With three successive years of high inflation, a typical household would have been wishing for some adjustment in the tax rates which would help increase the disposable income. The budget does not deliver on this score and has kept the tax rates and limits unchanged. This would have come as a disappointment for individuals. The implication is that if this had been done and households had got more money for spending on non-food items, it would have created a self-fulfilling demand for consumer durable goods, which have been afflicted by low growth for the last 3 years. In the current scenario, this may not materialize immediately.
Given that there could be some increase in prices of commodities since the excise rate has been increased uniformly through an additional cess, there would also be an upward pressure on the prices. The railway budget has already added to freight costs, which will get reflected in higher prices of food items to a certain extent. The budget says that on account of all the proposals on indirect taxation, the government will be collecting around Rs 23,300 crore, which will finally come from both corporates and households, depending on how much of this enhanced cost is passed on. Looked at from this point of view, there is reason for households to feel dissatisfied.
However, the budget does give compensation in the form of higher incentives for savings, especially in insurance and pensions. There is reason to migrate households to having greater cover for health through insurance and the higher limits serve this purpose. Further, by encouraging them to save in the pension schemes, there is a move to make individuals more self-sufficient in old age by providing for the rainy day from now itself.
Therefore, the interests of households have just about been balanced. So, should the common man be happy? On the balance yes, though there will still be some dissatisfaction in terms of not getting tax benefits. Ideally the tax exemption limit should be linked with inflation so that there is an automatic tendency to increase the same when inflation rises.
The budget does focus on growth through public expenditure and this is what would be of interest for the economy as we are targeting growth of over 8% in FY16. Such expenditure needs to be incurred from the beginning and not kept pending for the end of the year which has been the case in the past. Last year, if the plan and non-plan expenditure was combined, the revised number indicated a cut of around Rs 35,000 cr which was done to ensure that the fiscal deficit target of 4.1% was achieved. Quite clearly we need to get out of this syndrome. If this were done, then government expenditure in infra will provide the backward linkages with the rest of the economy by setting in motion a virtuous chain that will feedback into the cement, steel, capital goods etc. sectors.
It does appear that the government is keen to kick start the growth process and would begin spending this money on infra projects which will be good for the growth process. Given the limited fiscal space that was available to the FM, an attempt has been made to do the best with focus more on increasing the savings habit and spending money where it can generate growth and hopefully employment, rather than cutting taxes and giving away freebies. This does appear to be the ideology of the government which focuses on making money work better. To this extent it is pragmatic.
(The Writer Madan Sabnavis is the Chief Economist at CARE ratings)