A Tinker's Budget instead of a Thinker's Budget! - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
A Tinker's Budget instead of a Thinker's Budget! A  A  A

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3 MARCH 2008

With enough resources at his disposal one would have expected a Harvard educated, erudite, Finance Minister to have presented a thinker's budget, laying out his vision of India's future and providing the funding to set onto it. In the end, all he did was tinker around. His effort is to get the maximum number of votes for his party, using Government coffers.

The biggest item on the Budget was the Rs 60,000 crore for waiver of loans to farmers. There is no denying the human tragedy that is wrought by farmer indebtedness and the need for any responsible democratic Government to address it. But has Chidambaram addressed the cause of the problem or has he simply provided a temporary solution?

Think of it as a doctor who gets a patient losing enormous amounts of blood through haemorrhaging. He would first give a blood transfusion (Rs 60000 crores in this case) but, after the patient stabilised, would find out the cause of it and provide a treatment to prevent a recurrence. PC has done the former but there is no thinking on the latter. A tinker's budget.

What is the root cause of continuing farmer indebtedness. Chidambaram should have asked two questions. One, are Indian farmers less productive (yes, they are) and if so, what could be done to improve their productivity? Two, do Indian farmers get less for their produce (yes, they do) and if so, what can be done about it?

There are a myriad reasons for low productivity, including fragmented land holdings that cannot support the mass of people living off the land. If they were provided education, and jobs near their villages with public transport to reach them, they could earn much more than they do toiling in the field. Spending on education, even though raised, is pitiful nor has the Finance Minister thought about how to use technology for rural education. Through things like distance learning, with the teacher sitting in a nearby town or city and providing, through satellite, education in the village. A tinker's budget, not a thinker's one.

Rural road connectivity is abysmal. Even the much tomtommed and fully funded, golden quadrilateral project is just over 90 % completed so rural connectivity takes a back seat. This not only prevents children from getting an education, and later, jobs, but it also leads to a criminal (30%) loss in transit of fruits and vegetables.

The second question: are Indian farmers paid less? Yes, they are. Agriculture supports 60% of the population but gets 18% of the income. Terms of trade for agriculture are unfavourable; urban voters are more voluble during elections. State Governments put all sorts of silly restrictions on movement of agricultural goods, which erodes competitiveness and gives farmers a raw deal. Tackle that, Mr Chidambaram!

The Finance Minister has not mentioned, nor provided any outlays for, rural roads, nor has he stated how farmers will start to get a better deal. In this, perhaps the private sector may provide some sort of solution. Companies like ITC, Reliance Retail etc are working to find solutions to give better prices to farmers for produce, and to pay them instantly, by eliminating some layers of middlemen.

The waiver is also, rightly, criticised for the moral hazard. It is applicable only to those in default end Dec 07 who have not paid till end Feb 08. Those who had behaved well by paying in the two months are thus disadvantaged. Next time they would consider being in default longer. Banks which gave such loans may also be tempted to relax in scrutiny in the hope that problem loans would be taken care of by the Government. Perhaps it is likely that a good chunk of the loans may not be those of genuine farmers, but those well connected and well informed. That would be an even worse tragedy.

The other big item is a 2 % cut in cenvat. This should help reducing the cost of goods and, combined with the larger amounts of disposable income after he has raised exemption limits, ought to lead to a surge in consumption.

For investors the Finance Minister has behaved like Brutus. When introducing the STT (Securities Transaction Tax) he had, to make it acceptable, promised to make short term capital gains taxed at a moderate 10% and long term not taxed at all. Having got STT accepted and generating a heck of a lot of resources, he now reneges on his side of the bargain. First, his minions in the IT Department artificially and arbitrarily decide who is an investor (qualifying for lower taxes promised) and who is not (treating the gains as business income, taxed at a higher rate). Being purely an arbitrary decision, this is very beneficial to the assessing officer, perhaps more so than to the Government. A thinker would have tackled this by doing away with arbitrariness. Lay down specific time periods and corresponding tax rates. If held for under 3 months, pay 25%; 3 to 6 months, pay 20%; 6 m to a year pay 10%. Fair enough. Everything is clear and in black and white. Introduce arbitrariness and it is less white. Is that the intention? If not, think of the consequences of such folly.

The Railway Budget was, in fact, better and evidence that more thought was put into it. The Economic Survey was even better! In fact, had the Economic Survey been the Union Budget the market may well have shot up instead of shooting down. And, had the Economic Survey been the Common Minimum Programme, India would already be running at double digit GDP growth rates!

Besides, the way this Rs 60,000 crores will be provided is also not clearly spelt out. It is expected that, like oil bonds, it will be an off balance sheet item. The Government will provide banks with bonds maturing say 5 years later, thereby leaving it to a future finance minister to pay for the drinks at this party. If these off balance sheet shenanigans of the Government are considered, one doubts whether there has been any significant improvement in the fiscal situation. We seem to have only postponed our problems. Not a thinker's budget.

The market is likely to move sideways for a few months. If the Government starts to implement any sensible measure there would be political hell to pay from the Left; hence it is quite likely that it would call early elections this year. The Budget has also made no mention of the increased liability on account of the 6th Pay Commission which is expected to boost its wage bill by 25%.

To pay for all this the Government will resort to increased borrowing, which will drive up interest rates.

Last week the BSE-Sensex went up 229 points to end at 17578. The NSE-Nifty closed at 5223, up 112. It should move in a trading band of around 16000 - 18000 or so for some time.

Have you read the latest Honest Truth by Ajit Dayal?

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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