The 6 big macro ideas from the Union Budget 2018

Budget 2018 was a budget of the big picture. It was not about the nuances of personal and indirect taxes. Yes, there was the selective reduction in corporate taxes and the hike in customs duty on a variety of consumer products. Otherwise, the budget was about big macros and big ideas. Here are 6 such ideas that emanated from the Union Budget 2018

Minimal leeway on fiscal deficit

The spilling over of the fiscal deficit was a foregone conclusion with nearly 112% of the full year fiscal deficit breached in November itself. The question was not of whether but of how much? To the credit of the Union Budget, it kept the fiscal deficit spillage at just about 30 points for the next 2 years. For fiscal 2017-18 the fiscal deficit is likely to end at 3.5% as against the FRBM target of 3.2%. For fiscal 2018-19, the fiscal deficit is again spill over by 30 bps at 3.3% as against the FRBM targets. From the 3% fiscal deficit target perspective, the delay is just by two years. More importantly, the government has also guided for a phased reduction in the government debt as the percentage of GDP from 50.1% to around 44%. This minimum leeway on fiscal deficit despite an aggressive expenditure push will do a world of good for Indian sovereign ratings.

Focus on the quality of life of rural India

The rural focus was never about allocations and loan waivers. The government, to its credit, has taken a holistic view of the budget. The total allocation for rural livelihood schemes has been set at Rs.14.34 trillion. In addition, the focus on the farmer ecosystem apart from fixing the MSP at 1.5 times the cost of production is a big positive. The budget has also focused on 4 crore fresh rural electricity connections and 8 crore cooking gas connections. Above all, the government has undertaken the world’s biggest healthcare program with a health cover of Rs.5 lakh per family across 10 crore households. All these measures will go a long way in improving the quality of life in rural India.

Shift towards taxing importers more

OK, the focus is no longer on reducing import duties but on increasing them. So a 10% Social Welfare Surcharge has been introduced on imports. In addition, most consumer items will now attract higher import duties. You will end up paying more for mobile phones, LCD TVs, imported perfumes, toiletries, high-value apparel etc. The logic is that if you can afford to pay for imported goods you can surely afford to pay a little more. This is critical because it marks a clear shift from the past.

A shift towards equity as a growth asset

Forget about the LTCG on equity and equity funds at 10% above the capital gain earnings of Rs.1 lakh. The budget has been an indirect boost for equities as an asset class. The continued focus on anti-money laundering will be a roadblock for gold and realty as growth asset classes. That means the preference for equities will continue. The 30 basis points higher fiscal deficit is going to be a warning statement for long-term debt as higher yields will also mean lower bond prices. That again puts equity at an advantage over debt as an asset class. More importantly, the higher fiscal deficit is going in to fund infrastructure and rural spending. Both these factors have a multiplier effect on economic growth and consequently on the market capitalization of the Indian markets. The bottom-line is that equities as an asset class have got a very subtle yet emphatic boost from the Union Budget.

Divestment revenues at a tipping point

Every activity needs a tipping point and the tipping point in disinvestment may have finally come in the year 2017-18. For the full year, the government is likely to attain disinvestment revenues of Rs.100,000 crore as against the target of Rs.72,500 crore. The next year target is Rs.80,000 crore. This includes 24 CPSEs and a mix of minority stake sales and strategic sales. Don’t be surprised if India exceeds the target of divestment comfortably in the coming year too. The government may have finally got its formula for minority stake sales right. For strategic sales, Air India could be the test case. Watch this space for more action!

Giving fiscal policy precedence over monetary policy

This budget has made a very important statement that monetary policy may have finally outlived its purpose in the current context. With rates down by over 200 basis points in the last 3 years, the room for further rate cuts is limited. The answer will be to mix smart taxation with focused public expenditure to propel growth. The higher fiscal deficit is indicative of this shift. That could be the big takeaway from the Union Budget 2018!

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