"I believe that after the Delhi poll disaster, the lack of substantial improvement in the economy and to avert another rout in elections in Bengal and other states that the budget will be one that will be focused on delighting the common man."
We are without doubt living not only in interesting times but one in which contradictions abound. What is likely to happen and as responsible individuals what should we do? What is the state of affairs?
Retail inflation that was falling till now has risen from 4.28% in December to 5.11% in January. Ratings agency Crisil expects an average growth of 5.8% in 2015-16. The rupee has been falling against the US dollar and industrial output has slowed to 1.7% from 3.9% in December. In the face of this (by using a new formula) India's economy is expected to grow by 7.4% in 2014-15 making it the most vibrant major economy in the world – beating even China (expected to be 7.3%). This new formula covers a raft of activities from farm-level livestock to mega infrastructure projects and smart-phone sales. Based on this formula the growth in 2013-14 was 6.9% whereas on the old basis it was 4.7%. In short the new formula gives the economy a 2.2% boost and makes it look that the growth in the old regime was not so bad as it was touted to be. Having said that the new formula is still being digested. Even Raghuram Rajan has said that the Reserve Bank of India (RBI) would scrutinise the data closely by mentioning "we need to spend more time to understanding the GDP numbers".
In this scenario what can we expect in the budget?
I believe that after the Delhi poll disaster, the lack of substantial improvement in the economy and to avert another rout in elections in Bengal and other states that the budget will be one that will be focused on delighting the common man.
There will be an increase in the Section 80C benefit (incentives to save). It the last budget this was increased to Rs 150,000. This is likely to be raised to Rs 200,000. This will boost savings which is still doddering.
The real estate sector will get a boost by the budget increasing the home ownership deduction of Rs 200,000 on interest paid on loans taken for buying property. It is also possible that the additional deduction given under Section 80EE for first time buyers would be increased. The real activity will start however only after interest rates are again brought down, which I believe the RBI is under pressure to do so in view of the fall in industrial output. The sad factor though is that real estate prices are still unrealistically high.
The limit of minimum income exempt from tax is also likely to be increased. It is also expected that corporate tax may be reduced to 25%.
The stock market has been generally on an upswing, and after the initial reaction to Aam Aadmi Party's win has been steadily rebounding. This continues to be an attractive avenue for savings. Fixed deposits, in the face of falling interest rates, are no longer as attractive. Fixed income bonds and tax saving investments are opportunities that must, at this time, be seriously considered.
I am a little concerned about the rupee even though there is a flood of funds into the Indian stock market and our reserves are at an all-time high. The recent floodgates that have been opened by which Indian citizens can remit $200,000 per annum abroad is likely to result in the wealthy investing in residential apartments in exciting locales abroad. This can mean a significant outflow. Furthermore, the US economy is doing well and I do fear that the dollar will further strengthen against the rupee.
I am also concerned about huge expenditures which are either wasteful or seem unnecessary – especially when we need to be focusing our entire energy on improving the infrastructure. We must have roads on which vehicles can ply. Bridges cannot take a lifetime to build. There must be uninterrupted power throughout the country and water should be available to everyone.
Furthermore, as far as safety to women is concerned, I am appalled that India is now considered even worse than Afghanistan. There is not a day that passes by that does not mention some atrocity committed. This has a direct effect on tourism, an industry that has the potential to grow hugely if given the right incentives and support.
If the government focuses on these the good times will roll in.
The writer is MD, Cortlandt Rand, and an author
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