Just as there is no such thing as pure politics, pure economics belongs to the realm of Utopia. In real life, we live in the framework of a political economy. Hence, there can be no politics without economics and no economics without politics. Politics takes precedence over economics when you present a budget just before an election year.Finance minister P. Chidambaram could not have avoided that. He has, therefore, done a balancing act.
The economic well-being of a state and its people is based on continued growth, price stability and equitable distribution. When all are under threat, corrective steps are needed. The most radical step in the 2008 Budget is the proposed loan write-off for marginal and small farmers. The amount, almost 30% of the total agricultural loans outstanding in the banking system, ultimately will be paid for by the exchequer—which is all the people who pay taxes, whether income tax, excise or customs duties. It is a moot point to debate whether this is achieved through write-offs or through tax concessions, since directed write-offs run the risk of moral hazard.
The current threats to the India story come from inflation, slowing of growth and drop in consumer demand. The present Budget tries to deal with all these threats. Firstly, when faced with global inflationary pressures, it makes economic sense to drop excise duties and customs duties selectively. The investment demand needs to be kept intact through continued commitment to encouragement for capital formation through domestic and foreign savings. Of the three sectors, farm output is the single largest contributor to sluggishness in growth. The commitment to take rural credit to Rs2.8 trillion from current levels of about Rs2 trillion promises to keep investments in that sector high. Thirdly, the increase in income-tax slabs gives substantial savings to the upwardly mobile middle class. The benefits are large enough to revive the demand for housing loans and encourage consumption. The clear focus in these three areas will help us to overcome the threats coming from global economic slowdown, which is the caution part of the optimism Chidambaram has talked about.
Further, rationalization of dividend distribution tax is a positive. All in all, in the context of pre-election constraints, a fair balancing exercise.
Uday Kotak is executive vice-chairman and managingdirector, Kotak Mahindra Bank.
Respond to this column at firstname.lastname@example.org