Budget shows that formalisation of the economy is yielding results

The National Health Protection Scheme will insure nearly 40% of India’s population

One of the key themes of the government’s reforms in the recent past has been greater formalisation of the economy. The budget suggests that these measures have started yielding results, in terms of widening of the tax net and buoyancy in direct tax revenues .

Agriculture and health are the thrust areas of this budget. Especially two announcements are remarkable and promise to be game changers. First is the enhancement of minimum support prices (MSP) for agricultural products to 150% of the cost of cultivation. Along with the institutional measures announced for development of agro markets and Operation Green to address price fluctuations in perishable crops, it will go a long way in realising the government’s mission of doubling the income of the farmers. At a time when the farm sector appears to be under a lot of stress, these are thoughtful measures.

The second big announcement is the National Health Protection Scheme that will provide a robust medical insurance to nearly 40% of India’s population.

In the past two years, India’s growth performance has been falling short of our longterm growth potential — as the economy was adjusting to major structural reforms and because of some legacy issues like the overhang of NPAs. The recapitalisation of public sector banks and the rolling out of the Bankruptcy and Insolvency Code are already addressing the issue of NPAs.

Another big push to the infrastructure development through the budget — with a record provision of close to Rs 6 trillion that is almost 20% higher than in the previous year — is an apt growth-booster in the current macroeconomic environment. Allocations for roads, urban infrastructure and railways are expected to provide the muchneeded multiplier effect. One would expect this to also crowd-in private capex as India Inc deleverages its balance sheets and capacity utilisation levels move up. The government will be contributing 12% EPF for new employees for all sectors for the next three years. This recognises the imperative of creation of formal sector jobs.

On the taxation front, the benefit of lower corporate tax rate of 25% has been extended to medium-scale companies, which is in line with the focus that this government has been attaching to the MSME sector.

The social and infrastructural spends have meant some slippage from the path of fiscal correction. The fiscal deficit for FY19 is budgeted at 3.3% of GDP. Given the needs of the economy, the slippage appears to be within the acceptable limit.

It has also formally adopted the Fiscal Reform and Budget Management Committee’s target of bringing down the Centre’s debt to 40% of GDP. Overall, I believe that this budget has managed remarkably well the balance between fiscal discipline and its growth and the social agenda.