rate cut and even hiking it, if the consumption boost from the giveaways turns inflationary. The quality of the deficit is also not good. Revenue deficit – the gap between the government’s income and expenditure – is set to rise to ₹4,70,214 crore, 2.2 per cent of GDP. Economists may worry about those numbers, but the numbers Modi and Goyal are targeting are the 12 crore rural household beneficiaries, as well as the 48 crore workers in the unorganised sector through the pension scheme. With the genie of income transfers and giveaways out of the bottle, the Opposition is going to find it difficult to counter it politically, leave alone push it back in even if it wins.

Modi, clearly, has saved his best punches for the last round.