The Pay Commission’s recommendations for a general increase in the pay packages of government officials needs to be welcomed for five good reasons. The first is that it comes after a lag of about 10 years, during which time the cost of living has risen substantially—at an average of 6-7% per annum based on the CPI. Private sector employees see a big increase in their pay packages every year. The average increase of 40% for state employees is quite modest at just 4% per annum, which when discounted by 10 years would be even lower.
The second reason is that all such pay increases add to the purchasing power of people and help to stimulate demand. While there are roughly 4.5 million central government employees directly covered (which means around 20 million people), the same would also apply to varying extents to the state government staff. The growth momentum can never be sustained by merely providing more purchasing power to the same set of people, which has been the case in recent years with the private sector cornering most of the gains of rapid economic growth. Broadening is a must.
The third reason is related to the second. By increasing the purchasing power of a large segment of the middle class, we are actually reducing the disparity between the rich and the not-so-rich. This helps in upward social and economic mobility.
Fourthly, by reducing income disparities between the private and public sector, responsibilities are matched better with compensation. After all, the CEO of a public sector enterprise or civil servant who has 1,000 people reporting to her should be paid equivalently.
Lastly, by raising salaries even at clerical levels and for policemen, the level of corruption in the government will come down at the margin, even allowing for habitual corruption.
Now let us look at the criticisms that have been levelled against the report. The first line of attack has been that it offers a carrot but not a stick. But, if one looks at the private sector and juxtaposes this with what is being debated in the aftermath of the subprime crisis, a different picture emerges. Does the same apply to the private sector in India or elsewhere too? In the financial sector, for example, it has been seen that CEOs often get their rewards in the form of exaggerated bonuses and stock options when business goes up. When the chips are down, bonuses are never negative, and they do not even get the pink slip. The Pay Commission has been transparent with pay packages, unlike the translucent rewards system in the private sector. In fact, in owner-driven Companies, things are even more opaque.
The other concern has been the fiscal deficit. The private sector tends to look at the Budget as a corporate P&L. But this should not be the case. The government needs to carry out certain programmes and needs staff to implement the same. Therefore, ideally these essential expenses should be removed from the Budget or treated separately so that interest payments, subsidies and so on come after the net income of the government is calculated—analogous to the concept of EBDIT in corporate parlance. If this is done, then a more balanced view can be taken of the impact of this pay hike on the fiscal deficit.
There are, however, some issues that could have been addressed by the Pay Commission. The first relates to retirement age. Very often, senior civil servants retire but return in the form of consultants and carry on till the age of 70, if not more. This should have been capped. More could also have been done to retain talent fleeing to private sector prospects. Or else, the government may still be left holding only the “lemons”. .
Friday, March 28, 2008
Wednesday, March 26, 2008
CTT to bleed commodity traders. Economic Times 27th March 2008
The Budget for FY09 has introduced two measures that would affect the working of commodity markets. The first is the commodities transaction tax (CTT) and the other is service tax. All new taxes naturally hurt the taxed entity, but when it can upset the trading applecart then it is more serious. The CTT is to be 0.17%, which is around five and half times the charges being imposed by commodity exchanges on the transactions. The ostensible reason is that since the market is well developed, it can be brought on par with the securities market with a similar tax rate being imposed. The immediate response has been one of umbrage as prima facie it appears that the traders would see a positive disincentive in trading in this market. How can this affect trading? The peculiarity of the market is that basic liquidity is created by day traders or jobbers, which in turn attracts hedgers and speculators. The jobber rarely holds on to the position for long and would move out as soon as possible. In fact, they would normally look at the minimum variation in price, which is in their favour and would offset the transaction to make their profit. They are not the thinkers, who look at the fundamentals and then take trading calls. Now the price movements in case of the commodities, especially agriculture, is extremely low. The tick size of contracts is as low as 5 paisa for copper, soy oil or mustard and 10 paisa for castor or 20 paisa for gur. Intuitively it can be seen that these jobbers would be putting in their orders at these minimum price variations. These price spreads are very thin here, given the nature of the commodities and the markets. Under normal conditions, when there are no harvests or harvest news in the air, price movements would be minimal and this tick mark would be relevant for traders. Given the uncertainty in waiting, the jobber would be reluctant to hold on to any position for a longer period and would exit with this minimum price movement. The new cost being imposed would make him rethink. This is juxtaposed with the profit that can be made by the trader/jobber by trading this minimum lot size when the price moves up by the tick size, which varies between commodities. The same can be ballooned up for multiple contracts when the quantity traded is larger. To evaluate the cost impact, the service tax impact, though marginal, has been added to the CTT cost. The service tax is assumed to be imposed on a service charge of 0 .01%, which is imposed in the market on an average by brokers. The option for the trader is to either wait for a better tick price change or exit at a loss. The former is always an option, but given the nature of the jobber, it may not be too attractive as one is carrying a higher risk of adverse price movement while waiting. It would make sense to move out of the market, rather than take the risk or make a loss. The repercussions on the market would be felt in case the lower participation of this class leads to declining liquidity that can impact the participation of other players who may not find it too attractive as liquidity dwindles even though they operate with a longer-term view in mind. This would affect liquidity, particularly in the less liquid commodities and even the liquid ones in the off-season periods. It is not surprising that the commodities market is dissatisfied with these twin measures, where the CTT in particular does not get an offset benefit and accounts for over 90% of the new-cost burden.
