By far one of the best budget that I have seen in last 7 years that I have been following budgets and Indian economy more closely. Panniapan Chidambaram had goodies for everybody; be it the people of India or the farmers of Bharat. With an eye on the election and continuity of the robust economic growth this is the best thing that Finance Minister could deliver. Though there were few misses but the hits were more than the misses.
In my last blog I had written that we should not be concerned that the GDP growth has come down from 9% and above to sub 9% but what is more important is that how inclusive the growth is and is it touching the poor people of rural India and whether agriculture can grow at 4%. I have been for long saying that the important thing for rural growth is not only irrigation and fertilisers but it is rural infrastructure and good seeds. And this budget has both an increased outlay for rural infrastructure. I would like to go into a bit detail of the budget and analyse each section.
When I first saw the budget I felt what a lousy one Finance Minister had come out and reacted the same way as capital markets did but when I sat to analyse the budget I felt he has done a great job. Let’s look at details if the budget:
HITS
1) Economic Growth: The good part is that despite the blip in GDP growth the FM has been able to maintain the GDP growth above 8.7%. Though agriculture continues to be a laggard the FM is taking some great step towards providing a fillip to the sector. One of them is increasing the investment in agriculture to 16% of GDP from current 12%. The government is talking about inclusive growth in the economy and for the first time we are looking at some great concrete steps. Lot of governments have come and reduced the interest rates or have given soft loans but waiver of such big amount will go a long way in helping the farmers bettering their living standards and reducing farmer suicides. If the standard of living of rural India improves it will only do a world of good for the economic growth.
2) Education Programmes: Today’s India story is about outsourcing, is about knowledge and it’s about “Young India”. For long NASCOM has been talking about the dearth of manpower we are going to face in next half decade or so and I think it is great step that government has taken by setting up new IIT’s, IIMs and some other Scientific research institutes.
3) Agriculture: One of those sectors which has been a big laggard for a long time but which continues to touch more than 70% of the population. There has been some revolutionary steps take for half decade or so. The NDA government first came out with the Kisan Credit Card which helped in getting easy access to credit which was followed by the thrust given by UPA on agricuktural credit and we have achieved more than Rs.280,000 crore of rural credit. Also according to the 11th Five year plan we will see investment going up to 16% which is a great step. The big step that government has taken is waiving off RS.60, 000 crores as debt form marginal farmers and this is likely to have a great impact. This would mean that farmers have more money with them and this is likely to drive consumption in the country. This is also likely to clean balance sheets of PSU banks that have got huge exposure to rural loans. Though the big issue is that how is the government going to fund it will it be through bonds or will the government take the hit itself. The increase of RS.14, 000 crore in rural infrastructure is also likely to boost the agriculture sector.
4) Natural Resources: According to me what lot of people have missed out is that nobody has looked at the steps that government has taken is setting up of the coal regulator and coal distribution policy and also mulling that private participation should be allowed more in coal exploration. This would help the power generation units and it would also ease the coal shortage in the country.
5) FRBM: Over the last eight years governments have been working fairly hard on achieving fiscal prudence. The FM has in fact beaten hi own target and achieved FD 3.1% of the GDP. He has also set a bold target of 2.5% next year. Whether he will be able to achieve it or not is a big question. I will take it up later.
6) Direct Tax: The decision taken by FM in this section is a way of saying thank you to the working population of the country for the contribution given to the tax kitty of GOI. The increase of exemption limit form Rs.110, 000 to Rs.150, 000. This is likely to drive more consumption in the economy and help the GDP of the country.
7) 6th Pay Commission: The sixth pay commission has recommended an increase of 25% for all government employees. This is going to increase the money in the hands of the individuals. Now here is the big work for the government that this incremental money does not go only into savings but also increases the consumption in the country so that it keeps the wheel in the economy moving fast. Since the Indian story is all about domestic consumption if it keeps on moving India will be able to overcome the global slowdown.
Misses
1) Infrastructure: This is one front I am utterly disappointed, the government had no mention of infrastructure in this budget. We are talking about higher consumption and higher income in the hands of people and cheaper cars but do we have enough infrastructures to support these rising demands. I would like to see more corridors and more rural infrastructure.
2) Capital Gains and Transaction tax: I guess this was something which was not required. We could argue that how much % of the population invests in the capital markets but increasing the tax by nearly 50% was uncalled for. Also another big step was that the GOI introduced Commodity Transaction Tax; the commodity market is still grappling with and trying to overcome the effects of ban on various commodities and now they have another issue at hand. He also did not comment anything on the Abhijit Sen committee report.
3) Education: The budgets for years and years have mentioned about spending on education but nobody has ever spoken about the teachers who impart education. The problem today is not only about enough schools and colleges but it is also about quality teachers. Today nobody wants to join government schools and colleges as there isn’t enough pay. I still remember in School my teachers used to tell me they used to get Rs.2 for checking one SSC paper. Today a professor who teaches in university colleges gets Rs.200 for one hour. IS this the way we going to treat our teachers and is this the way we gonna thank them for imparting quality education. If we donot increase the emoluments of professors and teachers then they would shift to private jobs in the corporate world.
4) FRBM: When one closely looks at the fiscal deficit figures given by the government for 2008-2009 it paints a different picture. The FM aims to achieve 2.5% of GDP as FD next year beating the 11th Five Year Plan target of 3%. What the Fiscal Deficit figures do not include is Rs.20,000 crore of farm loan waiver (Rs.60,000 crore written off in 3 year tranches), it also doesn’t take into account the 6th Pay commissions extra disbursements. This means that the government may not be able to achieve 2.5% but could be very well achieving the target of 3%. Though when you add up these two figures it pushes fiscal deficit above 3% but with revenues for last few years beating governments estimates which I expect to happen this year also I guess 3% is easily achievable.
Overall to me this is a consumption driving budget this will keep the wheel of the Indian economy driving. What we have to look at closely is that how surplus cash in the hands of individuals is used. Do we have enough resources to fulfil the demand and also the excess cash should drive consumption and not runaway inflation. One last thing I would like to see from the FM which he has not touched upon in this budget is some sops for the exporters who have been hard hit by the rupee. Overall it’s a great budget by the FM and his team ahead of the crucial state and general elections. It is good that the FM has now shifted his focus from inflation to economic growth.
(The views mentioned in this write up are purely of mine and not that of my company)
