The Devil’s in the Details

Analyzing the 2018–19 Union Budget

At Kite, we want to leverage the current momentum toward economic formalization in India into a force for good for everyone. In a legislative landscape in which things change very quickly — from demonetization, to GST, to RBI guidelines — we conduct thorough in-house research on the impact of recent laws and policies on groups traditionally underrepresented in the formal sector. We take a holistic approach to “underrepresentation,” thinking about axes of discrimination like gender, religion and caste, but also considering more directly economic groups like small businesses.

The Central Government released its Union Budget for 2018–19 earlier this month. Given the direct impact of politics on the socioeconomic wellbeing of underrepresented groups, we decided to conduct an impact analysis of the Union Budget on micro and small and medium enterprises (MSMEs), women, farmers and Scheduled Castes/Scheduled Tribes (SCs/STs).

NB: While an evaluation of these four groups may seem disjointed, the socioeconomic landscape is incredibly interconnected; the sustainable growth of the Indian economy cannot happen without the development of these groups as well. Furthermore, Indians can fall into more than one of these categories (a woman farmer, a Dalit working at an MSME, etc.).

MSMEs

The recognition of the MSME sector as a chief source of growth and employment is a prominent feature of the Union Budget 2018. Employing over 111 million people, the sector contributes to 31% of the nation’s GDP. The double effect of demonetization and GST forced countless small companies to go out of business; companies that depended upon cash and lacked the information or resources to take advantage of the new tax scheme could no longer operate in the new economic environment. As such, a reduced corporate tax rate of 25% for companies with turnovers of up to Rs 250 crore is a welcome change; this reduces the barrier to entry into the formal market.

The budget also has allocated INR 3 lakh crore (USD 46.7 billion) for the Micro Units Development and Refinance Agency (MUDRA) scheme, which helps micro businesses with refinancing, access to technology and skills development. MUDRA is designed to tighten the link between state-owned banks and micro enterprises, which will also help micro enterprises access the advantages of the GST network. The reduction of working capital, discounted trade receivables and faster assessments should help resolve major cash flow challenges. The database generated through the MUDRA scheme’s work will further help the government and micro enterprises alike create more informed decisions in the months and years to come. Online portals for loan sanctioning will further aid banks access businesses on the cusp of formalization.

However, the Economic Times notes that most MSMEs are proprietorships and partnerships, rather than companies. Many of the union budget schemes for MSMEs, meanwhile, are specifically for entities registered as companies. This tricky wording restricts the benefits of legislative changes that are marketed as “valuable changes” for all MSMEs. This is not the first time that categorical definitions have confused the public, either. For example, rural electrification statistics are counted on the village level, not on the household level, which underestimates the million of Indians still without reliable access to electricity in 2018.

Women

The latest Union Budget sees major gender-focused changes, with a total of INR 1.2 lakh crore (USD 18.7 billion) allocated to the Gender Budget:

• The government will fund 12% of new employees’ wages in all sectors through the Employees’ Provident Fund (EPF) Act, 1952. To further encourage the employment of women, the EPF contribution for women employees will decrease from 12% to 8%.
• The Union Budget committed INR 75,000 crore (USD 11.6 billion) to women self-help groups by March 2019. This marks a 37% increase. Previously, support for women self-help groups took place through the National Rural Livelihood Mission (NRLM), which provided loans between INR 1,00,000 and INR 3,00,000 (USD 1500 to 4500) with low interest rates.
• Under the the MUDRA scheme, the government plans to spend INR 3 lakh crore (USD 46.7 billion) to provide loans. As per previous reports, a whopping 76% of loans go to women, of which half go to Scheduled Caste (SC), Scheduled Tribe (ST) and Other Backward Class (OBC) women.

The budget itself even featured a pink-colored cover as a symbolic gesture. The government claims to put its money where its mouth is through a number of schemes:

• Under the Ujjwala scheme, 80 million free gas connections will be set up for women below the poverty line. This move attempts to shift households away from practices such wood or cow dung burning in everyday life (for cooking, heat, etc.).
• The Sukanya Samriddhi Account Scheme, which is designed to help parents of girls save money (primarily for education), has opened 12.6 million accounts for young girls.

But, the total relative budget allocation continues to hover around 5%. The Ujjwala scheme is a further example of a statistics-friendly move with relatively few long-term benefits. Gas providers report dropout rates of more than 60% after the supply of the first gas cylinder, suggesting low conversion rates to fuel-based behavior. Other women-focused schemes funded by previous budgets have yet to generate any meaningful results. For instance, the Nirbhaya fund (2013) to finance women’s safety programs is still underused. The budget also fails to revisit maternity benefits, despite repeated efforts by activists and economists.

