SOME THOUGHTS ON THE UNION BUDGET 2014-15

Posted on July 31, 2014 by administrator

Prof. Rudra Sensarma

By Prof. Rudra Sensarma

While the Finance Minister (FM) said it is a directional budget, the opposition called it a directionless budget! Here I try to identify the directions that the budget proposals provide so that we have an idea of what we can expect from this government in the coming months or years.The FM has promised higher growth and lower inflation. The economist’s demand-supply model says the only way to do it is to shift the supply curve to the right.

Fiscal deficit — the FM went along with the previous government’s much maligned numbers. Perhaps he did not want to upset the rating agencies and international investors but took it as a challenge to contain the deficit. But he has to cut revenue deficit while continuing with capital expenditure, if he wants to achieve his growth-inflation objectives.

Taxes — the FM put more money in the hands of income tax payers by raising exemption limit (from Rs. 2 lakhs to Rs. 2.5 lakhs) and extending investment limits under 80C and in PPF. Less than 3% of Indians pay income tax, so this won’t be inflationary but has spread some good cheer around. Coverage of service tax was extended.On taxes, the real challenge is GST on which the FM promised results soon. DTC was also promised.

Liberalization — FDI limits were raised in defence and insurance. PSU banks were promised more autonomy. In future, expect more divestment, FDI liberalization and especially PSU bank restructuring (mergers, stake sale, dual class shares) as Basel 3 requirements bite.

Subsidies — will become more targeted. That is why the government wants to continue with Aadhar. MNREGA will also get more focused towards asset creation. Focus is clearly shifting from demand (spending) to supply side (utilization).

Infrastructure — smart cities, scientific warehousing, ports, highways, new IIMs and IITs. Banks have been allowed to issue bonds outside of regulatory restrictions (CRR, SLR) for the specific purpose of lending to infrastructure and affordable housing sectors. Housing sector got additional boosts (REITs, higher deduction limit on interest on home loans, relaxation of FDI norms).

Proof of the supply curve pudding is in its execution. Infrastructure building and asset creation will take time but are the needs of the hour. Overall, the FM may have under promised. One hopes he will over deliver.

Rudra Sensarma  is an Associate Professor of Economics at IIM Kozhikode