It is that time of the year when the nationwide armchair policy analysis is at its peak. We can begin by checking the temptation to keep staring at the Sensex and imagining that the market is a dynamic scoring mechanism for the performance of the finance minister.
The problem with this year's Budget is not what it did to the markets, but what it, unfortunately, failed to do.
The chief policy concern this time around has been inflation. There are two arguments that have been doing the rounds. The first one says that the speed at which the economy is growing is creating an excessive demand that pushes up the prices. The second one says, the supply of goods and services has not been able to match the growing demand.
The Budget has reduced custom duties, so it is possible to import what we need. It has also reduced excise duties, and gone to the extent of fixing a fair price (Rs 190 per 50-kg bag in the retail market) for cement.
These measures hope to augment supplies somehow. But, one cannot go all the way and alter the supply of food, pulses and oilseeds overnight. First, revenue will be lost if too many concessions are given. Secondly, agriculture will be hurt if import duties are slashed. So, it just stops short -- some reduction, but not too much of tinkering.
The net effect is: some possible reduction in costs of manufactured goods, marginal change in food prices, and multi-level alterations in cost and margin assumptions of several businesses, small and large. The unintended consequence of the urgent need to deal with inflation is that few more business will be pushed to get globally competitive, or perish.
After inflation, the next policy concern is about agriculture and its falling share in the GDP numbers. Inclusive growth is required to win the next election, anyway. The http://www.rediff.com/money/ecosur07.html Economic Survey outlined the roots of the problem -- from low productivity and yield levels, poor technology, low value-add, poor fertiliser use, to low levels of investment.
The straight forward approach would have been to enable a higher level of investment in agriculture and allied industries.
This can happen only in two ways. Either the government finds the money and invests it, or, it enables private and foreign players to make the investment. In the political environment in which we find ourselves, the latter is not possible. Given the need to control fiscal deficit and limited resources with the government, nor is the former option possible.
Therefore, trade off number two -- create a large number of small initiatives, ranging from seed research to rain water harvesting, but side step big bang policy reforms. We can only hope that investments in agriculture happen despite the government.
The growth in saving and investment rate in the last three years is a story that deserves more headlines. In a growing economy that provided the opportunity to earn more and spend more, Indians have actually managed to save more. The rate of gross capital formation is something we have to be proud of.
As industry begins to invest the surpluses it has accumulated, it is time for households to chip in more than before. Here too there are two approaches the Budget could have taken. One, cut some taxes and make more money available in the hands of people. Two, create long-term investment opportunities so savings actually fund growth.
The first could not be done, because it may fuel inflation. The second could not be done, because it would be seen as offering more tax concessions when the objective is to rationalise and reduce them.
So the FM offered a bountiful Rs 1,000 per year reduction in income taxes for all of us, and let that pass.
Also, as an aside, one cannot help but ask why the taxability of mutual fund dividends has to be tinkered with every single year, seven years in a row? Is there a macro logic here that has eluded our understanding so far?
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