As it currently stands, the Union Budget’s women-focused schemes work great quantitatively. However, as one digs deeper into the life cycle of these schemes — be it gas cylinder refills or funding use — there remains a lot of work to do to provide sustainable support to women of all backgrounds. As long as government policies fail to do so, their ability to turn market formalization into a means of development will remain structurally challenging.

Farmers

The focal point of this Union Budget was agriculture, given half of India’s workforce is employed in this sector. The recent budget saw several noteworthy proposals:

• The Finance Minister announced a 50 percent profit over the input cost for agriculture commodities, and declared an ambitious minimum support price (MSP) for crops. However, it is unclear what cost level will be used to make this calculated MSP.
• The government will upgrade 22,000 rural crop trading centers to facilitate interaction between farmers and bulk purchasers. The intention is to eradicate the need for middlemen, who eroded farmers’ ability to make a profit.
• The development of E-NAM, an online agriculture trading portal, will be completed by March 2018. Agricultural Produce Market Committees (APMCs) and state committees will be brought under its umbrella. Combined, an Agri-Market Infrastructure Fund of INR 2000 crore (USD 311 million) will evolve these 22,000 trading centres and 585 APMCs.
• A tax holiday was announced for FPOs (Farmer Producer Organisations) with annual turnover of up to INR 100 crore (USD 15.6 million). FPOs function as agents to retrieve crops from farmers under government schemes; as such, these tax breaks may help farmers gain a greater profit.

However, opposition leaders such as Sachin Pilot believe that the MSP increase by 50% is misleading. The budget does not address the intermediaries between producers and consumers, meaning the actual benefit of increased MSPs might not reach farmers. The leader of the Swaraj Abhiyan, Yogendra Yadav, further asserts that, “this government had an affidavit submitted to the Supreme Court in 2015 said that it cannot give the 1.5 times profit. However, it has announced it now.” This has led to some confusion as to which claim to believe — from 2015 or 2018.

Furthermore, only 5.4% of the agriculture budget is reserved for animal husbandry. This small proportion seems in line with the ruling government’s ideologies surrounding food choices, but it marginalizes many communities underrepresented in the formal sector that rely upon nomadic or animal-based lifestyles to survive.

Clearly, the effectiveness of these farmer-oriented schemes remains in the fine print. What will MSP mean? How will the government confront middlemen? Once the public receives more specific information, then proper, informed discourse on this component of the budget can take place.

Scheduled Caste (SC) and Scheduled Tribe (ST) Groups

The newest Union Budget sees small increases in funding set aside for SC/ST groups. These groups are largely marginalized due to structural and historical forces. As such, targeted government assistance is critical to bring them to development levels enjoyed by other populations in India. However, according to Nisar Ahmed, the decision to scrap an SC/ST sub-plan means no mechanism exists to clarify how funds are to be distributed amongst these groups.

According to the National Campaign on Dalit Human Rights (NCDHR), 50% of these funds are not accessible or are simply irrelevant to their needs. The NCDHR published Union Budget Report provides an in-depth perspective on the shifting stances of government budgets over the years. The report reveals that a mere 8 schemes out of 38 directly benefited SCs and only 15 out of 70 assisted STs. Grants to medical colleges, central universities as well as agriculture-based schemes do not target these groups specifically. Notably, 14 schemes worth over INR 8000 crore (USD 1.25 billion) were ‘obsolete’, representing a sorely squandered opportunity to assist SC and ST groups. The report recommends primarily legislative — rather than budget-based — changes to resolve structural forces that continue to affect SC/ST groups.

Similarly, the funding allocated to the education of SC/ST groups seems to create short-term resolutions rather than address more long-standing issues. Dalit activists cite the Eklavya scheme, which is designed to build and sustain quality education for ST groups, as an example. However, this scheme does not assist in reforming other schools that already exist. The state government of Tamil Nadu has asked for a jointly-funded scholarship scheme for Dalit students, which would help reduce dropout rates along caste lines.

Conclusion

By investigating the impact of the new Union Budget on MSMEs, women, farmers and SC/ST groups, it is clear that the devil is in the details. If previous schemes are to be any indication — regardless of the ruling party — the success of these ambitious projects depends upon what definitions are being used. This is also the case for ‘Modicare’, which doesn’t seem to have enough funding to actually succeed. Providing transparent definitions and statistics of critical features of the budget can further ensure that those affected by these policies have a greater say in how government schemes are implemented. Clearly, for the Union Budget to live up to its hype and succeed, Indian citizens need a seat at the table to determine how these schemes are implemented and measured.