Para 18 of the Budget refers to the spiralling food inflation in the country. One is well aware of the fact that the food inflation in recent months has indeed skyrocketed. (The reference to food inflation, which stands at approximately 18%, in para 18 of the Budget is perhaps straight out of some Dan Brown novel and his patented idea of remarkable coincidences). Readers may be cautioned that these are statistics put out by the Government of India. And statistics, as readers may note, are amenable to extraordinary manipulation, especially by the government. The reality of inflation, as the person managing the household would testify, is significantly higher that the “benign” claims of the Government.
It is in this connection the FM goes on to state “A major concern during the second half of 2009-10 has been the emergence of double digit food inflation. There was a momentum in food prices since the flare-up of global commodity prices preceding the financial crisis in 2008, but it was expected that the agriculture season beginning June 2009 would help in moderating the food inflation. However, the erratic monsoons and drought like conditions in large parts of the country reinforced the supply side bottlenecks in some of the essential commodities. This set in motion inflationary expectations. Since December 2009, there have been indications of these high food prices, together with the gradual hardening of the fuel product prices, getting transmitted to other non-food items as well. The inflation data for January seems to have confirmed this trend.”
Excellent diagnosis. Brilliant analysis. Candid approach. But when it comes to prescription the Budget speech waxes eloquence without providing anything substantial on how to deal with the extant situation. For starters the FM states “Government is acutely conscious of this situation and has set in motion steps, in consultation with the State Chief Ministers, which should bring down the inflation in the next few months and ensure that there is better management of food security in the country.” Nothing can be more hilarious than this. If consultation with the Chief Ministers can redress the situation, given the gravity of the food inflation prevailing in India, one suggests that this meeting should be held on a daily basis.
This humour is for starters and is retained further through the Budget. The tax proposals made out in this budget are bizarre, weird and actually “fuels” inflation. By increasing indirect taxes the FM seems to have taken an easy route to raise revenues for the government, perhaps little realizing that the indirect taxes are regressive and could have a direct impact on the finances of the poor in the country. Further, the increase in the customs duty on crude and Re one increase in Excise duty on petrol and diesel has calculated effect of further increasing the food inflation. Strangely the FM seems to have given a short shrift to his own diagnosis.
What is galling to note here is that the increase in indirect taxes on petro products has nothing to do with the increase in the international fuel prices, which has consistently shown upward bias in the past several months. The proposal to increase crude and excise duty are merely revenue raising measures. As and when the government decides to pass on the international oil price rise to the consumers, we may have to face another round of fuel price hike coupled with a bout of further inflation. This fuel hike in these days of spiralling food inflation is actually black humour.
In addition to the above, the burden of service tax on railway freight movement (estimated to yield Rs 6,000 crores annually) could further add to the inflationary pressures. Similarly the increase of Excise duty of 2% across the board could also fuel inflation. Over and above these proposals to hike indirect taxes, on the expenditure front, the FM has compressed revenue expenditure, more specifically the non-plan expenditure (RE for 2009-10 RS 641,000 crores Vs BE for 2010-11 RS 643,000 crores.) Given this paradigm, it is certain that the Aam Admi of the FM is surely not the 97% majority.
In direct contrast to the indirect tax proposals (which are aimed to garner revenues for the government), the direct tax proposals seem to have a number of indirect agendas. By significantly lowering direct tax rates, the Budget apparently provides succour to the three percent population that pays income-tax. While these cuts are long overdue it may be recalled that the entire bureaucracy has been visited with a substantial hike in their salary levels after the acceptance and subsequent implementation of the VI pay commission last year. Remember, what is good for the bureaucracy is always good for the country. Once the Indian bureaucracy felt pinch in their personal taxation, obviously they must have lobbied hard for effectuating substantial cuts in the direct taxes regime. And when they lobbied hard, they succeed easily. It would seem that the government wants to keep the bureaucracy happy for the rest of the term. Hence the tax cuts.
There is yet another logic to this largesse in direct taxes. According to the Budget papers the disinvestment target for the year 2010-11 is estimated to be Rs 40,000 crores. This is an unprecedented target which no previous budget has ever attempted to in the past. Naturally the FM must be keeping his fingers crossed on this score. But to achieve this target the Government requires a bullish stock market. A bullish stock market requires liquidity in the economy, people with purchasing power and of course people with willingness to buy stocks.
What better way to sustain the stock markets (at-least in its present levels) by empowering people with substantial amount of purchasing power effectuated through tax cuts? It is obvious that the government seeks to put money in the hand of those who can afford to invest in stock markets. In case they do not directly intervene in the stock markets and purchase shares, it is obvious that this very class of people will shop in sufficient numbers to ensure that this benefit is translated into the hands of corporate houses. What is good for the corporate houses is good for the Indian economy isn’t it?
No wonder the stock market has given a “thumbs–up” to the Budget. The cut in non-plan expenditure, proposal to hold the Fiscal deficit to approximately 5.5% (which in turn is aimed at ensuring enough liquidity is available within the economy for the stock markets) of the GDP and to offer steep cuts in the direct tax rates are all seen as an incentive to the stock markets. This fetish of pleasing stock markets and benchmarking the success or the failure of the budget to the rise and fall of the stock markets is a curse on successive Indian finance ministers.
In a country where less than two per cent of the population of the country is linked to the Stock markets and less than ten per cent of the national GDP directly linked to the stock markets, there is very little reason for the stock markets to be a representative index of the health of the national economy. The stock market can be an index of the national economic health like say in the US or UK but not in a country like India which still is run by the non-corporate sector. Strangely, this fundamental fact is lost on successive FM. Naturally their budgetary proposals are a squeal to this misunderstanding.