The NDA government's final Budget ends up painfully devoid of new ideas

A critique by a former Finance Ministry Correspondent

Minutes after Finance Minister Arun Jaitley concluded his Budget speech, Finance Secretary Hasmukh Adhia took his seat before the camera on a prominent business news channel to answer questions and discuss the Union Budget. While it is customary to congratulate the top bureaucrat on the Budget, in this case, the mood in the studios appeared to be significantly darker – with fiscal slippage and the levy of the long-term capital gains tax being two of the several topics playing on corporates’ minds.

It took another anchor to charitably term it a Budget for Bharat as justification for several measures which make this Budget one of the less memorable ones in recent history.

Finance Minister Jaitley’s fifth Budget’s better aspects are the policies which he has largely left untouched or made only minor tweaks to.

The fiscal trap and interest rate environment

The amendment to the fiscal roadmap has now become an annual fixture over the last two years, with the government justifying the slippage of 30 basis points for the current fiscal with lower revenues from the GST. With the markets appearing to largely take the slippage in their stride, one might be tempted to take a 'chalta hai' approach to the fact that the fiscal deficit target has been missed by a wide margin for the first time in five years.

What becomes significant, however, is that the fiscal slippage may have a domino effect on the domestic interest rate environment going forward. With the hike in MSPs, oil prices trending upwards and inflation headed back north, analysts are now expecting interest rates to rise 50 basis points (Link) in the current fiscal year. Goldman Sachs has since pointed to a 20 basis upside risk on already relaxed fiscal deficit target of 3.2% for FY19.

Moreover, the realigned roadmap doesn't appear to have resulted in any significant change in spending patterns for the upcoming fiscal. In macroeconomic parlance, the fiscal headroom appears to largely be to fund the indirect tax shortfall, rather than substantial new investment. Many flagship programmes have simply seen their outlays augmented somewhat.

Technology and connectivity

The Union Budget demonstrates just how out of touch the Central Government is when it comes to technical evolution and cutting edge technologies.

Of 900 million or so Indian adults, only 400-450 million currently have mobile internet access, and the solution to this problem of access is also based on first principles. The government would do well to note that 500,000 WiFi hotspots with a service radius of 100ft each does little to solve this larger issue.

WIth the National Optical Fiber Network in place, the government could do far more than currently stated, and instead look at 4G/5G devices and low cost/free/subsidised mobile internet access by allowing private players to pay-to-play on this immense network. To solve a problem, the solution must largely be Mutually Exclusive and Collectively Exhaustive. The current measures outlined are neither.

Crypto-currency and blockchain

This is in my opinion one of the most significant and far-reaching aspects of the Union Budget, which could have immense consequences on the economy in the next decade.

 “The Government does not consider crypto-currencies 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.”

The above is not just a poorly phrased sentence from the Budget speech, but is extremely ignorant of the realities of crypto-tokens. First principles indicate that markets gravitate towards assets that fulfil a need, and crypto-tokens are fulfilling the need for global, decentralised assets, and the fact that crypto-tokens have well over half a trillion dollars in market capitalization demonstrates there is a need.

Bans and crackdowns simply lead to evasion. The first lack of foresight which the government exhibits is seeing crypto-tokens simply in the context of payment systems rather than an inherent store of value. ICOs (Initial Coin Offerings) have demonstrated that investors globally are seeing these tokens as investment destinations, far more so than mere monetary instruments.

The chief area of concern within the regulatory purview of the government and the RBI should be the point of conversion of these tokens into fiat currency, as well as identifying the source of investments made through cryptographic exchange systems. Both of these aspects can be addressed through effective KYC systems within cryptographic exchanges, several of which are already flourishing in India today.

The fact of the matter is that whether North Block and Mint Street like it or not, crypto-tokens are comparatively seamless and reflect the new realities of global financial evolution. To ignore this reality would be both stupid, as well as dangerous.

Government as an operator of enterprise

The government’s commitment to disinvest and streamline was incredibly heartening, and is undoubtedly one of the brighter sparks of the current regime. Disinvestment receipts were the highest of any year to date, and decision to list 14 PSUs in a single year signals a commitment towards less excess and government control.

That Mr. Jaitley was unafraid to use the privatisation word is good news for eradicating the excess that is characteristic of several public sector companies today.

The evolution of the Railways – or the lack thereof

The rail network needs to get less bureaucratic, faster and most importantly needs immense investment and enhancement in freight carrying capacity and speed. Both of these can only be done with a massive participation of private investment, and sooner or later the government must actively start considering more private involvement in the railways and consider models such as the UK where the physical infrastructure is nationalised, but rolling stock is private. While the Finance Minister spoke of Wi-Fi and escalators, the fundamentals of the Indian Railways remain the same – it needs a lot of money and a change in mindset. Without that, we’ll be left funding subsidised alcohol at the incredibly opulent Railway Officers’ Clubs across the country.

The good stuff

The two bright spots in this otherwise bleak critique are the government’s proposal to create the National Health Protection Scheme as well as the incredibly sensible, if blasé, approach the government has taken to personal income tax.

National Health Protection Scheme and the welfare state

The NHPS is an excellent opportunity to once and for all make India an effective welfare state by removing the poor access to healthcare that has been the hallmark of our social security net. That over 75% of the healthcare market in India is private and consumes many households’ life savings makes this a problem worth solving.

The devil really will lie in the details, but if the State pays healthcare premiums for its poorest 50 crore citizens, it could usher in a huge revolution in terms of access to healthcare. Of course, adequate geographical coverage, timely and cashless settlements among several other aspects will have to be addressed to make the solution workable. Meanwhile, it doesn't help that the scheme adds to the long list of fiscal liabilities, and could lead to a bill of as much as $20bn even at a redemption rate of just 5% of projected beneficiaries, in a given fiscal.

In either case, universal healthcare is a positive pursuit, and the possibilities for this to evolve into the insurance marketplace model over a long run is a realistic possibility.

Personal income tax

India's income tax rates are fairly reasonable for a country growing at its current pace, and making the medical reimbursement and conveyance a part of standard deduction is a positive step in making life easier for the salaried class. However, the augmented healthcare and education cesses actually increase the overall tax rate.

As per-capita consumption in India rises, we have the potential to benefit from the higher indirect tax revenues and become an overall low-income tax economy compared to other developed economies to the Indian citizen's overall benefit.

Concluding thoughts

What is striking about the Finance Minister Jaitley’s final full Budget is how utterly devoid it is of new ideas. An inordinate amount of time in the current Budget speech was taken up in recounting purported achievements of the past many years or outlining underwhelming statistics such as the fact that only ?23.5 crore per city on average has been spent so far on flagship projects such as the 100 Smart Cities.

While the National Health Protection Scheme, levy of a Long Term Capital Gains tax and a reiteration of the commitment to privatisation and disinvestment are commendable in moving towards a prosperous market economy, it’s far from being one of this government’s better Budgets.

The Union Budget in its best form is a strategy document – a blueprint for the vision of growth for the nation, and past Budgets presented by this government have to varying degrees played that role. The same cannot be said of the document that was placed before Parliament this past 1st of February.

The current Budget falls short of that standard by a country mile.

The writer covered four Union Budgets between July 2014 and February 2017.

He is currently a student in the Class of 2018 at the Indian School of Business and is President of the Public Policy Club at the school’s Hyderabad campus. He was formerly a television journalist and Finance Ministry Correspondent for ET NOW and for Bloomberg TV India (now BTVI).