A mildly expansionary budget that may not help

by Mahesh Vyas

The highlight of Budget 2018-19 is the assurance to farmers that they would get, for all crops, a minimum support price that is 50 per cent higher than cost of production. This will apparently deliver a big benefit to farmers. Besides, Farmer Producer Organisations have been exempted from direct taxes. Farmer organisations across the nation had agitated against their stressed conditions particularly after demonetisation. Gujarat elections revealed the political implications of their angst.

The budget lived up to expectations that farmers and rural folks would be appeased. The finance minister even switched to speaking in Hindi in appropriate parts of his speech.

Agriculture is a risky business. Far riskier than industry. Twice every year farmers initially face a production risk and then a price risk. They need risk mitigation instruments, modernisation, better logistics to integrate with consumers and more. An assured 50 per cent return on cost does not help in any of these directions. It probably eliminates the risk of losses, but its collateral damage will be to ruin agricultural markets that discover prices.

NITI Aayog, entrusted with the mechanism to deliver the assured prices, faces a challenge in ensuring that markets do function to discover prices correctly and yet, we deliver the promised prices to farmers.

While the assurance to farmers has overtones of political expediency, its economic outcomes can be interesting in the short run if the government delivers handsome increase in income to farmers. The increase, however, is not very clear as it depends upon the method of calculation. If, and its a big if, the intention of the government is to make big transfers to the farmers for political gains then, corporates can expect good demand growth from the rural sector during 2018-19.

If monies reach the farmers in time, the multiplier effects could play an effective role in triggering revival. A half-hearted or delayed implementation would render the scheme ineffective. It will then be seen as a mere election-winning slogan or a jumla.

The budget, in general, is somewhat expansionary. The 13.8 per cent increase in central government expenditure (BE over BE) after a 15 per cent (RE) growth in the current year will help in expanding aggregate demand, which is the need of the day. A more aggressive growth, of say 20 per cent, could be a much better antidote to the sluggish economy. During the first three years of Modi sarkar, expenditure grew at single digit rates, averaging over 7 per cent a year. In comparison, the average growth during 2004-05 through 2013-14 was 13.5 per cent per annum with a peak of 24.5 per cent during 2008-09.

The reduction in corporate tax rates is half-hearted. The finance minister had promised in 2015 to reduce the rate to 25 per cent for all companies in four years to promote growth and create more jobs. Growth and jobs can be delivered better by the larger companies and they continue to face uncompetitive tax rates, as the finance minister had told us earlier. The US government’s aggression on corporate tax shows that we need to accelerate our path of reforms in this area.

Almost all discussions regarding GST have been around its implementation and rates. But its benefit is in a fall in the effective tax incidence. GST removes the cascading impact of indirect taxes. Its introduction is supposed to reduce the final indirect taxes we pay. Budget 2018-19 does not show any such impact. The tax/GDP incidence is expected to rise from 11.2 per cent in 2016-17 to 11.4 per cent in 2017-18 and to 12.1 per cent in 2018-19. From an aggregate demand perspective, this ratio has to decline. Compliance is a different story.

References
1. https://timesofindia.indiatimes.com/business/india-business/budget-2018-assu red-msp-does-not-help-agri-price-discovery/articleshow/62748517.cms
CMIE STATISTICS
Unemployment Rate
Per cent
6.2 -0.0
Consumer Sentiments Index
Base September-December 2015
93.5 0.0
Consumer Expectations Index
Base September-December 2015
93.9 0.0
Current Economic Conditions Index
Base September-December 2015
92.8 0.0
Quarterly CapeEx Aggregates
(Rs.trillion) Jun 17 Sep 17 Dec 17 Mar 18
New projects 2.33 1.38 1.24 2.15
Completed projects 0.87 1.21 1.02 1.07
Stalled projects 2.67 0.69 0.93 3.34
Revived projects 0.30 0.34 0.23 0.14
Implementation stalled projects 0.73 0.72 0.58 1.05
Updated on: 25 Apr 2018 8:20PM
Quarterly Financials of Listed Companies
(% change) Jun 17 Sep 17 Dec 17 Mar 18
All listed Companies
 Income 9.6 7.9 11.9 9.0
 Expenses 9.9 9.0 12.9 9.6
 Net profit -19.9 -18.1 -13.9 6.9
 PAT margin (%) 5.3 5.5 4.9 14.7
 Count of Cos. 4,482 4,469 4,431 85
Non-financial Companies
 Income 10.2 8.2 13.2 5.4
 Expenses 10.5 8.2 12.3 6.8
 Net profit -25.1 -6.0 12.7 -1.1
 PAT margin (%) 5.2 6.2 6.4 13.2
 Net fixed assets 9.2 5.5
 Current assets 78.7 8.5
 Current liabilities 11.0 22.7
 Borrowings 10.4 -2.3
 Reserves & surplus 5.2 0.4
 Count of Cos. 3,460 3,443 3,428 61
Numbers are net of P&E
Updated on: 25 Apr 2018 8:20PM
Annual Financials of All Companies
(% change) FY15 FY16 FY17 FY18
All Companies
 Income 5.5 1.5 5.1 1.6
 Expenses 5.6 1.7 5.1 0.7
 Net profit 0.0 -10.3 23.7 9.2
 PAT margin (%) 3.1 2.8 3.6 8.3
 Assets 9.5 10.0 6.9 3.3
 Net worth 8.5 11.4 6.0 2.8
 RONW (%) 5.8 4.9 5.9 12.7
 Count of Cos. 25,647 23,668 20,755 19
Non-financial Companies
 Income 4.7 0.6 4.7 1.5
 Expenses 4.9 0.0 5.2 0.6
 Net profit -8.6 18.4 18.0 10.7
 PAT margin (%) 2.0 2.5 3.1 7.4
 Net fixed assets 13.3 17.3 5.4 4.4
 Net worth 6.9 12.0 4.4 2.9
 RONW (%) 4.6 5.1 6.0 11.5
 Debt / Equity (times) 1.1 1.1 1.0 0.2
 Interest cover (times) 1.9 1.9 2.1 11.8
 Net working capital cycle (days) 66 65 62 38
 Count of Cos. 20,897 19,807 17,287 17
Numbers are net of P&E
Updated on: 18 Apr 2018 11:50AM

Time series available from 1990 onwards