FM’s cash transfusion from India to Bharat

How we earn and spend our money defines the stability of the household budget.

The way we grow our incomes, keep expenses in check and build appreciating assets will define our success as wealth creating households. The government budgets are not very different.

If we look at the Union budget as being somewhat similar to a domestic budget, then we see that the household income, in the form of salaries or business income, is similar to tax revenues for the government.

Both the government and a household will spend on current consumption and to build assets. Any mismatch between the two leads the household to the bank to borrow money to bridge the income-expenditure gap.

The government can borrow, print more notes and sell the family silver (disinvestment) to bridge this gap. We also see that not all borrowing is bad. When we take a home loan to build a capital asset, like a house, we are essentially using tomorrow’s income today.

The quantum of loan we take reflects our confidence in the ability to go on earning for the next 15 years an increasing amount of income. The government is no different. It borrows to build capital goods for the country in the form of infrastructure.

But what if a household is unable to stretch current income to cover consumption expenditure month to month? It would initially use the high-cost credit card route and then maybe convert that into a personal loan. These are high cost loans that do not build assets and are frowned upon as financially imprudent.

The government does something similar. Its borrowing to finance current expenditure over current income (called receipts) is called the revenue deficit.

The financially prudent number to this kind of deficit is zero. If the revenue deficit is zero, then a fiscal deficit (like a home loan for us, also called the total borrowing of a government) of 3 per cent is good for the country. The numbers for India today are 4.8 per cent revenue deficit and 6.8 per cent fiscal deficit —  and we are not even accounting for the off-budget items that take the deficit up even higher.

This large deficit is frowned upon (the markets tanked almost 6 per cent yesterday) largely because apart from being a sign of a spendthrift government, it also means that when the government borrows to fill this gap, it will crowd out private investment and raise interest rates. However, in special circumstances, a deficit may be the only way to dig a nation out of a slow-down or a recession.

Which is what this budget is aiming to do — it is trying to spend its way out of the slowdown to climb back to 9 per cent growth. The spend is aimed at stimulating domestic demand. This demand, the budget clearly wants not just from India but from Bharat.

India is being given small tax incentives in the form of zero tax threshold level of Rs 1.6 lakh, this is Rs 1.9 lakh for women and Rs 2.4 lakh for senior citizens. For the urban middle class person, the tax reform has been more in terms of a cleanup of untidy taxes like the fringe benefit tax, the cess, the surcharge and the commodities transactions tax. The promise to move to a goods and service tax will also reduce indirect costs across the board for consumers and boost domestic demand.

But the thrust of the demand push has been to Bharat which gets a large pipeline of, what will finally be, cash transfers. The money allocation under the National Rural Employment Guarantee Scheme has been hiked by a huge 144 per cent. India will now transfer Rs 39,100 crore to ensure Rs 100 a day for 100 days to the poorest of the poor in lieu of work.

This worked so well that it gave that extra edge to this government in its return to power. So we have similar hikes under Bharat Nirman, up 45 per cent, Pradhan Mantri Gram Sadak Yojana, up 59 per cent, Rajiv Gandhi Grameen Vidyutikaran Yojana up 27 per cent and Indira Awaas Yojana up 63 per cent. A total of a humongous Rs 1.1 lakh crore will be spent this year to as rural and poor transfers in cash and kind.

The budget is a statement of intent of the government. It wants inclusive growth. It wants to redistribute wealth as India transforms its millions from poor to middle class, from middle class to urban mass affluent, always shovelling money to those at the bottom of the heap.

Noble goals and they’ve been articulated before, but the crucial link to this cash transfusion is the statement on the delivery mechanism. If the biometric number programme is used to transfer cash to the poor, there is yet hope for this huge demand push to work. Then the market may remember this time as the time to buy really cheap.