The Sensexís fall of 144 points yesterday was a mirror of the individualís sentiment. At one end his/her income has been reduced and at the other taxes have been increased.
Taxpayers in one word are furious. The anger is partly due to the tax burden increasing but more so because there has been no effort to increase the tax base. What is ironic is the fact that when the Finance Minister talked of a security surcharge Gujarat was burning. (Read More)
Apart from the taxation what will likely hit the individual will be the lack of investment avenues. The administered interest rates have been cut by 50 basis points (0.5%), dividend taxes have been reintroduced for the individual and the investment RBI bond has been capped at Rs 200,000. Where does the investor invest when he is looking for safety? Probably, with the UTI.
The rate cut could have been done with the view of discouraging the individual from saving and thus, increasing consumption. This in turn would generate demand for the industry that has been ailing. However, things might work just the other way round. With investment income coming down and tax incentives going up people might save more money to earn the same amount of income. Therefore, in such a scenario saving would be encouraged and less money would go into consumption.
From the economist perspective it is a very bold budget and significant number of essential steps have been taken. The industry benefits as a consequence of the rate cut. This is because the cost of capital will come down eventually. And if it has to compete at a global level this will be a key enabler. Undoubtedly, investments will be attractive if the cost of capital is lower. But this is not the only factor that creates a climate for investment. A more critical factor is demand. Will the budget boost demand? If no, then will industries expand? If this does not happen what is the advantage of giving a benefit for depreciation?
What is commendable is that the government has thought of tackling the problem of high interest rates and biting the bullet. It would have been very easy to look that other way and postpone the rate cut, which is politically incorrect. The governments in the past have followed this policy. The finance minister has also decided to lay off 12,000 of the 45,000 estimated excess staff in the central government. This is something that was previously unheard off. The government has also taken steps to control subsidies that are one of the major cost heads and greatly responsible for the worsening fiscal deficit situation. Time and again the government has made it clear that it is concerned about the fiscal deficit and its control is a top priority.
However, the most positive aspect of the budget is the focus on infrastructure. This is something that the government has thought of with a vision, the multiplier effect will be seen a few years down the line. Central Plan outlay for roads and highways has been increased by over 27% to Rs 121bn.
Steps like these will undoubtedly bring in benefits but are quite sometime off. Thus, the government at the risk of becoming unpopular has chosen to tackle issues that need urgent attention. It will not be long before the middle class India learns to live with the pinch. It always has. It has to pay for the corruption, profligacy and sheer negligence of the critical issues by the governments in the past. Unfortunately, there is no other way out. What is even more disastrous is that after years of sacrifice when the time will come to reap the benefit a change of guard will undo all the good that has been done. And middle class India will continue to watch helplessly.