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#Budget2014 positive for common man but have to wait for tax and spend plan: Economist Ajit Ranade

Friday, 11 July 2014 - 6:00am IST | Place: Mumbai | Agency: dna

  • PTI

Last week the finance minister said that he did not believe in mindless populism, and preferred fiscal prudence. His colleagues, including the prime minister himself had been talking about giving us doses of bitter medicine, before "acchhe din" could be enjoyed.

There was a stiff hike in railway fares, increase in diesel prices and increase in import duty of sugar. Did this mean that the budget would bring more nasty suprises? Did fiscal prudence mean that taxes would go up?

Thankfully the FM did not raise any rates. In fact, for most taxpayers there is tax saving, since the minimum exemption slabs have been raised. So there will be more disposable income in your pocket. Home loan repayments now have higher tax deductions. Further, the tax-free contribution to investments like PPF has gone up. The common taxpayer then has reason to be cheerful.

But then why did the markets not cheer up? That's because of the mixed signal on fiscal consolidation. The FM and his team had barely six weeks to prepare the budget, since there was a parliamentary deadline. Most people expected the FM to project a more realistic deficit target. But he chose to keep the challenging fiscal deficit target of 4.1 per cent of GDP, set by his predecessor in the interim budget back in February. But back then the opposition had accused that the very same number was unrealistically rosy. So how is the FM going to keep his promise now? He defended fiscal prudence by saying that raising the deficit today, means raising taxes for the future generations. This target, he said, is daunting. It is however desirable to break out of the vicious cycle of high inflation and interest rates, leading to low savings, investment and growth. Hence a lower deficit is a must. But the stock market was confused. It zoomed down, then zoomed up again, and ended the day in the negative region. It wasn't able to make up its mind whether the numbers presented were credible or not. The FM projects nominal GDP (inclusive of inflation) going up by 13 per cent, but tax revenues going up by 18 per cent.

The fiscal consolidation path envisages 4.1 per cent deficit going down to 3.6 and 3 in the next three years. This is achievable only if growth picks up substantially, so that tax revenues are harvested from that growth, which narrow the deficit. To achieve that growth we need private investors to come in enthusiastically. The FM announced many measures to spur growth in infrastructure. These include rural roads and national highways, ports, airports and urban development. Rural and low cost housing too got a boost.

The power sector projects got a three-year extension in tax holiday. Similarly there are many growth boosters for manufacturing too. This is a sector which has been languishing for the past two years. Small and medium enterprises (SMEs) are the unsung heroes of manufacturing. They produce half of all output, and provide half of all employment, but do not get even 5% of bank loans. To the SMEs the FM is now offering a venture capital fund of Rs10,000 crore. This is quite innovative, and its success will be eagerly watched. The FM has also provided for investment allowance, an approach which was restored in the recent past.

There were no populist measures like providing for loan waivers. But the FM did have a long list of fund allocations for a variety of causes and activities. In this respect, it resembled the speech of all earlier FMs.

Allocations for smart cities project, for digital inclusion, handicrafts, dental college as well as five new IITs and IIMs are but some of the many examples. All of these are individually unexceptional, but they do add up to a long list, and hence a considerable amount. The FM's preferred packet size for such handouts was "100 crore", and there are 29 instances of this magical amount in the budget highlights!

The Union budget size is more than 17 lakh crore rupees, amounting to 15 per cent of national income. Every rupee spent needs thought and justification. It has to be funded from your pocket and mine, and possibly from our unborn generations (deficit financing). Its success is in outcomes not merely outlays. We shall see in the coming days, how credible and effective is the tax and spend plan presented in the Lok Sabha on Thursday.

Ajit Ranade is an economist based in Mumbai

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