by Anisha Bhardwaj and Deepthi Sai
A microcosm economy is like a family. Just like every household, an economy needs to manage its expenditure and revenue flows. Simply put, a budget is an estimate of revenue and expenditure over a set period of time. In this article we aim to understand the key components of the budget for the coming fiscal year (2013-14) put forward by the Government of India.
A budget is always planned keeping in mind certain economic objectives. One major objective of the Indian economy is to reduce its fiscal deficit. A fiscal deficit occurs when a government spends more than it makes. The fiscal deficit currently stands at 5.2 percent of the GDP. A central issue contributing to the rising deficit is increasing subsidies on items such a fuel, fertiliser and food.
A deficit in the budget obviously has to be financed in some way. One way is to sell bonds or promissory notes to borrow money from national and international investors. However, with rating agencies like Standard and Poor’s downgrading Indian bonds, this preferred option becomes difficult to exploit. Note however that a fiscal deficit isn’t all bad. If the government is spending money to subsidise items, it increases productivity of civilians and consequently growth of the economy. However, this also increases incomes for people and demand for goods which invariably contributes to inflation. Thus, a trade-off exists between economic growth on one hand and inflation on the other.
The Union’s budget for this fiscal year aims at bringing the deficit down to 4.8 percent of GDP to avoid adverse consequences. For this purpose, the budget aims at reducing subsidies on fuel by one third of its current amount while increasing that on food. The government also aims at switching over to cash transfers instead of direct subsidies. In order to increase revenues the government plans on undertaking disinvestments (or selling public sector undertakings) amounting to Rs. 55 thousand crores. Tax evasion will also be better checked which would contribute to government revenues. Another route considered to increase revenues was to pull up excise duties (taxes on domestic sale and production) to 14 percent. However, a tax on production will translate into higher prices on final goods which will put off potential voters for the Indian National Congress. Thus, the plan has been shelved for now.
The budget has left the spending on poor, minorities and scheduled caste/tribes untouched. Prices of jewellery and home loans have been slashed and income-tax reliefs for job market entrants and fresh entrepreneurs have been increased, making it appealing to women and the youth. A special bank set up for women entrepreneurs is a novel step. At the same time, the wealthy have been subjected to new taxes. The ‘rich club’ of 42,800 people who earn over one crore rupees per annum will pay approximately 34 percent of their income as tax. In addition, luxury items such as expensive mobile phones, cars and yachts will be taxed more.
While agriculture helped India’s balance of payments in the last year increasing exports worth Rs. 138 thousand crores, this year’s budget allocation for this sector was just a paltry Rs. 27,049 crores. Even today, agriculture is the largest employer in the unorganised sector of India’s economy and undoubtedly demanded more attention, especially on research. The ambiguity of the budget structure continues in the infrastructure sector. Having had lakhs of crores earmarked for this sector, efficacy of resources seems questionable as none are allocated toward water resource management, which not only would help farmers but also industry by means of power generation.
No large economy can become truly developed without a robust manufacturing sector. The budget proposed to provide an investment allowance at the rate of 15 percent to a manufacturing company that invests more than Rs. 100 crores in plant and machinery which has been a long-standing demand of the industry. However, this allowance has been abused by companies to reduce tax burdens and hasn’t served to boost manufacturing. Once again, Finance Minister P. Chidambaram, has managed to bring a great balancing act to the table.
Formulators of the budget have followed a do-no-harm approach wherein they have not taken drastic steps to better the current economic scenario but at the same time have done no harm to it either. Then why did the stock market fall? The answer lies in the fact that the budget aims at taxing gains from foreign investments which acts as a disincentive to investors.
In the 2012-13 fiscal year, the government spent Rs. 60,000 crores less than planned. This cut in spending was not in subsidies but in capital spending (infrastructure, machinery, etc.) which took its toll on growth rate. The paradox of the presented budget is in the fact that instead of consolidating this fall in expenditure, it indicated increasing public spending faster than what the economy’s nominal growth rates permit. The switch from austerity to recklessness is due to the national elections that will take place in 2014. The approach taken by P. Chidambaram has been a cautious one dealing with the political challenge of Congress remaining in power in the upcoming elections next year. Thus, from a political perspective, the budget seems to be appealing.
