Budget 2008-2009 - A Bird's Eye View
Kiran Dhanwada
Budget 2008-2009 (hereon referred to as the Budget) was eagerly awaited after a very structured and thought-out Railway budget. This was supposed to be one last shot for P.Chidambaram (hereon referred to as P.C) to present a dream budget. With the impending general elections next year, public consensus pointed towards a more populist budget – and P.C presented exactly that. Aim for the middle-class and agriculture, rest of them can take a backseat till next year.
Here is my view of some of the salient aspects of the budget –
1) Smart Moves –
a) Tax Holidays – IT industry seems to be disappointed with no news on extension of tax sops beyond 2009. Maybe it’s only me – but why does an industry which has enjoyed 10 years of tax sops, contributes around 4% of GDP and has matured to an extent where it can compete with global firms on an equal footing require tax sops? P.C has conveniently and rightly ignored this set of players – they better pay back to the nation what they have received all these years; enough of announcing terrific profits, the basis of which is the taxpayer’s money.
However, tax holidays were rightly extended to hotels and hospitals – the tourism industry needs a boost immediately (what with the Commonwealth games coming up) and if hotels can pass on the benefits to the consumers (which they will, provided enough competition is present) – tourism would take off in the positive direction. Healthcare needs huge investments, and if India is going to have the right provisions in place for the future for a substantial older population in years to come – the foundations have to be laid now.
b) Finance – Increasing the short-term capital gains from 10% to 15% will immediately put off many traders who already operate on razor thin margins – thus contributing to lesser volatility in the markets. The STT has also been given a provision of being treated as a deductible expenditure. The banking cash transaction tax has been abolished (thank god! I didn’t know why it was introduced in the first place – why should I pay tax to withdraw my own money?!) However, the tax relief on medical insurance (limit increased to Rs. 30000 on Section 80D – 15k for the individual, 15k for his/her parents) though being beneficial to individuals is a huge setback for the insurance sector. Clarifications regarding reverse mortgage was more than welcome – the product had really not taken off with the older population, simply because the tax liability on the monthly income received was unclear. This budget has announced that there would be no tax liability on the income received in case of reverse mortgages – a move hailed by both the banking sector and the older population, and rightly so.
2) Dumb Moves:
a) Rs 60000 cr debt write-off to farmers who have less than 2 hectares – I can understand a populist budget, but if it is costing the taxpayers money to the tune of Rs. 60000 cr without any clear delivery mechanism, it’s clearly a dumb move – P.C very well knows it, political pressures demanded this move. One of my biggest peeves at this move is that genuine farmers who have repaid the loans have been made to look like fools. Secondly, it will take a huge toll on the banks if they have to write entire loans off their books. The banking credit system for rural areas is still maturing and this move will only make banks to impose stringent credit-lending rules for the rural areas (thus creating a vicious cycle – no lending, farmers commit suicide etc.). Thirdly, most of the small farmers (<2 hectares) borrow from money-lenders who charge usurious interest rates – this move clearly does not address this set of people who are the majority.
What I don’t understand is why should the farmers be stuck at the ‘sustainable’ level? Why should the govt. not provide enough avenues for farmers to look beyond mere sustainability? There could have been multiple ways to handle this issue in a more competitive way. The govt. could have announced a zero interest regime for these loans, they could improve the delivery mechanisms of transporting the produce of the farmers to fetch a better price, improved the commodities market for the farmers to have a transparent look at the prices and expectation of the market and many many more. Populism or the illusion of populism – this move clearly benefits the middlemen more than it does the farmers. If history is anything to go by, any govt. who has announced a populist budget has never been re-elected.
3) Cat-on-the-wall moves:
There were some announcements whose effect I think would be felt only after a few months – and these have been termed as Cat-on-the-wall moves.
a) IT exemption increased – The personal IT exemption has been increased from Rs. 1,10,000 to Rs 1,50,000 for males, Rs 1,80,000 to females and Rs. 2,25,000 to the retired. Widely hailed by the salaried class that the Finance minister has finally considered the biggest taxpayers in the country, this increase in exemption also seems to be a populist move. Although I directly benefit out of this move, I am actually skeptical how far it would work. Yes, it would leave more disposable cash in the hands of individuals, which in turn might fuel inflation (the other way to look at it is that it would pep up the consumer durables sector) and this in turn would lead to increase in interest rates, stunting growth. India is supposedly very unique in tinkering with its Income tax slabs every other year – other countries hardly touch these slabs. Only time will tell – whether the effect of this move is positive or negative and two, will the govt. in 2009 sustain these levels?
b) Decrease in excise duty for small cars: Increase in personal tax slabs combined with decrease in excise duty for most of the consumer durable goods and small cars is like adding fuel to the fire. It is indeed beneficial to the individuals concerned, but what effect does that have on the economy? RBI is sure to increase its monitoring on inflation after this move.
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