Budget 2009

This is my review on budget. As everyone has said, it was for a man living on the street. And so elites easily dismissed this budget as timid and unimaginative. To be fair, man on the street has an equal right to live a good life as an elite. The bull run of 2005-2008 was not all-inclusive. The plight of common man wasn’t taken well care off. So, the government has allocated a large chunk of money to Rural Employment & Bharat Nirman schemes. Since, signs of monsoon don’t look good, government had to take this step. Large rural families, which depend on agricultural income will have extremely tough times this monsoon if MET dept. is to believed. SO it was necessary for government to address this issue in the right earnest. And I believe, by providing jobs to them, government has taken the right step.
Bharat Nirman scheme which is formulated to develop rural infrastructure is not just going to benefit rural India, but it will also provide a good opportunity to infrastructure, cement and steel companies. Government has allocated around Rs. 58000 cr to this scheme and so it should be seen as good business opportunity for steel and cement industry.
I do believe in one thing, if India has to prosper continuously, it is ‘must’ that majority of Indians prosper. And government is working in the same direction.
Government has taken a bold step in not raising Import duties, though it may not please corporate sector. India, along with China, is significantly large market for western countries. SO if we would have followed the protectionist policies, it would have hurt the western economies majorly. And since by now everyone has realised that decoupling theory is rubbish, it is imperative that developed economies get back on track for India to keep shining economically.
Tax cuts that government has implemented may help consumer product companies. Tax savings per individual after the budget would be very minimal. Its aroundRs. 1500 per annum for individuals who earn less than Rs. 10 lac and around Rs. 20000 for people who earn more. I personally don’t think that additional Rs. 1500 will change the expenditure pattern of an individual in a drastic way. It would have been better off if government would have collected this money and used it in a productive way. Its because multiplier effect is more pronounced when government spends rather than giving it to individuals. Also, scrapping of FBT will cheer up corporate world, instead now employees will have to pay the tax.
To fund the above mentioned expenditures, government will have to more borrowings. It plans to borrow Rs. 4 lac crore this year, half of which will be funded by RBI and rest through markets. This will have a negetive impact on rupee in a near term, as it will depreciate. Since India’s trade deficit is negetive, it could hurt even more. Markets fear that due to large borrowing programme of government, private secor would be crowded out. There would be an upward presure on interest rates. Even finance minister is aware of this and I am sure that steps will be taken to not let this happen. Even though FM has announced that proceeds from divestmentwould be just Rs. 1200 crore, he had said that everything cant be covered in a single budget speech. This can be taken as an indication that we may witness a significant amount of funds from divestment. Morever, there is still large amount of liquidity in the market and so I believe there wont be any liquidity crunchdue to government borrowings.
But government has to make sure that it lays the path for fiscal prudence. Out of every 1 Re. that government spends, 19 paise goes for paying interest. Therefore, its important that government reduces the borrowings which will result in using money more productively. Rating companies have already warned us about our loose fiscal conditions, and if we don’t mend it, it could badly hurt foreign investors.
Thus to conclude, government has provided the stimulus to economy at the cost of fiscal discipline. Government has been brave enough on this front. Reforms in insurance & banking sector and divestment will slowly follow. It is following keynesian theory of spending your way out of recession. And once economy starts improving, government can reduce its fiscal deficit. I believe that government has taken right steps at the right time.