Budgetary Review

For anyone who did not follow the pre and post-election buzz let me sum up the main arguments. The BJP contended that the UPA government mismanaged the economy, leading to lower investment and lower growth. They said that when in power they will cut down on the red tape and improve conditions for investment and economic growth.

Now there is something we need to understand about our political system. The era of socialist governments ended in 1990. And the Congress can claim to be socialist but it is merely less capitalist oriented than the BJP. The benefits of liberalization have been most strongly felt by the middle class who have prospered due to increasing income, foreign investment and stable expenditure as a result of government subsidized education, petrol and electricity and the middle class reluctance to pay fair wages. The middle class is also the class that forms the biggest support base for the BJP.

Middle Class sops

You bet. There is an increase in the no-tax slab to Rs. 2.5 lakh plus savings in PPF of upto Rs. 1.5 lakh per year are now tax free. This is in addition to the raising of the deductions available under S. 80 C of the IT Act.. If you are paying interest of Rs. 2 lakh for a home loan, then you can deduct it from your income for tax purposes. This is up from the earlier 1.5 lakh. Placement guys, house party eh?

Fiscal Consolidation

India’s fiscal condition has been a mess for a while. The fiscal condition is essentially the money ‘earned’ by the government via tax revenues and spent by it as form of government expenditure. Unlike money earned by private corporations, it is assumed that the government spends money not to earn further money but for the benefit of the general population.

Government expenditure consists of ‘Plan’ and ‘Non plan’. During the UPA times, the government expenditure was way over the tax revenues. So to balance the scales, the government reduced planned expenditure for non-plan expenditure, thus showing us the futility of planning.

As you all know, if you spend more than you earn, you will eventually run into trouble. To prevent this, Arun Jaitley has promised to stick to a strict timeline of bringing government deficits under control, with the deficit aim for this year being 4.1% but realistically to be around 4.5%. In contrast to the previous government, this Budget provides a roadmap to reduce deficit over the next few years. Of course, they may fail still, but the chances seem brighter for now.

Interesting Features

The budget has thrown up some interesting features. The government has allocated Rs. 7000 crore for ‘smart cities’. Nobody knows what these are but it is presumed to do something with ‘technological intervention to drive efficiency’.

The government has also created a Rs. 10,000 crore fund for supporting start-ups and new technology. It’s something new so we have to see how it will work out. Keep in mind that we do need a healthy start-up environment considering that India is one of the worst countries in the ‘ease of starting your own business’ index.

The government has also decided to fund new and existing community radio stations to the tune of Rs. 100 crore. This is a significant development considering till very recently, broadcasting news via radio stations except All India Radio was illegal in India.

And to tickle all our funny bones, a promise of Rs. 100 cr. for “modernization” of madrasas. Lol.

Infrastructure

Infrastructure in India sucks. And the BJP has pledged to do a lot for this sector. What were the problems in infrastructure? The biggest problem appears to be fuzzy government policy and slimy contractors. Let’s take a classic example.

Since the Krishna-Godavari Gas basin find, a bright future was foreseen for natural gas production in India. Many entrepreneurs invested in gas based power plants. Unfortunately, the gas production from the KG basin has fallen to a fraction of the initial high, which Reliance insists has nothing to do with the price revision dispute and all to do with ‘technical problems’.

However, this meant that thousands of crores of your money has been sunk into power plants that are not generating electricity. These plants are financed by banks and other financial institutions in which the public has deposited or invested money. Now no one knows what to do as there is no gas and no electricity production, but there continues to be interest on the loan taken writing off which would mean hits of more than Rs. 10000 crores.

Another classic example is of state electricity boards having a combined debt of 2 lakh crore. Slightly more than my annual income.

So what has the budget done?

The budget has brought into the mainstream Real Estate Investment Trusts (REIT’s). These funds pool their money to buy property and then earn money out of rental income. These instruments can then be listed on the exchanges. Similar to Asset Backed Securities (ABS). I heard a lot about that word in 2008, wonder what the fuss was about.

More importantly, the government has now exempted loans to infrastructure sector from the regular SLR and CRR guidelines, i.e., lending money to infrastructure would be very profitable as money doesn’t have to be set aside for safekeeping with the government- which means more investment in infrastructure.

Is the budget going to change your life?

Sadly, no. Since changes in the early 90’s budgets have been pretty unidirectional, i.e., moving away from our socialist past and towards a capitalist future and you can expect that trend to continue for a while.

Checking on Promises

Politicians hate this section. So what did the BJP promise in their manifesto- and what did they deliver? These are some of the major planks.

  1. Infrastructure push – Check.
  2. Meet middle class aspirations – Check.

So it’s not a bonanza, but it’s a pointer towards the future.

  1. Checking Price Rise – Fail.

Provisions made for better warehousing but too little for a country of India’s size.

  1. Fighting Corruption.

Budget obviously doesn’t handle this, but Modi seems to be trying to do his best.

  1. Employment and Entrepreneurship – Check.

More required but it’s a start.

  1. Women progress – Fail.

But this is more a social issue than a budgetary issue so we can cut them some slack.

Conclusion

Research projects have inculcated a good habit of writing conclusions, the only part of the project not plagiarised. So is it a good budget? Is it a bad budget? Unfortunately, the budget has lost a lot of its relevance in the general scheme of things as most major policy decisions by governments are announced outside of the budget. However, it does serve as a very clear pointer towards the thinking by the new government which is to build a stronger India.

The Modi government’s plank is not of free handouts. The campaign was focussed on growth and development. It will be too much to claim that this budget is suddenly going to change things, however a clearer direction and a greater focus seems to be seen from the focus on core sectors such as infrastructure and core issues such as controlling fiscal deficit. In continuation with the promises, policies to encourage entrepreneurship and manufacturing can give a big boost to employment and new elite universities to be created would be good for students.

The government appears to be serious about implementing Goods and Services Tax (GST). It is thought by experts that this is a beneficial step so I’m assuming it is a good thing. It has also increased taxes on health hazards such as cigarettes, tobacco products and aerated drinks. It’s a sad day- but my middle class upbringing approves.

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