Monday, March 17, 2008
The Levy is based on wrong assumptions: Financial Express 17th March 2008
The commodities transaction tax (CTT) makes fiscal sense as it is being imposed on a turnover of around Rs 40 lakh crore, which leads to the garnering of Rs 680 crore in revenue. But all new taxes need to be targeted meaningfully so that individual sectors are allowed to grow and meet their objectives. In this case, it is price discovery, especially for hedgers, which will ultimately lead to the inclusion of farmers in the stream of benefits.
The CTT has been imposed on the market based on two assumptions that are debatable. The first is that the market is mature and has come of age. The other is that it needs to be put on par with the securities market. The commodity futures market is now four years old and has followed a fairly rough path in the last two years. There was a ban on trading in four major agro products in 2007, which had pushed the market back by years. Farmers in Punjab had actually protested in favour of futures trading, which had offered them vital price clues in 2006 and 2007.
Liquidity has since then been more or less stagnant in this market and the size is around 20% of the securities market. In fact, there would have been virtually no growth in total traded volumes in FY08 over FY07. Presently, the market caters to the retail segment and corporates with participation coming from commodity brokers in particular. Due to institutional reasons, farmers are out of the ambit and while the exchanges, along with regulator FMC, are struggling to make this happen, the drying up of liquidity will make the job that much tougher.
This, in fact, leads to the second issue of whether this segment is comparable with the securities market. The securities market has been in existence for a much longer time and with the emergence of both NSE and Sebi in the mid-nineties can be said to be nearly a decade-and-a-half old. The array of instruments available is diverse--from cash, futures, options, indices, spreads and so on. The players are diverse, with mutual funds, foreign portfolio investors and hedge funds playing their roles. This diversity of players and instruments has added certain buoyancy to the market today.
Further, present tax laws are skewed in favour of the securities Markets. In this segment, players are allowed to set off losses from trading in futures against... profits from other business. Besides, there is also differentiation between short-term capital gains and long-term capital gains, with long-term capital gains being exempt from taxes. With these facilities not available to the commodities Markets, there appears to be an implicit doubling of the tax burden.
Therefore, to say that the market is mature or analogous to the securities market is not true. The consequences of this tax for the market are more serious. When members are trading on low spreads, this tax becomes serious and would come in the way of traders. In fact, exchanges are presently charging between Rs 2-3 per lakh of transaction, and the CTT comes to Rs 17 per lakh of trading. Hence, the pricing structure of this tax appears to be out of sync with the market mechanics. This, in turn, will reduce the levels of liquidity as the cost of trading increases, which will have a ratchet effect on the market.
Presently, there are a large number of hedgers in sectors such as edible oils, sugar, jewellery, steel and other metal products, spices and pulses. There are several other corporates in the textiles, metals and machinery sectors, which are seriously considering hedging on these platforms. Lower liquidity and the tax will certainly not inspire them.
The Budget appears to be ambivalent in its approach towards the farmers. On one hand it has decided to waive Rs 60,000 crore in bad debts. On the other hand, it is taxing the instrument that has delivered as of now limited results in terms of price discovery and information for farmers, but which has the potential to change their income streams in the future. There does appear to be a contradiction here. As Ayn Rand wrote: “Contradictions do not exist. Whenever you think you are facing a contradiction, check your premises. You will find that one of them is wrong”. Here, there are two premises, and both of them may be incorrect.
The CTT has been imposed on the market based on two assumptions that are debatable. The first is that the market is mature and has come of age. The other is that it needs to be put on par with the securities market. The commodity futures market is now four years old and has followed a fairly rough path in the last two years. There was a ban on trading in four major agro products in 2007, which had pushed the market back by years. Farmers in Punjab had actually protested in favour of futures trading, which had offered them vital price clues in 2006 and 2007.
