Saturday, 1 March, 2008

Budget 2008

Budget 2008

I'm glad that many of you have been happy with my post on the Railway budget.

On the whole, PC's budget is one big POLITICAL budget. There are some proposals here and there which have either a positive or negative impact on the economy, but the Political Impact is very straightforward - It is one big PLUS for the Congress. Chidambaram has, quite clearly, taken care of "his part" of doing what he can to satisfy every plausible vote bank. So much so, that unlike the Railway Budget, I'll not specify any separate "PI" for each budget proposal - it is a simple case of satisfying that particular section of the vote bank.

For example, right at the outset, PC claimed that during the current year 40+ villages are being electrified every day and telephones are being provided in over 50 villages each day of the year. This is both a matter of pride - because so much of rural infrastructure is being developed and a matter of great shame - to note that there is scope to electrify so many villages or introduce telephones to so many villages over 60 years after we got independence.

Here's my take on the economic impact some of PC's Budget 2008 proposals:
{BP - Budget Proposal; EI - Economic/Financial Impact}
  • BP - 16 new Central Universities, 3 IITs, 3 IISc, Allocation to Education increased to 34400 crores (implying an increase of 20%), increased age limit for science scholarships, etc.
    • EI - Major thrust on education. Focus on skill development. Addresses a very important concern - of talent crunch - faced by industries of all kinds, especially those belonging to the Knowledge Economy.
  • BP - All knowledge institutions (esp of higher learning) to be integrated through a digital broadband network.
    • EI - Availabiltiy of technology will increase awareness and usage of technology exponentially. Will also result in speedier sharing and dissemination of knowledge, with all kinds of resultant benefits to the society at large.
  • BP - 15% increase in allocation to health
    • EI - Potentially inflationary, if you are in a mood to criticise - However, essential for a country of our size - Can't afford to allow people to suffer and die on account of diseases which can very well be cured. Improves quality of life of the population at large
  • BP - Health Insurance of Rs. 30000/= for all persons below the poverty line (BPL)
    • EI - Same as the above point.
  • BP - National Programme for the Elderly (400 crores allocation), 2 National Institutes of Ageing
    • EI - Most timely, considering a combination of factors such as (1) Ever increasing urbanisation, leading to migration of youth to different corners of the country in search of livelihood, increasing life expectancy, absence of adequate social security network, etc.
  • BP - Announcement of increased allocation to North East (over 16000 crores, including a dedicated NE development fund of 500 crores) 
    • EI - Much needed focus on Development of NE and further integration with the rest of India.
  • BP - More candidates from minorities to be recruited for Paramilitary forces
    • EI - Greater opportunities for the minorities for further upliftment both economically and politically. Will also further the cause of National Integration, with obvious peace dividends in terms of better law and order, lesser number of bandhs, etc. Can be accused of "communal budgeting" (as the BJP have promptly done, keeping in mind both this proposal and a few other proposals).
  • BP - Life and health cover on subsidised basis to All-women Self-Help Groups through LIC
    • EI - Yet another example of gender budgeting and women empowerment. Also, when a man is "provided for", only he is provided for. When a woman is "provided for", her entire family (and future generations) are often taken care of.
  • BP - Salary of Anganwadi Workers increased from Rs. 1000 to 2000 per month
    • EI - Benefits 18 lakh people (and their families) with higher disposable income.
  • BP - Allocation for National Drinking Water Mission increased to 70000 crores, Increased thrust on Irrigation, Opening of several new rural branches by PSU banks, Target of at least 250 new accounts per annum for each rural / semi-urban branch of every bank, etc.
    • EI - Very major push on rural infrastructure development. Can result in explosive investment led growth.
  • BP - Agri-loan waiver (for small and marginal farmers holding upto 2 hectares) amounting to 50000 crores - benefitting 3 crore farmers, One time settlement (of 25% waiver on payment of the balance 75% of agri loans) for all other farmers, benefitting around 1 crore farmers
