Posted by: DD | March 3, 2008

Budget 2008-09 Diagnosed

“While he spoke, enemies waited to grab an opportunity to belittle him. When he finished, enemies sat confused whether to congratulate him for his success or find (hardly any) fault with what he presented.”

This scene was written, produced and directed by our FM, Mr. P Chidambaram. After he finished presenting Budget 2008-09 on February 29th, 2008, he became only the second FM to enter the enviable league of FMs who got the honor to present 5 consecutive budgets. The first one was Dr. Man Mohan Singh, our current PM.

The last budget of UPA government (for this term) was a clean hit. I would like to congratulate FM for his dexterity in striking a fine balance between a populist and progressive budget. This budget will not only earn UPA govt. huge number of votes in coming elections but also set the country on progressive path.

Writing off the debt of millions of farmers was a long demand of the opposition but FM always slipped to mention it in his previous budgets. And just when the BJP was planning to use this as their forthcoming election propaganda, FM, with skill of shrewd businessman, used it to tilt the result of coming elections hugely in his party’s favor, leaving BJP dumbstruck.

But the most important announcement that made me happy (and a ‘bit’ richer) was the change introduced in the Income Tax slab. This will not only leave middle and lower class with more money to spend but will in turn help the economic growth by spurring demand.

Having said so let me jot down some quick points that were highlights of Budget 2008-09. I’ll categorize them in positives and negatives as per my point-of-view.

Positives:

  1. Farmers debt of over 50,000 crores was written off. This serves two-fold purpose. First, it serves as an important measure to stop the chain-reaction of farmer suicide. Second, it (probably) earns for Congress huge amount of votes in coming elections.
  2. Revision in I-T slabs – This will leave every taxpayer richer any-where ranging from Rs 4,000 to Rs 45,000 depending on the income level.
  3. Excise Cut – under various categories will help reduce the cost of items in market and hence lead to growth in demand in turn fueling the growth of economy. The excise cut for small cars and 2-3 wheelers deserve special mention, leaving these vehicles up to Rs. 20,000 cheaper.
  4. Education Budget hiked by 20% with promises to open more IITs, IISc and IISERs. A welcome move but only if we can maintain the standards of the institution being referred to. IIT tag to an un-qualified institution can leave indelible mark on our heritage and renowned centers of learning.
  5. 5-year tax holiday to 2-,3-,4-star hotels to be built in districts with world heritage sites. Its impact will be again two-folds. It will increase tourism as well as infrastructure development.
  6. Increase in the STCG (Short Term Capital Gain) tax – is a blessing in disguise. Mainly targeted for stability and not for reform, this may hamper the day traders but will encourage the retail investors to stay invested for long term indirectly providing the stability to the insane markets.
  7. The 125% deduction on R&D outsourcing expenditure in Pharma industry is a welcome step to increase the competitiveness of local players before India opens its Pharma market.
  8. Apart from the Central Excise duty, the reduction in the customs duty from 7.5% to 5% will help the port development gallop fast steps towards modern ports. Shipping industry is the ‘next IT’ industry with huge growth and profit potential. This will allow the industry to have better technology and equipments at lower costs and will help modernization of the ports, roads, infrastructure and in turn, that of India.
  9. Defence budget allocation of just under 2% of GDP. This is a strategic area where we spend a lot. But I somehow feel that defence can get a bit less money and amount saved can be used for better purpose. We are in a greater need of better roads than better tanks. Our existing military strength is good enough to pose a great threat to our ‘forecasted’ enemy(ies). Lets try developing in house defence projects than spending on out-dated or ‘approximately’ out-dated technology from abroad, to which the counter and better version has already been developed. This will leave us dependent on upgrades from our suppliers again and again draining our much-required money.
  10. Tax exemption for parent’s medi-claim insurance premium up to 15,000. This move will boost the insurance sector, which lags way behind its should-be state in India. It will also be beneficial in long run, as today or tomorrow, we have to open our Insurance sector to foreign players. A head start to local players will not hurt anyone.

Negatives:

  1. The farmer debt waive off. I criticize this move as much as I praise it. What signal does FM wants to send by taking this step? Does he want to convey that being a cheat will be admired and rewarded by the government? What about those sincere and honest farmers who worked very hard and ate just one meal a day to repay the debt? They surely must have felt cheated. This step will only encourage unintended treachery and complacency in the farmers.
  2. Revisions in I-T slabs. This does leave me very happy but not without a hint of suspicion. Won’t the extra money in consumer’s hand fuel the inflation that the government is finding too hard to fight? Won’t this indirectly increase the demand and in turn the costs?
  3. Leaving the Telecom Sector almost untouched – is something which I would not approve of. With one of the most profitable and important sector in Indian economy, I was expecting the FM to rationalize the tax structure and hence allowing more players for better consumer services. In turn, 1% NCC duty may not have some negative effect but was uncalled for. I see it more as a means to generate some revenue after giving so much for free in other areas.
  4. Retail Sector misses the limelight yet once again. This is again something that disappoints me. With Indian consumer based expanding at such a vast rate, government needs to take steps to promote the retail market. We need to have expert local retailers having excellent supply-chain management systems, which will ensure farmers their fair dues and modern technology to produce things. With extra money in hand, after redefinition of I-T slab, Indian consumer would be raring to go. FM misses out on cashing on the opportunity he himself created.
  5. No clear road map for Infrastructure development. What came as the real shocker to me is how something of such huge importance and need of the hour has been totally neglected. FM tries to give the infrastructure a support thorough various indirect means as discussed above in points 5 and 8 of the positives, but he miserably fails to cast a clear blue-print of how will the advancement in this sector be achieved. Long has our manufacturing sector suffered at the hands of weak infrastructure. A big change should be in order.

One thing that deserves a special mention at this point is the silence of FM on the STPI scheme. It’s the scheme under which the IT organizations in India are enjoying the tax benefit for past 10 years since 1999. This comes to an end on 31st March 2009. PM chose to avoid this matter and buy more time to think about it. From my point of view, the scheme can come to an end as the IT industry has matured enough in India and is strong enough to take care of itself without much of government support. But considering the current Rupee appreciation and low performance of IT stocks, it might be prudent to extend the scheme for some years. That’s the reason I place this point out of the positive or negative purview. May be a win-win situation for both such as low initial tax-rate for IT organizations can be a viable solution.

All in all, a very balanced budget, keeping in mind that the elections are a footstep away. The FM has been successful in pleasing the 4 main voting banks that of farmers, students, middle class and the senior citizens with his gifts for every one.

By using his full spectrum of options to try and achieve 100% throughput, FM has done his best to hit 2 birds with the same arrow, birds being the valuable votes and economic progression of the country. Whether or not his arrow kills the ‘currently important’ bird (read elections) remains to be seen.

As it is said, the FM has won both – the Business of Politics and the Politics of Business.

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Responses

  1. very good

  2. @dharmendra
    thanks !! Hope u’ll visit again

  3. sir i read em all….give us somethin nu.. 🙂

  4. hey plz issue a pat to the “mother” of this blog..man she deserve’s it to push an iitian to blog!!!

  5. @Nilesh

    Thanks a ton for those nice words of appreciation.
    And yeah, she surely does deserve a pat 🙂


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