Free Press Journal

Union Budget FY17: No good news for the household


The Budget was high on expectations with the general feeling being that there would be a stimulus for the economy the Keynesian way so that we would have the government play the role of engine of growth. But this was not to be as the government has actually pulled two birds from itshat.

First it shocked the market by sticking to the FRBM path and announcing a deficit ratio of 3.5% for the year. Analysts were talking of 3.7% or 3.9% depending on their own theoretical inclinations.

Second, it has spoken of higher allocations in infrastructure especially roads and the rural economy which when combined with the railway expenditure plans, would be quite a handful. While this may be debated at the esoteric level, the question is what is there for the common man?

For a household which has been neck deep in inflation which has cumulated to around 30% in the last three years, what is important is disposable income. Here the Budget falls short and does not offer much solace to the income tax payer.

An amnesty has been provided to tax evaders, but the honest household in the service sector, which cannot escape tax, does not really get anything from the budget. Ideally the income tax exemption limits as well as tax slabs should be linked with inflation to provide a natural cover. This has not been done in any way.

Further, the avenues for savings have not been widened which was called for considering that the financial savings rate in the economy is coming down. One may also remember that the small savings are going to earn less income from interest in the new financial year which means that there will be less incentive here too.

Add to this the fact that deposit rates have been coming down; there will be little comfort for the common man in the service sector. It is possible that there could be gravitation to gold under these circumstances as financial savings become less relevant.

Surprisingly no additional incentives have been provided to the housing sector which has been the focus of previous budgets. It looks like that the era of giving incentives or benefits to the middle class is over or has taken a break for now.

At the same time, the various changes in the tax and duty rates will lead to higher prices for several products, which will add to the CPI price inflation. Therefore, there will be less relief for the households even though the impact will not be very high – but it will be in the upward direction. One should hope that the monsoon is normal or else there could be a replay of the inflation story in FY17. Hence, there is little for the common man as such.

However, in the rural areas there would be more employment opportunities as the government spends more on irrigation, NREGA, roads etc. This will help to strengthen the rural economy which will provide some additional purchasing power. This can be an idea for the corporate sector to tailor make their products for such markets so that sales can be pushed up.

This can be useful during the busy season in propping up sales growth. Also the crop insurance allocation should be implemented with several awareness programmes being held to educate farmers of the use of the same. Presently a large number of farmers are not aware of such schemes and hence are not able to derive much benefit from the same.

The other aspect of the budget which affects the public is the subsidy bill. The three main subsidies, food, fertilizer and fuel have been reduced marginally which indicates the further rationalization of the same by the government.

While it has been announced for fertilizers, the same may be extended to food and other fuel products in course of time. The message is that a large part of the middle class may be moved out from these subsidies which is a loss for these households at a time when neither their disposable incomes are increasing or savings avenues widening.

The interest subsidy or subvention would be higher which fits in with the theme of furthering the interest of farmers. The lower income households on the other hand would be net beneficiaries with the government also planning to provide for LPG connections to 150 lkh households at state cost.

Hence, on the whole the budget may not quite bring a smile to the middle class, which does get left out often from all programmes. With a definite rural bias, and a virtual neutral approach to the corporate sector, the budget does work on bridging the difference between the rich and the poor. Piketty surely should be pleased here.

(The view expressed are personal of Madan Sabnavis, Chief Economist, CARE Ratings)