    • EI - Most significant "give-away" of not only this budget, but perhaps the biggest give-away of all time since independence, according to most experts. Nevertheless, this is likely to be of great benefit to very large sections of our society who have been suffering immensely in the past couple of years (I'm sure that you'll be well aware of farmer suicide reports from different states all over India.) This proposal can (and mostly will be) inflationary. Nevertheless, despite being a person who is a staunch capitalist and who is dead against subsidies, according to me this proposal is essential and even economically acceptable. (To know why, just calculate the "per-capita" impact spread over 3-4 years (over which the benefit will accrue) and compare it with the per-capita Income Tax Exemption Benefit that PC has given away for the middle classes (and the richer folks) in this budget. My only grouse is that it has been declared as a "give-away". A smarter move might have been to securitise the debts and buy the securities (at the government end) and restructure the loans for individual farmers by extending the due date by a few years (so that credit discipline is not violated)
  • BP - Introduction of currency futures, credit derivatives, introduction of "Commodities Transaction Tax" on the lines of STT for shares, clarification on reverse mortgages, etc.
    • EI - Step in the right direction in terms of expanding the financial services industry and in terms of introducing global products for Indians. Perhaps overdue. Question: Why has PC not given specific clarification on tax treatment of REITs? (Real Estate Investment Trusts) They ought to have been treated on par with Equity Mutual Funds.
  • BP - Announcement of 5-Year tax holiday for establishment of hospitals (everywhere except in identified urban areas) and for establishment of 2-3-4 star hotels in certain heritage locations
    • EI - Great for health care and tourism. Even better for overall de-congestion of major cities, development of new cities and towns, etc.
  • BP - Creation of National fund for Power Transmission & Distribution, Irrigation & Water Resource Finance Coroporation, etc.
    • EI - Increased focus on specific identified sectors
  • BP - PAN made compulsory for more financial transactions
    • EI - Transparency, and resultant expansion of the "White economy"
  • BP - Smart Cards introduced on pilot basis in Haryana & Chandigarh for distribution of foodgrains and PDS.
    • EI - Excellent initial move towards targeted subsidies in future.
  • BP - Increased Allocation for Defence by 10% (with an assurance of further allocation if required)
    • EI - Necessary Evil
  • BP - Not too many changes in Customs Duty
    • EI - No tinkering. Could have attempted to move towards ASEAN levels, but was probably being cautious considering the impact of the US recession and global slow down.
  • BP - General CENVAT rate brought down from 16% to 14%
    • EI - Good to keep down prices to that extent and general move towards a uniform GST in future. (Perhaps the only proposal which can reduce
  • BP - Reduction in Excise for Pharma, 2-wheelers, cars (esp. small cars), Buses, Chassis, certain types of jewellery, paper, paper board, etc.
    • EI - relatively minor tinkering with impact for specific companies. Likely to be of benefit for middle class "NANO" fans!
  • BP - Specific duty instead of Ad Valorem duty for Petrol and Diesel
    • EI - Good to Oil Marketing companies (only if crude continues to boil!)
  • BP - Increase in Exemption Limit for individuals, Minor tinkering of slab rates
    • EI - Increase in disposable income for middle classes ranging from Rs. 4000 to Rs. 44000 depending on income levels.
  • BP - Increase in Short Term Capital Gains Tax (from 10% to 15%)
    • EI - Minor tinkering, with no significant impact on too many persons - can cause a short term negative impact on stock market sentiments

On the whole, I'd give a 9 on 10 in terms of a politician's election budget, but my score will come down to a 6-7 on 10 from an economic perspective:

Overall Drawback of the budget - Certainly Inflationary - highly unlikely to meet revenue deficit and fiscal deficit targets, especially considering the HUGE give away on account of Farm-loan waivers to the tune of 60000 crores. This figure was way beyond even the most wild imagination of any of the TV channel predictions from so-called experts as well as from the politicos!

Overall Benefits of the budget -

  • Increases the disposable income for every segment of society
  • Major rural infrastructure push

Do give me your feedback regularly to keep me motivated to post equally regularly!



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