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My Review Of Budget 2018: A Few Good Bits, But Not Revolutionary Enough

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After listening to a long 2-hour speech by the finance minister, I had some equally frustrating and fascinating thoughts, moving beyond the usual debate of “will this be good economics or bad politics?” and vice-versa. The two can co-exist. As a whole, the Budget needs to move away from populist and prudent definitions. It needs to be examined on the merit of what it does to different classes of people.

I had to take a bit of time to properly digest what I had heard. I had to contextualise it with the other Budgets (in the past years) as well as the needs of the current scenario. These are a few thoughts about the Budget speech, which will be debated soon and passed.

World’s Biggest Health Insurance Scheme Or A Repackaged Americanisation Of Healthcare?

The major announcement, and the one that made me blurt out a ‘wow’, was that of the announcement of a National Health Protection Scheme under the Ayushman Bharat programme. This scheme is touted to be the world’s biggest health insurance scheme. For 50 crore people in 10 crore BPL families, insurance up to ₹5 lakh per family per year shall be provided for secondary and tertiary healthcare.

The rather clever moniker of “Modicare” has been doing the rounds. If it is anything like “Obamacare”, then it is doomed to fail, in my opinion. Sure, this key legislation of Barack Obama gave health insurance coverage to tens of millions of people, which they did not have, previously. However, it also paved the path for high premiums, high deductibles and high co-payments for a lot of people. The unpopular individual mandate has been repealed by the current administration.

Turns out, privatising the healthcare system was not a great idea. If “Modicare” moves towards greater privatisation, it will be similar to what happened with the Pradhan Mantri Fasal Bima Yojana (PMFBY) where insurance companies collected close to ₹10,000 crores worth of profit, according to the CSE. The farmers got delayed claim settlements, as only 32% of all claims were paid in 2016-17, and had no idea that they were even enrolled in the scheme (automatic enrollment for loanee farmers). There was no interaction between the insured and the insurance companies. The insurance companies must not be allowed to dominate the proceedings, when it comes to increasing premiums or delaying payments.

Surprisingly, the scheme is not new. The Rashtriya Swasthya Bima Yojana (RSBY) was renamed the Rashtriya Swasthya Suraksha Yojana (RSSY). In the 2016-17 Budget, it was renamed as the National Health Protection Scheme (NHPS). Under the NHPS, the finance minister had announced a cover of ₹1 lakh per family. The only difference is that the coverage has now been extended to ₹5 lakh per family.

It still shares a core weakness of its original form (the RSBY) in that it still does not cover outpatient care. Outpatient care, such as medical procedures, surgeries, therapies, classes, diagnostic tests, etc., accounts for the largest share in out-of-pocket-expenditure by the Indian public. I hope that the largest component of expenditure is now taken under this scheme’s purview.

The scheme has been repackaged and announced. There is no allocation/outlay for this scheme in the Budget documents. So, it is harder to gauge all the information about a currently-unfunded scheme. Every Indian should have the right to know – how much will this cost? Where will the government raise resources from?

The health minister has said that money will not be a problem. However, I have a bit of a problem with the calculations involved. The RSBY scheme has been allocated ₹2,000 crores. Assuming that all the government’s assumptions are correct, this scheme will likely be subsumed under “Modicare”. The government has estimated the premium to be ₹1,000-₹2,000 per family per year. Personally, I doubt this as existing state government health insurance schemes have a premium of ₹3,000 per household. For 10 crore families, the figure turns out to be ₹10,000 crores-₹12,000 crores per year.

According to the NITI Aayog, only 50% of the beneficiaries will be covered this year (2018-19), which won’t make it the world’s largest health insurance scheme for the moment. The figure can thus be estimated to be ₹5,000 crores to ₹6,000 crores for the first year. 60% of this turns out to be ₹3,000 crores. Even if you assume that all of the RSBY money will be used for this scheme, that will still leave ₹500 crores to ₹1,000 crores behind. Why was the money not properly accounted for?

Since the announcement, it has been mentioned that states will bear 40% of the cost (90:10 for the hill states). Since health is a state subject, most states already run their own insurance schemes. Would they need to give up their own schemes to join the Centre’s scheme? Were they even consulted before it was made?

There are reports that a council (akin to the GST Council) will be formed to implement the scheme. The NITI Aayog mentions that states will have a choice to either choose a ‘trust model’ or the ‘insurance model’. This is good. The states also need to be given the freedom not to use “Modicare” in favour of their existing programs. The problem is where do the states (such as Maharashtra) which are already debt-ridden (and need to pay 40% of the cost a scheme) raise the money from?

