‘THINK BIG AND ACT BIGGER’- PRANABDA’S BUDGET EFFECT

Weeks after the Union Budget, after a month long, criticisms, praises and debates by experts, the storm has finally calmed down. Majority of the corporate people favored the budget, calling it a growth oriented and a budget for long term growth. This indicates that the budget has offered a lot for the corporate sector and on the other side opposition parties and a few intellectuals criticized the UPA for fuel hike, failure to contain inflation so on and so forth.

Let’s first see how a perfect budget should be, a budget should not be a short sighted one, like giving a lot of freebies to the People just to save vote banks and completely ignoring the long term goals, usually governments do during the election year. A budget should not be completely focused on long term growth only, ignoring the current problems and immediate requirements of the people. A good budget should be a balanced one focusing on the long term growth and at the same time the focus should also be in solving present crisis. The budget should provide favorable conditions for private sector investments, allocate funds for investment in long term infrastructural and human resource development ( education, health, nutrition, clothing, shelter, jobs) and short term needs like inflation check, smooth supply and availability of basic food items, efficient functioning of public distribution system etc. so overall budgeting is a balancing act.

Now keeping this theory in mind, let’s analyze the union budget. The objective of the budget is to boost public consumption, demand and private sector investments and a private sector led growth which the government believes, will create jobs and increase growth rate.

The macro economic strategy of the government is clear enough to prove the above said objective. The broadening of tax slabs will result in more disposable income in the hands of consumers and thus will increase consumption and demand. To exploit the opportunity, a favorable demand-led growth, the private sector needs more capital at a reasonable interest rate, government has a plan for that too, it aims to reduce the fiscal deficit from 6.9% to 5.5%, how? Government plans to raise Rs.75000 crore that it plans to collect from the sale of equity in public sector firms and the auction of third-generation telecom sector, this would keep it net market borrowing to Rs.3.45 trillion. So lower marketing borrowing by the government due to reduced fiscal deficit should keep the interest rate low, which should ensure availability of cheap capital for the private companies and a huge investment in infrastructure 46% including 25% to rural areas.
So a perfect platform for an investment led growth.

But what the finance minister, failed to see is the inflation, the inflation if not contained, will spoil the whole game, how? Firstly, a high inflation may discourage consumer spending on goods other than basic goods. Secondly, the RBI in an effort to contain inflation has already raised its repo rate to 5% from 4.75% and reverse repo rate from 3.25% to 3.50%, as a result banks will any time increase their lending rates. So, cost of capital for private sector will rise. Only hope is the fiscal correction, but industry experts feel that the governments target to raise 35000 crore through 3G auction is too high as the telecom companies who are already in too much of pressures because of hyper competition in the market will not be able to afford, and due to absence of any foreign players for the bid, the bid will be very conservative. The target of 35000 crore may not be possible. So, in such a situation, the success of the macro economic strategy of the government seems uncertain.

Now, coming to the corporate sector, let us see how the budget favors the corporate sector. Firstly, the broadening of the tax slab will rise consumer spending and boost demand, of course inflation will affect a section of the tax payers and discourage spending, but the top creamy layer of the tax payers will lead the consumption and demand. So this will favor the corporate sector to a certain extent. Secondly, if the government succeeds in reducing the fiscal deficit to the proposed level, will reduce government’s market borrowing and this can to a certain extent offset the rise in interest rates to contain inflation, otherwise, higher market borrowings from the government would further rise the interest rates and would definitely discourage private sector borrowings.

The stimulus package has only partially been rolled back; this step of the government really goes in favor of the corporate sector. The surcharge has been reduced to 7.5%.
The RBI’s consideration to issue new licenses to private sector players and NBFCs is a real boost to the companies in the finance sector.

Now, the reasons to worry for the corporate sector, the rise in excise and customs duties will make the consumer durables dearer. Some of the segments that are going to be affected by the duty hike are aviation sector, auto mobiles, consumer durables, Real estate etc (some products like mobile phones and accessories, medical equipments, micro wave ovens, CDs and DVDs will become cheaper). Rise in MAT (Minimum Alternative Tax) from 15 % to 18% will affect mainly affect IT and oil companies.

Now, what does this budget offer for the common man, now and for the future? In a common man’s perspective this budget has neglected some of his immediate needs, though funds have been allocated in some crucial sectors for future developments, yet considering the pathetic conditions of Indians below poverty line, the fund allocated for human resource development (Nutrition, Education, Health care, shelter and clothing) is considerably very low compared to the level of investment needed. But of course, the funds needed for human resource development cannot be provided in a single budget keeping fiscal deficit in mind, investment in HRD is a consistent and long process. So what are the immediate problems the government failed to solve? The obvious answer is inflation and fuel price hike. With an objective of drafting a perfect budget for a demand led growth. Government failed to check inflationary pressures which surged to 9.9% recently leaving the middle class and the poor to suffer, and the extremely poor, below poverty line people to almost starve and die. The inflation problem can not be solved only by raising the interest rates. Government should have taken concrete steps to stop speculation and most importantly should have immediately increased supply of food items by increasing production and imports, and it is not enough, building a strong public distribution system is essential, because of our inefficient public distribution system, food supply do not reach efficiently to the end consumers, a large quantity of food items are wasted in transportation and ware house storing. For a long-time now many experts in the field have shared their views about the same for an effective distribution system. Another serious concern is the existence of middle men in vegetable distribution channels, these middle men raise the Prices of vegetables 4 to 5 times before it reaches the retailers, there should be a mechanism in place to regulate the prices of the vegetables, to discourage gambling by middle men in the channels.

The hike in fuel prices further added to the inflationary worries, the fuel hike has resulted in high transportation cost, and further pushed inflation rate higher. But you may think, the broadening tax slabs will result in rise in disposable income in the hands of at least the middle class. The sad thing is that the broadening of tax slabs does not benefit the lower middle class; it only favors the sophisticated upper middle class and the well-to-do.

Assuming that you must have gone through the revised tax slabs, the taxable income above Rs.160000 and up to Rs.500000 would be taxed 10%, earlier taxable income for the range of 3 lac to 5 lac was 20%, now the people in the income bracket of 3-5lac bracket will pay less tax, who are the these people? the upper middle class whose income level is some where between Rs 25000 to Rs 40000 per month and having taxable income from Rs 500000 to Rs 800000 would be taxed 20%, a tax amount considerably less than what they were paying earlier, they are people whose income level is some where above Rs 40000 to above Rs 60000, the creamy layer in the middle class and for income level above Rs 800000 the tax rate is 30%. These people account for only 5% of the population who pay such taxes. These are beneficiaries of the tax measures, which will cost the exchequer, an estimated Rs 26000 crore, in other words, loss in tax revenue.

So, is this budget completely negative in a common man’s perspective? No, government has allocated funds for some crucial sectors like infrastructure. A huge investment in infrastructure (46%, including 25% for rural infrastructure) will give a boost to long-term growth. Funds have been allocated for Bharat Nirman ( Rs 48000 crore), for urban development ( Rs 5400 crore) and other social sector projects like education, health etc. Funds allocated for social sector projects are not sufficient enough. But, the investments made in these sectors will bring long-term benefits.

So, overall the budget is more of a long-term budget focusing on the growth rate which failed to solve short-term problems. The objective is to achieve an investment-led growth and the assumption is that economic growth will deliver more jobs. Funds allocation will not only be sufficient, the key to success is not only to invest in crucial social sectors and infrastructure but also to monitor that the funds are effectively used for the purpose and to ensure efficient functioning of social sector projects