A microcosm economy is like a family. Just like every household, an economy needs to manage its expenditure and revenue flows. Simply put, a budget is an estimate of revenue and expenditure over a set period of time. In this article we aim to understand the key components of the budget for the coming fiscal year (2013-14) put forward by the Government of India.
A budget is always planned keeping in mind certain economic objectives. One major objective of the Indian economy is to reduce its fiscal deficit. A fiscal deficit occurs when a government spends more than it makes. The fiscal deficit currently stands at 5.2 percent of the GDP. A central issue contributing to the rising deficit is increasing subsidies on items such a fuel, fertiliser and food.
A deficit in the budget obviously has to be financed in some way. One way is to sell bonds or promissory notes to borrow money from national and international investors. However, with rating agencies like Standard and Poor’s downgrading Indian bonds, this preferred option becomes difficult to exploit. Note however that a fiscal deficit isn’t all bad. If the government is spending money to subsidise items, it increases productivity of civilians and consequently growth of the economy. However, this also increases incomes for people and demand for goods which invariably contributes to inflation. Thus, a trade-off exists between economic growth on one hand and inflation on the other.
The Union’s budget for this fiscal year aims at bringing the deficit down to 4.8 percent of GDP to avoid adverse consequences. For this purpose, the budget aims at reducing subsidies on fuel by one third of its current amount while increasing that on food. The government also aims at switching over to cash transfers instead of direct subsidies. In order to increase revenues the government plans on undertaking disinvestments (or selling public sector undertakings) amounting to Rs. 55 thousand crores. Tax evasion will also be better checked which would contribute to government revenues. Another route considered to increase revenues was to pull up excise duties (taxes on domestic sale and production) to 14 percent. However, a tax on production will translate into higher prices on final goods which will put off potential voters for the Indian National Congress. Thus, the plan has been shelved for now.
The budget has left the spending on poor, minorities and scheduled caste/tribes untouched. Prices of jewellery and home loans have been slashed and income-tax reliefs for job market entrants and fresh entrepreneurs have been increased, making it appealing to women and the youth. A special bank set up for women entrepreneurs is a novel step. At the same time, the wealthy have been subjected to new taxes. The ‘rich club’ of 42,800 people who earn over one crore rupees per annum will pay approximately 34 percent of their income as tax. In addition, luxury items such as expensive mobile phones, cars and yachts will be taxed more.
While agriculture helped India’s balance of payments in the last year increasing exports worth Rs. 138 thousand crores, this year’s budget allocation for this sector was just a paltry Rs. 27,049 crores. Even today, agriculture is the largest employer in the unorganised sector of India’s economy and undoubtedly demanded more attention, especially on research. The ambiguity of the budget structure continues in the infrastructure sector. Having had lakhs of crores earmarked for this sector, efficacy of resources seems questionable as none are allocated toward water resource management, which not only would help farmers but also industry by means of power generation.
No large economy can become truly developed without a robust manufacturing sector. The budget proposed to provide an investment allowance at the rate of 15 percent to a manufacturing company that invests more than Rs. 100 crores in plant and machinery which has been a long-standing demand of the industry. However, this allowance has been abused by companies to reduce tax burdens and hasn’t served to boost manufacturing. Once again, Finance Minister P. Chidambaram, has managed to bring a great balancing act to the table.
Formulators of the budget have followed a do-no-harm approach wherein they have not taken drastic steps to better the current economic scenario but at the same time have done no harm to it either. Then why did the stock market fall? The answer lies in the fact that the budget aims at taxing gains from foreign investments which acts as a disincentive to investors.
