Tuesday, March 4, 2008

Union Budget and Economy

The union budget 2008-2009 is out and the newspapers have got ample fodder to keep the nation (and some parts of world concerned with India's economy) busy over the next couple of days. They will be examining each and every word of finance minister's speech from different angles and come out with vastly different conclusions trying to predict the future course of the country. At least one out of these many predictions will turn out to be true which they will call their ability to predict accurately. If at 10 a.m., I predict that it will rain tomorrow and then at 10:10 a.m., I predict it won't rain tomorrow. Now, day after tomorrow, I will tell you "see how good I'm at predicting the behavior of clouds" (note I made both predictions, either of which is bound to be true) and I know you won't ask me questions about the prediction which didn't turn true (do you ask your newspapers). So, the media have been debating whether the FM has pushed India backwards with increased fiscal deficit (how much is again a matter of debate) or ushered into a new era of reduced tax but still higher revenue collection and growth. And this mindless debate will continue as long as there are mindless viewers trying to find out a conclusion and as long as there are advertisers. I haven't gone into the nitty-grity of the bill, but to me one thing is clear that finance minister has tried to achieved three things by doing three things. Three things he tried to achieve: 1. Keep inflation under control. 2. Keep GDP growth intact. 3. Enhance vote bank for the next election. Three things he did: 1. Reduced excise duty (tax levied on locally manufactured goods). 2. Reduced direct income tax. 3. Donated generously Rs 60,000 Cr to garib kisan. The first thing, reduction in excise duty in myriad of manufactured/packaged goods is aimed at keeping inflation in check. This in conjunction with recent decrease in rail freight rates may have some effect on prices of manufactured/packaged goods, but major contributes of inflation are commodities which are on fire due to (may be) huge money moving from equities to commodities. Moreover, it is the agricultural commodities and perishable food items prices of which affect the public in general and prices rise of which are shown on TV, hence affecting the vote bank. I'm uncertain about how far the duty cuts will influence the prices of these sensitive goods. Secondly, the reduction in income tax rates has left anything between Rs 5000 to Rs 45000 in the pockets of Indian middle class, the informed voter. It will have two ramifications: 1. To save Rs X of income tax, on average one has to invest Rs 3X in tax saving instruments. A significant part of this money that the nation invests to save tax will now be available for consumption. So, enforced investment (enforced by the need to save tax) which is probably the only investment most people in India make will be reduced to great extent. Bad time for tax-saving mutual funds, ULIPs, et al. 2. Local consumption will increase hugely. People will spend not only the amount saved in taxes but also which was supposed to be used for investment. Thirdly, the Rs 60,000 Cr. Most analysts and media didn't quite like this since they feel this is unnecessary waste of funds and will make rural borrowers "addicted" to this kind of generosities in the future. I'm assured that most analysts have no connection with the farmers and media is published from urban areas only and hence, they have little insight if any about farmers' plight. Unlike other government generosities, the chances of money being lost in transit is less likely. This is because of the fact that money has already been spent and government is paying back the credit to the financial institutions, who, I suppose, will perform far better in extracting dough from the ministry in comparison to unorganized masses, like tsunami victims, etc. I know lot many borrowers will still be required to pay the loan themselves and many who have paid back partially will be shown on papers as if they didn't. But more or less, farmers will now have renewed ability to borrow and to go farming. Basically, Finance Minister has virtually given gift coupons worth Rs 60,000 Cr to farmers as well as to all those involved in the process of distributing loan wavers, people in the ministry, babus in the bank, the middleman who reads the deed to the borrower, etc. And of course, they are going to buy stuff with these gift coupons hence increasing local consumption. With no credit to pay back, the garib kisan will have a lot more funds (as new credit though) to be deployed in fields in the form of farm input, i.e., fertilizers, seeds, pesticides, tractor. Results. Increased sale of farm inputs (local consumption) leading to better harvest leading to increase in GDP growth rate and stabilization of farm product prices (decrease in inflation). Also, don't forget that it will strengthen the vote bank too. So, the bottom line is that reduction in excise duty and income tax along with the gift to rural janta will ensure that economy gets a boost with hugely increased local consumption but at the cost of decreased savings and investments (are we becoming more like Americans). I'll be expecting better quarterly numbers from the companies serving the local economy in the third and fourth quarters of 2008-2009 since these are months when most of the investment is made and now that amount will now be diverted to mobiles, jeans, shoes, jewelry, and of course, chicken as well as better harvest. Now, you would say what about stock market; since the money is diverted from investment to consumption, stocks must take a dip. No. Investment for tax saving is a very small amount when compared to total domestic investment and tiny if you compare with FII numbers. On the other hand, investors (domestic or foreign) will be more interested in buying stocks with better earnings. Indian growth story (as they say in the media) continues....
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  1. sry for totally offtopic :p
    I have seen ur posts in archlinux forum.
    If ur from India,can u post here the arch mirror which u use ?
    I am new to archlinux,though NOT new to Linux.
    thank you :)
    also ur posts will be informative if u post in thinkdigit.com/forum opensource section.

  2. Prakash
    Hope u see this post here. I could have mailed u but ur email I dont have. However, for arch I use the default, that is US mirrors. I dont find any speed issues and hence left them untouched. However, you may use rankmirror to check the speed of mirrors and move the fast mirrors up. Any issues, you may post inthe forum. Someone will help.


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