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Sunday, Dec 15, 2019

There can be no economics without politics

The most radical step in this budget is the proposed loan write-off for marginal and small farmers, writes Uday Kotak.

india Updated: Mar 01, 2008 03:01 IST
Uday Kotak
Uday Kotak

Just as there is no such thing as pure politics, pure economics belongs to the realm of utopia. In real life, we live in the framework of a political economy. Hence there can be no politics without economics and no economics without politics. Politics takes precedence over economics when you present a budget just before an election year. Chidambaram could not have avoided that. He has therefore done a balancing act.

Economic well-being of a state and its people is based on continued growth, price stability and equitable distribution. When all are under threat, corrective steps are needed. The most radical step in this budget is the proposed loan write-off for marginal and small farmers. The amount is almost 30 per cent of the total agricultural loans outstanding in the banking system which ultimately will be paid for by the exchequer which is all the people who pay taxes whether income tax, excise or customs duties. It is moot point to debate whether this is achieved through write-offs or through tax concessions, since directed write offs run the risk of moral hazard.

The current threats to the India Story come from inflation, slowing of growth and drop in consumer demand. The present budget tries to deal with all these threats. Firstly, when faced with global inflationary pressures, it makes economic sense to drop excise duties and customs duties selectively. The investment demand needs to be kept in tact through continued commitment to encouragement for capital formation through domestic and foreign savings. Of the three sectors, farm out put is the single largest contributor to sluggishness in growth. The commitment to keep Rural credit at 2.8 lakh crore from current levels of about 2 lakh crore, promises to keep investments in that sector high. Thirdly, the increase in income tax slabs gives substantial savings to the upwardly mobile middle class. The benefits are large enough to revive the demand for housing loans and encourage consumption. The focus in these three areas will help us to overcome the threats coming from global economic slow down which is the caution part of the optimism Chidambaram has talked about.

Further, rationalisation of dividend distribution tax is a positive. All in all, in the context of pre-election constraints, a fair balancing exercise.

( Uday Kotak, MD, Kotak Mahindra Bank, is writing exclusively for HT on provisions for the auto industry)