To see an account statement of a person is to get an insight into who he or she is. One can judge fairly accurately this person’s age, stage, situation and future. How we earn, how we save and how we spend is a reflection of who we are. The young leverage the future and have large loans on their books. Older people will be low debt and should be asset rich. A reckless entrepreneur will nearly always show a heavily leveraged personal balance sheet. A zero-risk employee has a highly conservative spending and saving pattern. The conservative person with a view to growth would take a loan to build an asset, but will still keep his saving ratio high and curb current consumption. The reckless youth will use a credit card to fund current consumption.
Who of the above does the Central government’s annual income and expenditure statement point to? It points to a young nation since there is a lot of leverage in the account statement—39% of annual receipts are from market loans. With more than half its population below the age of 25 and more than 65% of the population below 35, both politically and age-wise, India is a young nation.
The next inference from the numbers is worrying. The numbers point to loans being taken to meet current expenses rather than asset creation. Twenty-two per cent of spending goes to fund interest payments and about two-thirds goes to keep the government running. Just 4% of the annual spend of the Central plan is used to build assets. The numbers show that current consumption is more important than the future, they show loans being used to fund current consumption rather than to build an appreciating asset. The analogy of a youth with lots of family silver to sell to make up the deficit and of being keener to manage the image of the family (party), the goal, rather than any bold statement in the use of funds, comfortably stretches on.
Perhaps the dissonance is because the sharp aspirations of a young nation are colliding with the fact that India is ruled by people who cut their teeth in politics in the control and command era of a pre-liberalized era. India’s financial agenda is set by a group of people (the Lok Sabha) whose average age is 53. If we are a true democracy (rule of the majority), this age majority of the population should show up in the average age of the Lok Sabha soon. Till that happens, we should not expect any bold, youthful changes to the way the finances are managed.
Expect more of the same in Budget 2011-12 as in the last two budgets that Pranab Mukherjee as finance minister has presented. He has worked on a road map of three goals that his budget should meet. The first goal is a steady 9% growth, before moving higher. Two, make this growth inclusive so that those outside the growing bubbles of wealth and incomes are not left out. The aim is to include the millions who are unable to partake of this growth spurt as they are far away— geographically, educationally and due to poor health—from the pockets of growth in India. Three, make the pipeline that redistributes wealth leak less—mainly through the unique identification programme and by moving to cash transfers rather than actual goods delivery.
The report card shows that we are on track with these three goals, partly from the momentum of past reforms and partly from the fact that we have a huge domestic demand that moves India back to the growth path after a blip. But the deeper changes needed to make this growth reach higher are missing. And for those changes, either governance will have to change or the government.
What will the budget have for me?
As income-tax payers, we tend to believe that it is the debit from our monthly pay cheques that keeps the machine India running, we work two days in a week (or three-and-a-half months out of 12) for the government. But with just 8% of total receipts coming from personal income tax, the benefit of raising rates for the government is marginal. Don’t expect any big changes from the budget in terms of personal taxes. The road map to implement the Direct Taxes Code is in place and only minor tweaks should take us closer to that destination. I would think that an estate tax or a wealth tax is more likely, if not in this budget, then in one of the next budgets.