Many states opted-out of the RSBY (which provided only ₹30,000 insurance). For a scheme like this, it might be even more problematic – especially when the Centre has imposed an extra 1% cess on taxpayers, which will reportedly raise ₹11,000 crores for them. The Centre can easily put a cess, which will not be shared with the states, who may instead have to pay for it. Where will the states raise the money to pay for it, especially the debt-ridden ones?

I sense that Aadhaar may be used to enroll these families into this scheme, since it is touted to be a non-cash scheme. That is indeed the case. With the problems surrounding biometric processes of identification, I had drafted a question to be asked in the Parliament in the Winter Session of 2017-18, through the MP I was working for. The query confirmed reports that 210 government websites (belonging to the Centre and the states) were displaying the personal information of beneficiaries to the public.

This single scheme will handle a lot of sensitive data for large numbers of people. I hope that private operators will not be given the power to misuse this data and cause potential data leaks. Furthermore, I hope that people will not be denied insurance claims if they do not possess an Aadhaar card.

In my opinion, insurance-led health coverage is an Americanisation of healthcare which does not work. More people than ever became uninsured due to “Obamacare”. Alternatively, improving the public health system must be the priority. The government must move in a direction to allocate at least 2.5% of the GDP for the healthcare sector, as soon as possible. The other scheme which does deal with primary healthcare (under Ayushman Bharat) aims to transform 1.5 lakh sub-centres into health and wellness centres. Only ₹1,200 crores have been allocated for this – that is, roughly ₹80,000 for one centre. This is not even close to what’s actually required.

Overall, this scheme seems to be an announcement with serious concerns. However, I shall wait and hope for its rectification and success.

Is There Anything For The Middle Class?

The middle class sees no change in the tax slabs concerned.

Senior citizens, however, do get a lot of benefits. In simple terms, a senior citizen is defined as someone above the age of 60. The interest-income exemption for senior citizens on deposits has been raised to ₹50,000 from ₹10,000. The TDS (tax deducted at source) will also not be deducted on these deposits. The TDS is deducted on fixed deposits at the rate of 10%. The Budget proposes that TDS not be deducted from the deposits of senior citizens if their interest-income goes up to ₹50,000. I welcome this move.

Even for deductions on medical expenditure, the limit has been raised for senior citizens – from ₹60,000 to ₹1 lakh. Most importantly, an assured return of 8% is given by the LIC to senior citizens under the extended Pradhan Mantri Vaya Vandana Yojana, for which, the investment limit has now been doubled to ₹15 lakhs from ₹7.5 lakhs.

It is quite commendable that the budget significantly helps the senior citizens, an oft-neglected group. This initiative is commendable because it wants to put more money into the pockets of a vulnerable group. It really brought a smile to my face.

However, what had preceded the smile was the frown due to the overall treatment of the salaried class (the taxpayer). The government’s customers previously paid an Education Cess at 2%, and a Secondary and Higher Education Cess at 1%, thereby making it a total of 3%. This will now be increased to 4% and will be called the Health and Education Cess. This will be used to fund the healthcare scheme. This will be implemented from April 1, 2018.

To counter this, the standard deduction has been raised to ₹40,000 from ₹34,200. A negligible saving of ₹5,800 hardly makes any difference. According to the Finance Bill 2018 (Clause 7), the standard deduction is applicable from April 1, 2019! We will have to pay for the cess in this financial year, but will get our deduction from the next year. This isn’t exactly fair.

This is without taking into account the 10% tax on long-term capital gains. I do agree with the “Buffett rule” – a person like Warren Buffett should not pay less tax than their secretary only because of the availability of little or no tax on long-term capital assets. It benefits the richest people in developed countries – and it should be taxed as their appreciation is exponential. In India, however, this is added to the already-existing Securities Transaction Tax (STT) and the Dividend Distribution Tax (DDT) for equity funds.

In India, STT is simple as it deducts tax at the very source. With a long-term capital gains tax (LTCGT), every transaction must be accounted for, with a 10% tax rate when filing tax returns. This is complex and discourages investing in stock markets, especially by the middle class. Plus, the 10% DDT will further erode the attractiveness of the equity market. It isn’t efficient and is particularly disconcerting. A larger STT might have worked better as the income tax officials would not be required to scrutinise every individual transaction. The LTCGT is also not subject to indexation, that is, it is a flat tax. To put it simply, you pay a lot less tax when it’s adjusted for inflation.

Consider the following: you bought an asset for ₹500 in February 2018 and sold it at ₹600 in February 2020. You pay a ₹10 tax on a ₹100 gain. This is without indexation. If the annual rate of inflation is 5% for both years, ₹500 in February 18 becomes ₹550 in February 2020. This means that the gain was ₹50 (in real terms). You will still have to pay a ₹10 tax, thereby leaving you with a ₹40 profit only.

