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Budget 2019: A tightrope walk between populism and fiscal prudence

Budget 2019: A tightrope walk between populism and fiscal prudence

Budget 2019: A tightrope walk between populism and fiscal prudence
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By Rahul Parikh  Feb 2, 2019 2:35:33 PM IST (Published)

With limited fiscal slippage (inadvertent in an election year), the Interim Budget 2019 looks poised to boost consumption in the rural and urban economy, along with a mild boost to the real estate sector

The government while presenting an interim budget in an election year, walked a tight rope between populism (with an eye on elections) and fiscal prudence. With limited fiscal slippage (inadvertent in an election year), the Interim Budget 2019 looks poised to boost consumption in the rural and urban economy, along with a mild boost to the real estate sector.

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As expected, the government has tried to ensure higher incomes in the hands of farmers and those in the low to middle income category, whilst keeping an eye on the fiscal deficit.
FY19 fiscal deficit has been revised upwards to 3.4 percent (vs. 3.3 percent as per BEFY19) while the target for FY20 has been kept at 3.4 percent too. In absolute terms, FY20 fiscal deficit is likely to grow by 11 percent to Rs. 7.04 trillion, while the gross and net borrowing plans have been pegged at Rs. 7.1 trillion and Rs. 4.73 trillion respectively, growing at 24.3 percent and 11.9 percent respectively. Though this marks a shift from the fiscal consolidation path that this government has followed so far, the same needs to be viewed in the context of an election year. Part of the rise in FY19 fiscal deficit can also be attributed to the Rs. 1 trillion shortfall in CGST collections.
The budget was primarily focused on boosting the consumption economy, by ensuring higher incomes in the hands of people at the bottom of the pyramid i.e. farmers and those earning gross income of Rs. 7.25 – 7.75 lakhs per annum. People with total income (gross income less deductions u/s. 80C, 80D, etc.) of not more than Rs. 5 lakh p.a. will have to pay no income tax. This would benefit approx. 3 crore tax payers in the coming fiscal year. Farmers holding up to 2 hectares of cultivable land shall be given an annual income of Rs. 6000 (a step towards the government’s vision of doubling farmers’ income by 2022). Owners of 2nd self-occupied residential property shall not be required to pay tax on notional rent, while tax on capital gains from sale of a property can be saved by investing in up to 2 properties. Some of these steps shall help in boosting demand for residential and commercial real estate too.
However, there was disappointment for medium to high income earners, looking for increase in maximum income tax exemption limit (presently at Rs. 2.5 lakhs) and in deductions u/s. 80C, 80D, 80G, etc. None of these limits were increased. The only solace for salary earners, having total income in excess of Rs. 5 lakhs, was in the form of a Rs. 10,000 increase in standard deduction.
The reaction of bond markets to the budget was slightly negative. Higher supply from rise in gross borrowing program, coupled with supply from state governments and PSUs, is likely to crowd out private borrowers. The impact shall be visible once OMOs from RBI fizzle out post March / April 2019. Hence the muted rise in bond yields (yields of new 10-year g-sec rose to 7.37 percent).
Initial reaction of equity markets was positive due to the boost to consumption. However, the optimism faded once the fiscal deficit figures were known. Nonetheless, the markets closed higher by approx. 0.6% with the Nifty India Consumption Index rising by 1.9 percent. The reflationary undertone of the budget also led to a 0.5 percent rise in Gold ETFs.
Before criticizing the government for fiscal slippage, one needs to consider the fact that it faces general elections in 3 months. In light of this, keeping fiscal deficit at 3.4 percent of GDP shows that government is still focused on maintaining fiscal prudence and macro-economic stability. Even this slippage pales in comparison to the fact that the government has, in the last 5 years, succeeded in bringing down retail inflation from double digits to an average of 4.6 percent and narrowing fiscal deficit from 4.8 percent to 3.4 percent.
 
Rahul Parikh is CEO of Bajaj Capital
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