Liquidity has since then been more or less stagnant in this market and the size is around 20% of the securities market. In fact, there would have been virtually no growth in total traded volumes in FY08 over FY07. Presently, the market caters to the retail segment and corporates with participation coming from commodity brokers in particular. Due to institutional reasons, farmers are out of the ambit and while the exchanges, along with regulator FMC, are struggling to make this happen, the drying up of liquidity will make the job that much tougher.
This, in fact, leads to the second issue of whether this segment is comparable with the securities market. The securities market has been in existence for a much longer time and with the emergence of both NSE and Sebi in the mid-nineties can be said to be nearly a decade-and-a-half old. The array of instruments available is diverse--from cash, futures, options, indices, spreads and so on. The players are diverse, with mutual funds, foreign portfolio investors and hedge funds playing their roles. This diversity of players and instruments has added certain buoyancy to the market today.
Further, present tax laws are skewed in favour of the securities Markets. In this segment, players are allowed to set off losses from trading in futures against... profits from other business. Besides, there is also differentiation between short-term capital gains and long-term capital gains, with long-term capital gains being exempt from taxes. With these facilities not available to the commodities Markets, there appears to be an implicit doubling of the tax burden.
Therefore, to say that the market is mature or analogous to the securities market is not true. The consequences of this tax for the market are more serious. When members are trading on low spreads, this tax becomes serious and would come in the way of traders. In fact, exchanges are presently charging between Rs 2-3 per lakh of transaction, and the CTT comes to Rs 17 per lakh of trading. Hence, the pricing structure of this tax appears to be out of sync with the market mechanics. This, in turn, will reduce the levels of liquidity as the cost of trading increases, which will have a ratchet effect on the market.
Presently, there are a large number of hedgers in sectors such as edible oils, sugar, jewellery, steel and other metal products, spices and pulses. There are several other corporates in the textiles, metals and machinery sectors, which are seriously considering hedging on these platforms. Lower liquidity and the tax will certainly not inspire them.
The Budget appears to be ambivalent in its approach towards the farmers. On one hand it has decided to waive Rs 60,000 crore in bad debts. On the other hand, it is taxing the instrument that has delivered as of now limited results in terms of price discovery and information for farmers, but which has the potential to change their income streams in the future. There does appear to be a contradiction here. As Ayn Rand wrote: “Contradictions do not exist. Whenever you think you are facing a contradiction, check your premises. You will find that one of them is wrong”. Here, there are two premises, and both of them may be incorrect.
Monday, March 3, 2008
Chinks in the Armour: Hindustan Times 4th March 2008
The important question to ask after viewing the provisions of the Union Budget for 2008-09 is as to what is wrong with it. We must look beyond the goodies and the answer must steer clear from the usual clichés that are heard such as non-reduction of certain taxes or surcharges or the introduction of new taxes. After all, if the FM has to garner revenue in some form or the other, somebody has to pay for it.
The significant observation on the Budget is that since this is a pre-Election one, the proposals are laced with propaganda on the success of the ruling UPA government. The problem issues have been tackled head-on, which is good. However, a very myopic view has been taken of things as a result of which five anomalies arise in this budget.
The first is the loan waiver scheme. This is analogous to the ‘loan mela’ schemes in the eighties where loans were perforce disbursed by banks on account of political considerations. Now, banks have to write-off loans to the tune of Rs 60,000 cr. The first issue here is that it sets a bad precedent for future defaults. Borrowers may be tempted to default every 5 years when Elections approach knowing fully well that the government will bail them out. The second is that we need to know as to who will bear this cost. The government has clarified that the burden will be spread over 3 years i.e. banks will be reimbursed by the government. However, the write-offs will take place this year itself. This means that these loans, which are around 2.7% of total bank credit, will be written off with the burden of adjustment also falling on banks. Assuming that Rs 20,000 cr is reimbursed every year, banks have to bear the opportunity cost of not having Rs 40,000 cr of funds to lend at the PLR of 11% which works out to Rs 4400 cr in the second year and Rs 2200 cr in the third year. While the act of saving the farmer is gracious, the result of banks’ losing out does not make banking sense. If the entire amount was reimbursed by the Budget at one shot, then it would have been okay.
The second problem with the Budget is the Pay Commission. The Report will be out by the end of March, and the proposals will then get incorporated. Clearly, there will be no compromise on the recommendations given that the class of government officials is very important elite which matters at the time of Elections. The fiscal numbers are bound to get distorted further and maybe when it comes for final discussion, these numbers will slip in when the Parliament meets.
