Five takeaways from Arun Jaitley's fifth Budget

The fifth Budget of Finance Minister Arun Jaitley has already drawn huge attention for its ambitious health insurance scheme, a special minimum support price package for farmers, the imposition of the long-term capital gains tax on equity, an increase in the customs duty and surcharge on a host of imported goods and a substantially relaxed road map for fiscal consolidation. But going beyond these measures, the Budget for 2018-19 has at least five more takeaways that are yet to receive adequate attention. Here is an attempt to list them along with their key implications. 

Bigger government: Contrary to expectations that the size of the government under the National Democratic Alliance will get smaller, there has been a rise in the headcount of employees in government departments, though the pace of increase has declined considerably. At the end of February 2016, the number of government employees was estimated at 3.25 million. 

This increased by 230,000 to 3.48 million a year later at the end of February 2017. But by the end of February 2018, the number of employees on government rolls will go up to 3.5 million, a much lower increase of only 25,000 employees. Significantly, the headcount for the Indian Railways, the largest employer at 1.3 million, has remained unchanged in the last three years. 

In keeping with that trend, government expenditure on pay, allowances and travel expenses is set to grow by less than 6 per cent at Rs 2.07 trillion in 2018-19, compared to an 8 per cent rise at Rs 1.95 trillion in 2017-18. The increase in 2016-17 was much higher at 20 per cent. 

Queering the pitch somewhat is the outlay for tax administration next year. At about Rs 1 trillion, the 2017-18 outlay for tax administration represents a 36 per cent increase over what was spent in 2017-18. It is not yet clear why the government’s outlay on tax administration should go up by such a huge margin. The headcount for the departments overseeing administration of direct taxes and indirect taxes has almost doubled in the last two years, but that alone cannot explain this sharp increase. 

Weakening public sector capacity: Internal and extra budgetary resources (IEBR) mobilised by public sector undertakings (PSU) have always played a key role in promoting investments. In 2017-18, these enterprises, excluding Indian Railways, will be spending Rs 3.96 trillion under IEBR. This was a huge increase of about 45 per cent over what they spent in 2016-17. 

However, the IEBR of such PSUs in 2018-19 will actually decline by 3 per cent to Rs 3.85 trillion. Why should the IEBR mobilisation by non-railway PSUs decline next year? The Indian Railways will increase its IEBR by 17 per cent next year, but has the financial health of other PSUs deteriorated to such an extent that they are not in a position to provide more resources for investment? Or have they declared an investment holiday?

Capitalisation: It is reassuring that the government has allocated an additional Rs 0.65 trillion for recapitalisation of public sector banks during 2018-19, which should be more than adequate to complete the proposed equity infusion of Rs 1.35 trillion. In the current year, a total Rs 0.9 trillion has been spent for recapitalisation, which includes Rs 0.1 trillion promised earlier. 

The total PSU capitalisation programme, estimated at Rs 1.63 trillion for 2017-18, compared to Rs 1.66 trillion in the current year, also provides for Indian Railways at Rs 0.53 trillion, and National Highways Authority of India at Rs 0.3 trillion. This would indicate how the government has ensured adequate equity infusion into railways and road-building. 

But the surprise in this pack is a provision for equity infusion into Air India, which is due to be privatised next year. An amount of Rs 6.5 billion is relatively small, but it does raise questions on the need for capitalising a company that is already up for sale. 

Lower PSU dividends: The Budget numbers for 2017-18 show clearly how a 13.5 per cent decline in non-tax revenues contributed to the slippage in meeting the government’s fiscal deficit target. Learning from the setback, the government has now budgeted for only a 3 per cent increase in non-tax revenues for 2018-19. 

The worrying projection is that dividends from PSUs, accounting for a fifth of total non-tax revenues, will decline next year. From Rs 0.55 trillion dividends from PSUs in 2017-18, the revenue under this head next year will be Rs 0.52 trillion. Declining IEBR mobilised by non-railway PSUs and lower dividends by them could be early signals of a deeper problem afflicting such enterprises. 

Labour reforms: Finally, Jaitley slipped in quietly a sentence in his speech to announce the extension of fixed-term employment to cover all sectors. Only time will tell how effective it will be to introduce flexibility in the labour market.

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