Budget 2019 May Borrow Farmer-Incentive Templates from States to Address Agrarian Crisis

New Delhi: Despite the upcoming budget being interim, the timing of the annual exercise makes it imperative that it will be loaded with policy intents to get the voter attention for the forthcoming general election.

With GST, the budget now is not about changes in indirect tax rates that prefers one industry over others. Key questions from a market perspective are: What social policy measures would be announced and its impact on the fiscal arithmetic, what would be market borrowings by the government going ahead and will there be changes in direct tax to increase consumption?

With GST collection remaining way behind the target in the current financial year, there is not much room for the government for social profligacy. However, looking at the elections ahead, some incentive to rural sector looks imminent. The current government is not going in for general farm loan waivers as that would cost mammoth 2.5 percent of the GDP. But some variant of direct cash transfer to farmers is expected.

Telangana style (Rythu Bandhu) farmer incentives that provide Rs 4,000 per acre per season to farmers as the direct transfer has been widely held as the scheme that helped re-elect the current Telangana government. However, this would have higher fiscal deficit implications.

On the other hand, the Odisha model (Rs 5,000 per season to small and marginal farmers), more likely as a similar variant, has been implemented by the BJP government in Jharkhand. Here, the cost could be split with the participating states to further dampen the impact on the fiscal deficit. A step like this could have only 0.2-0.3 percent impact on the fiscal balance.

With falling inflation and struggling IIP, an interest rate cut is usually expected but the bond yield has continuously increased. This is because of a higher fiscal deficit that is feared will be financed by large market borrowing.

With fiscal deficit around Rs 6.7 lakh crore, net market borrowing would be about 2.2 percent of the GDP. But this is not alarming as we have had higher net market borrowings in prior years.

There are also expectations that some changes would be brought in the direct tax rate to invigorate consumption and that would be populist too.

However, not only GST but to some degree even other sources of government revenue like direct taxes, disinvestment and telecom auction have remained below the budget estimate. So scopes are limited but something directed towards struggling MSME could be a fair expectation.