Middle-class people are rightfully angry about this Budget. In contrast, companies which have a turnover of up to ₹250 crores will now pay a 25% corporate tax, instead of the existing 30%. This will now affect nearly all of the companies filing tax returns. This is seen as a bid to boost the micro, small and medium enterprises (MSMEs), for which the government has had to redefine the MSME sector itself.

While I am in the favour of reducing excessive corporate taxation, why has the middle class not been given the same relief?

Happy Farmers?

Agriculture was the key focus of this Budget. Four months ago, I had written about the need to implement the Swaminathan Commission report. Well, it’s better late than never.

A promise made in 2014 has finally been implemented. But, the details are lacking. The minimum support price (MSP) is now going to be 50% more than the cost of production. It will also automatically be linked to inflation. However, the government has not specified whether it is properly going to be follow the Swaminathan formula (or rather, recommendation). Will the right definition of cost be used?

There are three different definitions of cost. In descending order, these are:

1. C2 – Comprehensive Cost.

2. A2 – Input cost.

3. A2 + FL – Input cost + Family Labour.

In 2014, when the promise was made, the MSP prices were already higher than 50% for A2 + FL. It was only logical that C2 must also be 1.5 times the production cost. However, the agricultural ministry does not think so. They believe that the status quo will prevail, as hiking the MSP by 50% on C2 may cause a distortion.

Kharif crop MSP vs production costs, 2017-18.
Rabi crop MSP vs production cost, 2017-18.

This is particularly deceptive towards the farmer.

I have long felt that there should be a separate fisheries ministry – and a phased step towards that is the fisheries and animal husbandry fund of ₹10,000 crores each.

Another good step is the doubling of allocation of funds (to ₹1,400 crores) to the food processing sector. Finally, farmer producer organisations (FPOs) with a turnover of up to ₹100 crores shall be favourably taxed – a 100% tax deduction for the next five years. In my opinion, this is much better than the core announcement. Even liberalising the export of agricultural commodities is a welcome blessing. Our farmers should be allowed to compete with the world’s best.

The ‘farm distress’ is something I am very worried about, as it may lead to a loss of jobs for a majority of the country who are dependent on it.

Miscellaneous Thoughts

1. The fiscal deficit has been revised from 3.2% to 3.5%. This is not on the right track of fiscal consolidation and does not send a good signal to foreign investors or the IMF, World Bank (among others) that this is a fiscally-responsible government.

2. Great news: the income tax base is now 8.27 crore. This is 33% more compared to 2014-15 (6.47 crore). With a larger tax base, however, it would have made much more sense to lower the taxes which would have been more of an incentive, along with more revenue generation. The increase in the base is still welcome.

3. Increasing the limits for tax-free investments under Section 80(c) of the IT Act is disappointing.

4. As a big sports enthusiast, Khelo India needs a much bigger hike than just ₹520 crores, especially if it wants to sustain Khelo India School Games and be the platform to help world-class athletes emerge.

5. I am elated that the 2017-18 disinvestment target of ₹72,500 crores is expected to be easily reached – that too, without the Air India disinvestment which will take place this year. Even then, I hope that the Air India disinvestment is not just about one government entity buying another.

6. Indirect taxes accounted for 23% of the total revenue in the past year, whilst, non-tax revenue was just 8%. There is a need to regenerate non-tax revenues as a significant source of the total revenue.

7. Why has the allocation to the ‘Road Safety Works – Level Crossings’ been cut from ₹705.05 crores (in 2017-18) to ₹700 crores (in 2018-19)? Surely, the increased number of derailments and deaths should have meant that the expenditure on constructing level crossings (and other such safety measures) must be improved drastically. Or has the government already found perfect safety measure? This, while the bullet train project got ₹7,000 crores.

8. NABH Nirman, a new proposal to expand airport capacity (so that they can handle a billion annual trips) seems like a great idea to improve the connectivity between numerous cities.

9. In the Budget speech, the finance minister said that the Central government will be receiving GST revenues only for 11 months, instead of 12. Seriously, I do not understand this. Was the GST not launched with much spectacle on July 1, 2017? That will make the collection period nine months, and not 11. Also, did the government not receive excise duties and service taxes from April till June, 2017, when GST did not exist? How is the government receiving 11 months worth of GST revenue?

This Budget is extensive – and its perception greatly varies on how you look at it and the viewpoint from which you look at it. It does not give as many doles as I had feared – but it is not as reformist, as I would have liked it to be. It is above-average, at best.

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  1. Ambar Sharma

    EDIT: The example I used is flawed. Consider the following: you bought an asset for ₹500 in February 2018 and sold it at ₹600 in February 2020. You pay a ₹10 tax on a ₹100 gain. This is without indexation. If the annual rate of inflation is 5% for both years, ₹500 in February 18 actually becomes ₹550 in February 2020. This means that you will have to pay a ₹5 tax. Even though your actual profit was ₹100.

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