Union Budget 2018: Some hits, some misses

  • Blog Post Date 09 February, 2018
  • Perspectives
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Bhaskar Dutta

University of Warwick

In this article, Bhaskar Dutta critically analyses the Union Budget for 2018-19 in terms of announcements for the rural and agricultural sector, healthcare, and manufacturing, and implications for fiscal consolidation.

The Union Budget for 2018-19 had to be designed keeping several objectives in mind. Perhaps, the most important task was to ameliorate farmers’ distress and more generally revive agriculture. In contrast to the Prime Minister's promise in 2017 to double farmers' incomes by 2022, farm sector incomes have actually come down, and there didn’t seem to be any silver lining to the dark clouds hovering over the rural sector. The manufacturing sector too is hardly in the best of health, with the ‘Make in India’ campaign producing not much more than a catchy slogan. Only a couple of days before the budget, the Economic Survey had raised the "twin balance sheet" problem. Many companies are struggling to pay off debts. This has resulted in public sector banks being loaded with nonperforming loans, making it difficult for the banks to extend credit. So, it was felt that the Finance Minister (FM) Mr Arun Jaitley would make some big announcement about public sector banking reform.

There was also the fear that with the general election not very far away, political compulsions would trump sensible economics. So, much of the pre-budget discussion focussed on whether the FM would spend indiscriminately in order to revive agriculture and manufacturing and to buy votes, or whether he would strive towards achieving the goal of fiscal consolidation. While it is too early to say anything definite about the extent to which the budget will stimulate the economy, it is now clear that both short-term and long-term targets of fiscal consolidation have been abandoned. The actual fiscal deficit for the current year will overshoot the budget estimate quite substantially. Perhaps the FM could claim that the dislocation to the system has been caused by introduction of GST (goods and services tax). But even this fig leaf is not available for next year’s estimated fiscal deficit of 3.3% of GDP (gross domestic product). This is even higher than the original estimate for the current year, and is despite optimistic estimates of the proceeds to be earned through disinvestment during the next year.

Rural sector

As expected, the FM did announce a large number of schemes for the rural sector. He has announced his intention of providing farmers with a minimum support price (MSP) for crops that will ensure them a 50% return on their cost of production. However, what was not clarified by him is what components of cost will be taken into account in computing cost of production. In particular, will the cost of family labour be included in total labour costs? This is a long-standing demand of farmers that has not been accepted by the government so far. It can also be argued that the entire price support programme, which subsidises farm producers – big and small – at the expense of consumers, can at best be a firefighting operation that should be used to address short-term distress.

More desirable support systems must surely be based on improving agricultural productivity, improving marketing systems, and weaning off a sizeable fraction of the rural population away from traditional agriculture. The more developed we become, the less will consumers spend on foodgrain. So, the economy simply cannot support roughly 40% of the population in growing foodgrain. Fortunately, the budget does make an effort in this direction. For instance, one proposal which will be very beneficial to farmers is the plan to upgrade rural haats to grameen agricultural markets – this will enable farmers to sell directly to consumers, thus cutting out middlemen. In the same spirit, Mr Jaitley also announced the creation of an agricultural market infrastructure fund to connect a large number of rural markets to the electronic national agriculture market.

There is also renewed emphasis on the development of the food processing industry with a much larger allocation to the ministry. A similar effort to diversify the product basket of the rural sector is the emphasis on animal husbandry, fisheries and aquaculture. These steps will undoubtedly improve farm incomes and also improve the long-term prospects of the agricultural sector. However, there is absolutely no chance of doubling farm incomes during 2017-2022 – a promise that was repeated by Mr Jaitley during his budget speech!


Of course, potentially the most important piece of policy initiative – one that rivals in importance policy reforms such as the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) and the Right to Food Act – is the announcement of a giant step towards universal health coverage. Mr Jaitley has announced the world’s biggest health insurance scheme. The National Health Protection Scheme will provide hospitalisation coverage of up to Rs. 500,000 per family per year for 100 million poor households. Successful implementation of this scheme would provide a huge boost to the living standards of a sizeable fraction of the poor. Such a scheme should certainly be an essential component of the social sector safety net of any country professing to follow socialist ideals. Unfortunately, so little of the details of the scheme have been revealed that one wonders whether this is just an election gimmick. How much will the scheme cost? How is it going to be financed? Will the state-owned insurance sector implement the scheme? How will the already creaking public healthcare system cope with the increased demand? There are many questions, but no answers!


Not much change was expected in the indirect tax structure since the GST system is relatively new. But a very surprising and regressive step is the increase in customs duty on several items. Mr. Jaitley claimed that this is a move to promote domestic industry and revive the ‘Make in India’ campaign about which not much is heard in recent times. Several decades of global experience and our economic history has demonstrated the folly of trying to use import substitution to promote domestic industries. Tariff protection will result in inefficiencies and hurt consumers by raising domestic prices. Our exporters will find it more difficult to compete in world markets. It may even promote retaliatory action from our trading partners, compounding the problems of our exporters. Perhaps, the increase in customs duties was introduced to raise much-needed revenues, but it seemed more ‘nationalistic’ to claim that it is being done in the cause of domestic industry!

There were no other major surprises in the budget. In fact, the budget, somewhat surprisingly, does not contain any major steps in support of the manufacturing sector. One small piece of encouragement is the reduction in corporate income tax for small- and medium-sized enterprises. However, while they constitute the bulk of domestic industry – a point emphasised by Mr Jaitley – they form only about 10% of domestic industry in terms of value. The failure to provide some relief to the large enterprises may affect their global competitiveness. Mr Trump’s recent announcement slashing American company taxes is likely to lower the global structure of corporate taxes, thereby putting our own corporate tax level even more of an outlier. Despite all this, FM did announce that the economy was poised to soon grow at around 8%. Perhaps, he knows something that most of us know nothing about!

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