There is a little bit of a child in all of us. We build expectations about an event and become so attached to these that they become the reality ahead of the event. The final event then has no option but to disappoint. After discounting the huge build-up to the Budget that the media and the market created and looking at the exercise as a vision statement for the next five years, I find that it works very well.
I like it because it is a goal-oriented Budget—not in the way that the market would have liked with specific number-driven targets but more as a vision statement.
The finance minister has three goals to this Budget, which must be seen as a building block in the larger jigsaw of reconstructing India. One, get growth back to 9%, not because we like this fancy number but because this number allows a billion Indians to leapfrog into economic well-being, and that this number is viable. A growth of 15% would take us there faster, but we may implode.
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Two, make this growth inclusive—not restricted to India Shining—but one that will thrust out a hand that Bharat can hold and pull itself into the bell jar of prosperity.
Three, the most crucial link between the first two, the chord that carries the money-laden lifeline to Bharat from India needs to be robust and leakages must be curbed for everybody to feel happy about the transfer, and indeed, for the transfer to happen at all.
Everything in the Budget speech and document is aimed at achieving these three interconnected goals. The 9% gross domestic product (GDP) growth target means that we are increasing our production of goods and services at a fast clip. But who will buy these goods and services since global demand looks sluggish for a while more?
A way out is to stimulate domestic demand, and in doing this, not only will we spend ourselves out of this slowdown but move to a growth rate that is not so dependent on the next Wall Street bust-up. Demand is stimulated by lower taxes and government putting money directly in people’s wallets.
Sitting on a new deficit figure of 6.8% of GDP, with a revenue deficit of 4.8%, the room to cut taxes is marginal. But within this constraint, the Budget has managed to clean up some untidy taxes and bump up the slab limits a notch. The basic zero-tax threshold now sits at Rs1.6 lakh. For women, this is Rs1.9 lakh, and for senior citizens, Rs2.4 lakh.
More importantly, there is a road map of rationalization of the tax system. Also, the goods and service tax regime that will be implemented next year will bring the indirect tax cost of Rs25 in every Rs100 spent down to at least Rs20.
The Budget has also knocked out some unreasonable taxes whose compliance was more expensive in time and money than the tax itself, such as the fringe benefit tax, the cess and the surcharge on income tax, and the yet-to-be-implemented commodities transactions tax. If reducing taxes will not get us the demand stimulus, it will have to be through government spending. The Budget draws up a long laundry list of spending aimed largely at redistribution of wealth, which it hopes will stimulate steady demand from the bottom of the pyramid. In the absence of a growth rate that will earn extra taxes to fund this spend, there is little option but to junk the fiscal goal of 3% deficit and a zero revenue deficit.
The government will have to find the money to fund the yawning gap of 4.8% revenue deficit—the money the government borrows to pay for current expenditure and not capital formation—and the 6.8% fiscal deficit—total borrowing of the government. Knowing that its presence in the money market will raise interest rates and crowd out private borrowing, the disinvestment window is being opened and though no targets were mentioned, the speech gave enough indication that family silver will be sold to meet growth and development needs.
The bond markets are still skittish, not knowing how much money the deficit will soak up and how the global credit ratings will fall hearing of this large deficit number. That possibly is the most crucial link in the months ahead of this Budget’s mandate getting translated into intended action.
The last goal—of a robust pipeline—is the real challenge. To change gears that involve lives of over a billion people, existing vested interests and institutions, sudden shifts and knee-jerk policy can prove damaging.
But if the national rural employment guarantee scheme, that ensures 100 days of employment at minimum wages in a year to poor families in villages, was a pilot project in using cash transfers, we know it has worked. Add to it the clear intent of attaching a biometric number to every Indian and we see the road ahead to non-leaky cash transfers.
We, as taxpayers in India, are happy to redistribute our money if we knew that a poor family deep in Bharat was able to build a toilet or buy a cow or buy education and goods directly. The leaky delivery pipeline has made us resent the entire taxation exercise. But in five years, if we were to move to a cash-transfer system, maybe the newly mature middle class will see even better tax compliance than today.
Fed on a cynical diet of rhetoric Budget after Budget, not unlike the Animal Farm-like recitation of numbers, we find the intent of any government difficult to trust. But there is truth in the three-pronged goal-set of this Budget. If there is political will to back it, we are looking at a long-term steady upswing in the fortunes of India.
Monika Halan is a certified financial planner and iscurrently working as adviser, Pension Fund Regulatory andDevelopment Authority. Your comments and personal finance queries are welcome at firstname.lastname@example.org