Well, Well, Well….If it isn’t that time of the year again!! The Finance Minister has just presented the 2nd budget of his reign and everyone queues up for their share of the sops. It’s not quit the rain of blessings that we have come to expect from the UPA government over the last couple of budget presentations, rather a more balanced and well thought out effort on the most. Let me focus on the more positive aspects of the budget, for it is always difficult, nay impossible to please everyone all the time.

  • First, the return to fiscal responsibility; the government has tried to return to the path suggested by the 13th finance commission on the FRBM front on two accounts. One, to include the oil bonds and fertilizer bonds in the overall deficit accounting calculations, and second by eliminating bond-based subsidies going forward and reverting to ‘cash-only’ method of subsidies. The first measure presents a true picture of the overall deficit (as opposed to the under-reported figure in the earlier practice) and the second measure promotes a higher level of fiscal propriety – expenditure tends to pinch you more when its cash straight from your wallet rather than mere promissory notes (bonds !?) The government proposes to bring down total deficits to around 5.5% of GDP and a further roadmap of 4.8% and 4.1% in subsequent years – a critical development keeping in mind the sovereign debt crises engulfing the major European economies such as Spain, Portugal and Greece. This will in turn lead to greater confidence in Indian markets, increasing the FDI and FII inflows (compensating for the current account deficit) as well as help out with the burgeoning import bill for Oil imports and heavy capital equipment required for the building of infrastructure in the country (although the appreciating currency will be bad for exports – the above effects will compensate….I guess the exporters will have to focus on improving business efficiency to give them the competitive advantage…not too bad a side effect eh! J)
  • Second, the thrust on infrastructure development with almost 46% of the total planned expenditure being spent on various infrastructure development schemes. All this infra-spending will lead to stimulus for sectors such as steel, cement, hardware and their associated industries upstream and downstream and allow the country to accelerate its rate of growth in the future by providing the basic amenities required for leveraging the growth momentum. This, along with the ‘progressive’ (pay based on ability to pay) direct taxation regime will prevent unnecessary over-heating in the economy, the signs of which are showing their ugly heads in the form of high inflation rates and excessive dependence on the service sector.
  • Thirdly, shifting to a more progressive direct taxation regime by increasing the taxation slabs. This will not only leave more spending power in the hands of the people, it will leave spending power in the hands of the ‘right’ people. Its very similar to the ‘income effect’ in the classical theory of demand. The majority of people falling in the affected slab-group are the burgeoning young middle class with more appetite for consumption. With a reduction in taxation, the effective ‘real’ income of the youth rises, for every rupee left in the hands of the youth, a major proportion is going to be spent on goods and services and the accompanying trickle-down effect ensures that the wheels of the economy keep turning. The alternative to letting the people spend, is to let the government mop up disposable income and spend on behalf of the people – but the inherent inefficiency associated with government spending in terms of cost of tax-administration, leakages, corruption, red-tapism and time-delays in fund disbursal, etc mean that there is a significant lag before the government spending takes effect, as opposed to the faster and more efficient way of private consumption expenditure (although allocative efficiency in terms of where the money ought to be spent is a completely different matter as you cannot stop individuals from spending on undesirable commodities!)
  • Fourth, the recapitalization of the banking system, especially the rural banking system and the thrust on RRB’s will not only help develop the rural and agrarian economies but also indirectly provide a thrust to the growth momentum. The entire process behind the macro-economic move translating to micro-economic stimulus is ingenious in its operation. With cheaper credit available to rural population and self-help groups, they have more avenues of adding to their agricultural income such as trading in spices, local jewelry, vermi-compost farming, poultry farming, brick-manufacturing, etc. This not only allows the village economy to thrive but raises their standard of living making growth more inclusive. The self-help groups also put pressure on the village members to pay back the loans and this peer-pressure ensures a level of financial propriety in the micro-finance system. Also, notice that these are marginal income group people and their marginal propensity of consumption is very-very high and hence every rupee of their income will lead to a greater factor of growth (the multiplicative factor being [1-MPC]) further strengthening the growth momentum.
  • Fifth and finally, I must conclude with what I perceive to be the major disappointment of the budget. No, it is not the raising of indirect taxes and partial withdrawal of the stimulus package, nor is it the raising of import duty (and excise duty) on petroleum products – although it could prove inflationary in the short run. Favourable movement in exchange rates as discussed above could mitigate this impact and coupled with steps to counter speculation in food products could help in bringing down the inflation in these items. The major worry for me, was the absence of financial and insurance sector reforms. This was the second budget for this government, and a golden chance to further de-regulate the business environment as well as make India a better place to conduct business was missed. Generally in the fourth and fifth budget of its tenure, the measures are more populist in nature as the government tries to strengthen its voter-base before the impending elections. It is the second and third budgets where the government has a chance to take some tough decisions as it knows it still has a few more years in power yet. Although the government may be given the benefit of the doubt on this count as this time the priority was fiscal consolidation and maintaining the growth momentum while simultaneously managing the inflationary expectations.

~Abhay Bhaniramka

Abhay Bhaniramka (CA and CS inter) has done his business management (Finance & Economics) from XLRI, one of the top B-Schools of Asia. He works with the management of Tata Steel, strategic finance group, and focuses on financial planning. His hobbies include soccer (ManUtd), blogging and playing chess.

By Guest

This is a contribution by a guest author. These guest posts are protected by Creative Commons unported license 4.0. Viewpoints are that of the author only. For posting articles as a guest author, please send your proposals to [email protected]