The 2014-15 budget : A step in the right direction

Dr Damodar Nepram *

The 2014-15 budget had created a stir among all sections of the society partly because it was the budget of a new government with a new vision and partly it had the majority mandate in the last election which would enable it to take hard economic decisions. The budget was presented at a difficult time as the economy has been facing slow growth and rising prices or stagflation in technical terms.

It deserves accolade as a deeper look into it reveals that it aims to tackle both the problems and infuse a sense of hope among the common man and the industry of a rising real income and employment in the near future. To fully appreciate the wisdom of the new budget let us briefly dissect the causes of the current malaise inflicting the Indian economy and the prescribed remedial measures.

Causes of low growth and inflation

America experienced the so called 'bursting of the housing bubble' starting in 2007 sending shockwaves in the form of spiralling recession not only to its economy but around the world as well. This is because most developing countries generate a significant proportion of their national income by exporting goods to the richer countries of Europe and America.

After a few years when the recovery was in progress the euro zone crisis emerged due to unsustainable public spending of some countries. Public expenditure in European Union (EU) countries is generally high as to meet the so called EU standard of public service but many of them had gone in excess with borrowed money and were falling into the debt trap. The recovery has been slow and painful with a drastic cut in public expenditure which has contractionary effect on their economies.

Any public finance textbook would prescribe an expansionary fiscal policy or increase in public expenditure especially in infrastructure projects to check the slow growth of the economy. But the Government of India neither has the money nor the capacity to borrow. Its borrowing capacity is restrained as its deficit is already high and has also failed to meet the so called Fiscal Responsibility and Budget Management Act (FRBMA) targets due to high committed expenditures. The fiscal responsibility law was enacted in the year 2003 and lays down that, inter alia, the government will wipe-out revenue deficit and will bring down the fiscal deficit or borrowing to 3 percent of the GDP or national income and also limit salary expenditure to 35 percent of the revenue expenditure net of interest and pension expenditures.

The next issue is on the question of using money in the right direction. A number of schemes such as the implementation of the Sixth Pay Commission recommendations, MGNREGA, SSA, food subsidy, etc. have been implemented by the former government. The schemes have helped the working class and the poor to tide over the harsh economic difficulties.

On the other hand, these programs are also said to be waste of money. Pay rise failed to increase productivity and a well known economist had even called it a transfer payment, a term used in economics to denote free payment just as old age pension, scholarship for students, etc. Another flagship program for the previous government, i.e. MGNREGA is plagued with lot of criticisms while the subsidy schemes have been criticised for poor targeting resulting in huge wastage of money. Expenditure on these items did add up to a staggering amount of money.

Another problem afflicting the Indian economy is high inflation though it has marginally come down from the 2009-10 level. Inflation not only hurts the common man but it has a detrimental effect on the economy. It is a hidden tax and discourages savings as its value diminishes over time while it encourages consumption and hoarding of unproductive assets like gold, real estate, etc. The Economic Survey 2013-14 published by the Ministry of Finance blames food inflation as the main cause of inflation in the country. There has been recent spurt in inflation caused by increasing fuel prices also.

Remedial measures

The new economic budget aims to infuse growth from different directions. First, it has reduced income tax and excise duty of some goods. The income tax slab can be divided into four, viz. the first two lakhs, the second three lakhs, the next five lakhs, and finally more than ten lakhs. These tax slabs are taxed at 0 %, 10%, 20 % and 30 % respectively.

The first tax slab which is taxed at 0 % is to be enhanced to 2.5 lakhs. On the other side, there have been reductions in the excise tax on electronic items, textiles and a number of consumer items. The twin steps, one an increase in the disposable income of the people and the other reduction in taxes levied on useful commodities will definitely help in increasing demand for goods and revive the industry.

The second major step is the attempt to increase the savings of the country which has gone down over the years by increasing the income tax rebate for savers which the government has been giving from Rs. 1 lakh to Rs. 1.5 lakhs. Saving is vital in the economy as all investments will have to come from savings and without investments there cannot be higher economic growth. Even if one takes loans from banks also it is the savings of others.

The biggest source of savings comes from the people the size of which is over one billion. The small savings of individuals when added up can be large and if it is translated into higher investment can have larger income generation through the multiplier effects. The government also plans to step up investment on its own and also by encouraging public private partnership and foreign direct investment in infrastructure development.

Another welcome information is the aspiration of the government in having another green revolution. There is a saying that India lives in the villages and a good harvest of the millions of farmers can spur economic growth by boosting demand for consumer items.

The government aims to tackle inflation head on by encouraging the private sector to invest and produce more goods and services. On the other hand, the government aims to cut down fiscal deficit by reducing expenditure on various government welfare programs by targeting only those which genuinely need them.

The idea of bringing the revenue account deficit to zero means that no loans will be used to finance revenue account expenditures or the so called unproductive expenditures like salaries, pension, interest, administrative expenses, etc. Whatever loans incurred subject to a limit of 3 % of the GDP will then be used on creating assets or reducing public debt. This will bring about an improvement in the quality of public expenditure.

Manipur in the budget

Economic liberalisation in the country has accentuated economic disparity and the north eastern states have lagged behind. The main hurdle in the region is the infrastructural bottleneck. Some schemes have been cited in the budget for the development of the region. However, the people of Manipur would have loved the mention of specific schemes for the development of road and power sector in addition to the setting of the sports university.

Conclusion

A central government budget differs from the budgets of the state governments in many ways. It is mainly concerned with macroeconomic issues like growth, distribution, inflation and others which generally affect the entire country. The current budget has mentioned programs for steering the economy in the right direction which can culminate in growth and prosperity in the near future.

It aims to tackle the problem of low growth and inflation by taking time tested classic textbook steps like giving of more purchasing power to the people, creation of better infrastructure, targeting of subsidy, etc. Most important of all, the idea of a second green revolution in the country is most refreshing. Three months have already passed in the current fiscal year and the current budget is for a period of nine months only. Its strategy will be severely tested in these coming months.