In the 2012-13 fiscal year, the government spent Rs. 60,000 crores less than planned. This cut in spending was not in subsidies but in capital spending (infrastructure, machinery, etc.) which took its toll on growth rate. The paradox of the presented budget is in the fact that instead of consolidating this fall in expenditure, it indicated increasing public spending faster than what the economy’s nominal growth rates permit. The switch from austerity to recklessness is due to the national elections that will take place in 2014. The approach taken by P. Chidambaram has been a cautious one dealing with the political challenge of Congress remaining in power in the upcoming elections next year. Thus, from a political perspective, the budget seems to be appealing.
A very good article indeed! Very nicely worded, compiled and presented. Appreciations to the authors! Last para matters a lot.
ReplyDeletea) Whereas food exports have brought in FE, including cash crops like cotton, please calculate/deduct the subsidy provided in the form of electricy, taxes, fertilizer, pesticide, seeds etc. Do we make net plus or minus? There has been no attempt to reduce subsidies!! (b) Whereas there has been attempts to hike fuel prices, there has been little attempts to curb automobile production - which is consuming the same; instead we are hiking capacities and production. There have been little attempts to improve public transport system!!(c) To hike the revenue - FM is arranging to sell assets. This anyone can do. We dont need him. There has been no attempt positive to improve growth of economy. Instead they are talking politics. (d) Biggest expense is the Government expenditue. What are the steps taken to cut Government expenditure like salaries & wages, free travel allowances,etc? (e) There has been no concerted efforts to improve performance of railways -which could spin max money in logistics comparing trucking. Should there not be an attempt to privatize logistics via railways? Sea way logistics could be a great spinner. Some of the older naval ships can be converted to reduce the cost b/w western coast & eastern and hence FE for fuel(f) Lot many attempts are made to bring in foreign investors. Why FI and FII? Mittal is investing outside and so is Mahindras! Tatas spend more outside than inside! Ambani goes to USA with 4 Bil. Birlas buy Canadian and Egyptian assets. Why not take steps to make our Indian investors invest in India first?? (g) Corrupt schemes like NREGA etc flourish to make some select special rich and super rich! WHy not stop or modify? (h) FE outflow has been mainly in the account of 1. OIL 2. GOLD 3. COAL 4. Fertilizer inputs. Could you identify any salient points in the budget - to curb these things in a significant way - except for some partial dressing! (i) India imports 150 Mil MT of coal every year, wheres with our inventory which our mother earth has donated us, we can feed the world for the next 50 yeras. Why not privatize Coal India? Why allow private traders to mint money in coal trading & importation?? (j) India has been exporting iron-ore - especially a big company in the west - so much that if allowed freely, they will go to the core of the earth, whereas Indian companies were running at lower capacity utilization due to shortage of iron-ore. Why not study the profits made by these companies and increase loyalty? Same is applicable to coal mining? (k) If you take rich companies like Tata, Birla, Ambani, Essar, vedanta, Jindal - etc, they all have become rich, by plundering mother earth - which belongs to you & me. Why few are becoming flithy rich and others are yeaping and blinking? What is Government's take? What have they returned in PROPORTION??(l) Energy shortage is the main reason for reduced growth in manufacturing. What is PC's budget telling us as the catalyst? Are they coming up with more Nuclear reactors? When are they going to use Thorium as a fuel, which is available in plenty? (m) Has there been any statement on inter-linking of river project - Which Dr APJ Kalam was beating about? None bothers about it, though crores could be saved using cheaper logistics? (n) Why PC has not talked about alternate forms of energy - especially hydrogen car, electric car etc - and allotted good money for research in the much needed direction?
Altogether, it is a sloppy budget, that came from a Harvard Alumini, whose hands & mouth are tied against political bigwigs! Afterall PC has to survive politics! This Government is spineless and hence lack creativity.
It is our duty to remember Shri Narasimha Rao now, under whose PMship, Dr Manmohan Singh Could perform. If not for him, you & me could not have seen this growth! Credit has been stolen and given to Dr Singh!