Budget 2018: Lag between policy announcements and implementation a problem

By Abheek Barua

The FM ticked almost all the right boxes of a pre-election Budget. To take three examples, the plethora of policies aimed at the vote-heavy rural economy, the extension of insurance cover for poor households, and the enhanced turnover limits eligible for the reduced corporate tax rate of 25% for the job intensive MSME sectors all make for good political economy.


One could argue that they make for sensible economics as well. The initiatives for the farm sector put more emphasis on protecting farm incomes, which is far more critical than merely enhancing farm output.

The guarantee of minimum support prices (MSPs) for key crops that amount to 1.5 times the production cost might not make much of a difference on its own since farmers have been getting similar MSPs in the past. However, coupled with a price-deficiency repayment scheme that Arun Jaitley hinted at (a foolproof mechanism so that farmers get an adequate price) could ensure that the principal cause of rural distress — that of farm-gate prices falling far short of MSPs — is addressed.

The problem is the familiar slip between the cup and the lip: the lag between policy announcements and implementation. Some of these schemes seem to be at a nascent stage and one can only hope that the twin pressures of eight state elections in 2018 and the Lok Sabha polls in 2019 ensure that the lag is minimal. One can, of course, quibble over whether the allocations for some of the new schemes are in keeping with the apparent grandness of the gesture.

‘Operation Green’, the attempt to replicate India’s milk revolution for tomatoes, onions and potatoes, seems like a brilliant idea — until one sees the tiny allocation of Rs 500 crore to the programme. Again, while there are a number of plans for rural infrastructure development, the trivial increase of less than 2% in Budget allocation for rural development makes one wonder where the money to fund these schemes will come from. Thus, it is imperative to trawl through the minutiae before jumping to any conclusions about their viability.

The macroeconomic assumptions underpinning the Budget seem reasonable. Nominal GDP growth for 2018-19 is pegged at a fairly sedate 11.5% compared to 10% in 2017-18. This builds in a mild recovery in growth and a modest uptick in inflation.

One could defend the increase in the gross tax collections-to-GDP ratio of 0.5 between this year and the next year citing greater formalisation of the economy resulting in a larger tax base.

The expenditure column of the Budget balance is, however, somewhat disappointing as the ratio of revenue to capital expenditure has risen from 6 in 2016-18 to 7 in the current year, and stays there for 2018-19. Put crudely, GoI is planning to depend less on asset-creation compared to its day-to-day expenditure.

For 2018-19, this possibly reflects greater allocations to things like food subsidies (a revenue item) and restrained allocations to projects. These would have to rely more on extra budgetary resources for their funding.

What’s the one big flaw of the Budget? GoI’s decision to stray from the fiscal ‘glide path’ of 3.2% this year and 3% in the next for the fiscal deficit-to-GDP ratio. While a modest slippage in both the current year’s number and next year’s target (0.3% in both) might seem somewhat harmless in normal circumstances, this does not augur well in the current situation. The bond market is in the middle of a selling mania and is likely to punish the smallest of transgressions on fiscal commitments.

Of course, it would be unfair to blame the sharp rise in bond yields (by over a percentage point) since October entirely on government finances. However, in a situation where domestic inflation pressures are building up, oil prices seem unlikely to reverse and global liquidity is drying, perhaps the government could have pulled out all the stops to stick to the glide path.

Rising bond yields presage a rise in interest rates across the board. Thus, if bond yields continue to harden, borrowing costs will catch up soon and put the brakes on growth. This, in turn, could raise uncomfortable questions about the credibility of Budget projections. Not quite the outcome that the FM would desire, is it?

The author is Chief Economist, HDFC Bank