The budget our
Finance Minister has presented is not an exciting budget, it is an indifferent
budget because the decisions taken neither indicate a price rise so that markets
can cheer nor indicate a rise in income, after manipulating taxes, so that it
brings relief to our middle class. Both are exciting, but not this time.
The government
wanted to raise revenue a little so it levied a 10% surcharge on income above 1
crore and a Rs 2, 000 per Rs 10, 000 tax will be credited to Rs 2-5 lakh income
bracket. Therefore as far as taxes are concerned the change is only marginal
and will not affect aggregate demand in any effective way, and, if it does, it
does it marginally, again. People will neither buy more nor less. We will more
or less remain indifferent. We are not going higher. Moreover low taxes will
mean that government will spend less and less jobs will be created, publically
and privately, through multiplier. I mean multiplier will be low and less
income will be generated. Therefore, in terms of income we are more or less
same as previous year. No more consumption.
The government
wanted people to build more houses so it offered them interest deduction of Rs
1 lakh for loans upto Rs 25 lakhs. This will boost demand for houses and with
it demand for labor, land, and capital. For an estimate, suppose that 10 lakh
people go for a house, then, the excess liquidity that will come out of the
banks to the market will be around 25, 000 core. This is much money to produce
inflation. When the RBI reduces cash reserve ratio (CRR) by 50 basis points it
injects liquidity in the system of the same magnitude, 25, 000 crore. And,
moreover, housing is the most labour-intensive sector of the economy and
builders will spend more. Employment, wages, income, and prices will go up. I
think 10 lakh is an underestimation and more people will think of buying a
house. This was not a welcome decision keeping inflation in mind.
The government allotted
Rs 1, 000 crore for 10 lakhs youth for skill development. I surprise whether we
actually have this number of people who need skills up-gradation. India where
half of the population is illiterate and poor who can not take care of
themselves we, atleast, need to upgrade skills of minimum a crore people for
which we will need atleast, again, Rs 1, 00, 000 crore. Skill gap in India has
been widely discussed and is recommended by reports and surveys. We needed a
big investment so that we can increase the productivity of our labour-force and
they can earn higher per capita income. This was a good decision but
insufficient to achieve the objective in mind.
Government has
also proposed to bring inflation-indexed-bonds or certificates in consultation
with the RBI to wean away investors from gold so that the funds are diverted to
more productive use and investors get more value for their money. Moreover, too
much demand/investment in imported gold has created a divergence between
nominal and real prices which has to be reduced so that prices remain more
sustainable to avert a bubble and a burst, later, that makes the economy
vulnerable to shocks and will threaten stability. This was a good decision.
The fiscal
deficit of 5.2%, lower by 10 basis points than the initial target of 5.3%, was
achieved but it comes as no surprise because the Finance Minister has
emphasized its importance keeping the rating agencies in mind in order to
motivate foreign investors to enter Indian scene. But, since the RBI is constantly
giving us its message that inflation is high and that is why we do not need
more investment this time. We should know that inflation may come from foreign
investment, too, they can push prices up at a time when we actually want to see
them coming down. But for the external sector the decision was good. It will
drive demand for Indian currency and it may go strong. Therefore, this decision
produces a mix feeling; at one hand it may increase inflation and on other hand
it may decrease prices of imported goods by making Indian currency strong.
These effects will cancel out each other. Almost no gain.
Therefore, the
budget 2013-14 is not a happening budget it is more a sort of indifferent
budget. The Finance Minster did not have many options and curtailing fiscal
deficit was an imperative just like controlling inflation. Nonetheless,
whenever government spends money it increases inflation. We almost remain at
the same indifference curve…
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