Not enough pocket money

The small changes in indirect taxes, introduced by the Finance Minister a week after the interim budget was tabled, are going to make at least a psychological difference on people’s pockets, writes Jayshree Sengupta.
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Updated on Feb 25, 2009 10:38 PM IST
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None | ByJayshree Sengupta

Finally, the much-awaited tax relief has followed the interim budget 2009-10. The small changes in indirect taxes, introduced by the Finance Minister a week after the interim budget was tabled, are going to make at least a psychological difference on people’s pockets. The UPA government can also feel reassured that it has done what it could, despite the disappointing initial verdict from the market and many corporate heads. But too much shouldn’t have been expected in the first place.

The interim budget is just an exercise to get the Parliament’s approval for certain expenditures that would help the government to function for the few months before the elections. In ordinary times, this year’s interim budget would have gone unnoticed. But since today there are dark clouds of global meltdown on the horizon, people expected substantial relief from the interim budget. It is true since lakhs of jobs are being lost and some sectors are witnessing hard times with orders being cancelled and inventories piling up. Unlike in many industrial countries, job losses are always traumatic for people in India because of a lack of social security for an average worker.

Now, after this third stimulus package, there is a hope that it would boost consumer spending (through a reduction in the service tax and excise duties of 2 per cent). Indirect tax cuts, when fully passed on, always benefit the consumers. Hopefully, many goods in the market will become a bit cheaper. The 2 per cent interest rate subsidy has also been continued to the affected export industries like textiles, gems and jewellery. Instead of giving sector-specific relief, the Finance Minister chose to give a fillip to infrastructural development.

China’s infrastructural superiority keeps it ahead of us during these recessionary times. Our exports have taken a big dip as a result of the ongoing recession but the Chinese are still cornering a bigger share courtesy their lower costs of production.

During the present hard times, when many in the unorganised and small and medium scale enterprises are facing closure and, as a result, many children are being withdrawn from school, Pranab Mukherjee has done well to allocate more money towards education and mid-day meals for children. Many schemes like the National Rural Employment Guarantee (NREG), which have proved their worth in the past, have been enhanced and Rs 30,100 crore have been allocated for it. But the moot question is will these schemes be properly implemented?

The macroeconomic problems facing the country are those related to slack demand, high import costs of raw materials due to the depreciating rupee, industrial slowdown (currently at a record low of 2 per cent) and low foreign exchange inflows into the stock market through FIIs and low FDI inflows. Sops offered to key inputs like steel and cement have made them marginally cheaper. But on the whole, instead of addressing all these specific problems, the Finance Minister has laid emphasis on the social sector and increased social expenditure. Much of the enhanced expenditure in various areas is responsible for the gaping fiscal deficit of around 6 per cent of GDP which rises to 13 per cent if you add the deficits of states. The new stimulus package will cost the government an additional Rs 29,100 crore in giveaways which translates into a large-scale borrowing by the government which could balloon further, given the industrial downturn and the low oil and petroleum prices that would impact on customs duty and excise duty collections.

It would be important to watch government’s borrowing as it may lead to higher interest rates and wasteful expenditure. Already, Standard & Poor, a rating agency, has revised India’s long-term sovereign credit rating to negative from stable. This could affect India’s investment profile.

The Finance Minister, perhaps, could have done more towards reducing the deficit if he could announce various tax proposals. But that onerous task will have to wait till a new government is at the Centre. Meanwhile, the cost of finance, namely interest rate, still remains high. People in need of loans are not getting them though there is plenty of liquidity in the market.

The Finance Minister has indeed hinted that monetary incentives are important. Action on the monetary front — a fall in interest rate, is now due but all the critical economic problems will have to be addressed by the new government in a full-fledged Budget 2009-10.

(Jayshree Sengupta is the author of A Nation in Transition: Understanding the Indian Economy)

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