Walking the tightrope between leaning towards populist measures and maintaining fiscal prudence, the Union Budget 2018-19 places concentrated emphasis on rural spending and social sector. At the same time, the budget commendably shows a resolute intention to follow the fiscal consolidation path. In the backdrop of rising crude oil prices, vulnerable fiscal and current account situation and nascent recovery in the domestic growth the budget strives to achieve a symmetry between growth and social sector spending by reiterating its focus on rural income push to spur consumption.

As anticipated in the economic survey, the budget reveals a delay in achieving fiscal consolidation target. However, the revised fiscal deficit target stands at 3.3 per cent (from earlier target of 3.0 per cent of the gross domestic product) for 2018-19 financial year. Though a little unrealistic, the market borrowing number works to ease concerns of a potentially excessive yield disruption in the bond market. Nonetheless, this deferment could imply some surge in the cost of borrowing for corporates.

More importantly, the quality of spending will be a key determinant of growth and to justify the higher spend. Building in a healthy growth of 20.8 per cent year on year in the infrastructure outlay, the budget accommodates a 9.9 per cent rise in capital expenditure though the rise remains steady at 1.6 per cent of GDP for 2019. With a tax revenue growth of 16.5 per cent built into the scenario, we view this to be on the higher side.

In line with our broad expectations, the budget delivers extensively on the rural/agri push and housing. The promise to set Minimum Support Price (MSP) at 1.5 times the input costs in the farm may lead to some aggressive hikes and can engender inflationary risks driven by higher food prices.

By continuing to place thrust on affordable housing in the current budget, the finance minister reiterates emphasis on achieving double objective of high growth multiplier through housing sector along with high employment generation capacity. Effort to widen the coverage of health insurance scheme to include 100 million poor and vulnerable households is a positive long-term trend.

Though concerted efforts being taken by the government to focus on rural sector seem credible, we see a clear lack of focus on capital formation and push to augment the private sector capex, given the low levels of investment to GDP ratio in the economy. Bringing a larger number of Micro, Small & Medium Enterprises (MSMEs) into the lower tax bracket of 25 per cent may count as a sporadic effort in this direction. Higher allocation towards developing secondary airports is another example.

The budget also lacks initiatives to improve the health of housing construction sector (for urban middle class). A clear tax incentive was expected to be given a push, both for spurring home ownership and to kick-start job creation in the semi-skilled sector. This is clearly a missed opportunity.

As for the capital market, the introduction of long-term capital gain (LTCG) tax to equities and equity based mutual funds should lead to moderation in asset prices as the market factors in a lower level of realised post-tax returns. Even as this budget refrains from overtly populist measures and shows lower divergence from the path of fiscal consolidation, it falls short of providing a significant boost to improve Investments to GDP ratio and set the economy on a structurally higher growth path.

Anand Radhakrishnan is the Chief Investment Officer — Franklin Equity, Franklin Templeton Investments — India.