Why India's budget is misleading

The key theme of this year's budget was supposed to be fiscal consolidation. We indians are good at making simple things complicated. So let us start by understanding the meaning of this term. The word fiscal consolidation is bombastic and misleading. A better and simpler term would be cutting the deficit.

Very broadly speaking, the deficit can be reduced in two ways: by cutting expenses and by increasing revenues. In general, a combination of the two approaches is needed to bring down the deficit. One approach alone may not be enough.

I was hoping that Mr Pranab Mukherjee would tell us how he was going to eliminate wasteful expenses incurred by the Government year after year. But it is quite obvious that he did not even make a semblance of an effort in this regard.

Instead, Mr Mukherjee chose the easy way out. He tried to increase the excise duty and brought more services under the tax net. At least, if he had remained focused on additional tax revenue mobilisation, we could have given him the benefit of doubt. Instead, he has actually reduced income tax for many people by widening the slabs. This is a gesture which benefits the richer members of the middle class ( including people like me) but is of questionable merit as far as the economy is concerned.

Mr Mukherjee has also further complicated things by announcing more tax exemptions. This is something clearly unwarranted when the Government has already committed itself in public to a new and completely overhauled direct tax code in about a year's time.

Last but not the least, the finance minister has made convenient assumptions that he will be able to raise plenty of non tax revenue through public sector disinvestment and auctioning 3G telecom licenses. Imagine a CEO of a loss making company at the Annual General meeting announcing to the assembled shareholders nothing whatsoever about how he will cut overheads and improve efficiencies. Only that he will cut losses next year by selling off the company's real estate/office space. What kind of reaction can he expect from the shareholders? It would be very surprising indeed if paper rockets were not thrown at him.

The puzzling point is that the stock markets have reacted favourably to the budget. And market reactions are often correct. There is only one explanation for this phenomenon. Those segments of the society who are active stock market investors seem to have benefited handsomely through the widening of the income tax slabs. An equally probable reason is that the stock markets had such low expectations from Mukherjee that they were relieved when they saw the budget proposals.

Watch out for more in my forthcoming posts.