Thirdly, there have been liberal doses of benefits for the farming community in terms of expenditure on water, soil etc. This is good enough to placate the farmers. However, while admitting that agricultural growth has been a stumbling block this year, the FM should have typically taken a longer term view of things and had concrete plans to raise productivity in wheat, oilseeds and pulses. But, this has not been done as the focus has been very short term. Therefore, the development aspects are missing from the Budget while catering to the immediate requirements.
The fourth problem has been the reaction to the commodity markets. The market, which is in a nascent stage is already faced with the problem of a ban on futures trading in 4 commodities. The FM has imposed the commodities transaction tax which will be a burden on the players. Their withdrawal from the market on account of this burden could mean that the price discovery process would be affected. Therefore, instead of growing this market, which is handicapped today with one single instrument and only retail and corporate participation, the tax will be a dampener.
Fifthly, there are liberal allocations for Bharat Nirman, rural roads, plantation industry etc. However, what would be more pertinent there is the administrative issues of implementation. This becomes important here because while monetary allocation targets are met in these cases, the same does not hold true here.
Now let us look at the pure economic variables. The FM has admitted that growth is lower this year, but the Budget has no clear strategy for spurring growth. In fact, it is assumed that growth will be there at 10%. The few changes in the excise and customs rates will not have a major impact on consumption to start a growth chain.
Further, inflation has been stated as being a concern. If one were serious on inflation, the agricultural plan should have been on, as mentioned earlier, as food along with oil prices have been mainly responsible for inflation in the last two years. The Budget has not addressed this issue. Besides, the Budget has implicitly assumed an inflation rate of 5% for the next year (15% growth in nominal GDP which will mean 10% in GDP and 5% inflation).
Lastly, the Budget gives confusing signals on interest rates. While the fiscal deficit is down, there will be less pressure on the available liquidity in the system. The government has implicitly assumed a marginally higher interest rate of 6.4% this year with interest payments (Rs 190,000 cr) well exceeding total borrowings (Rs 145,000 cr). This is indicative of the fact that notwithstanding the signals that will be given to the RBI, it may be difficult to lower interest rates in the coming year.
The significant observation on the Budget is that since this is a pre-Election one, the proposals are laced with propaganda on the success of the ruling UPA government. The problem issues have been tackled head-on, which is good. However, a very myopic view has been taken of things as a result of which five anomalies arise in this budget.
The first is the loan waiver scheme. This is analogous to the ‘loan mela’ schemes in the eighties where loans were perforce disbursed by banks on account of political considerations. Now, banks have to write-off loans to the tune of Rs 60,000 cr. The first issue here is that it sets a bad precedent for future defaults. Borrowers may be tempted to default every 5 years when Elections approach knowing fully well that the government will bail them out. The second is that we need to know as to who will bear this cost. The government has clarified that the burden will be spread over 3 years i.e. banks will be reimbursed by the government. However, the write-offs will take place this year itself. This means that these loans, which are around 2.7% of total bank credit, will be written off with the burden of adjustment also falling on banks. Assuming that Rs 20,000 cr is reimbursed every year, banks have to bear the opportunity cost of not having Rs 40,000 cr of funds to lend at the PLR of 11% which works out to Rs 4400 cr in the second year and Rs 2200 cr in the third year. While the act of saving the farmer is gracious, the result of banks’ losing out does not make banking sense. If the entire amount was reimbursed by the Budget at one shot, then it would have been okay.
The second problem with the Budget is the Pay Commission. The Report will be out by the end of March, and the proposals will then get incorporated. Clearly, there will be no compromise on the recommendations given that the class of government officials is very important elite which matters at the time of Elections. The fiscal numbers are bound to get distorted further and maybe when it comes for final discussion, these numbers will slip in when the Parliament meets.
Thirdly, there have been liberal doses of benefits for the farming community in terms of expenditure on water, soil etc. This is good enough to placate the farmers. However, while admitting that agricultural growth has been a stumbling block this year, the FM should have typically taken a longer term view of things and had concrete plans to raise productivity in wheat, oilseeds and pulses. But, this has not been done as the focus has been very short term. Therefore, the development aspects are missing from the Budget while catering to the immediate requirements.
The fourth problem has been the reaction to the commodity markets. The market, which is in a nascent stage is already faced with the problem of a ban on futures trading in 4 commodities. The FM has imposed the commodities transaction tax which will be a burden on the players. Their withdrawal from the market on account of this burden could mean that the price discovery process would be affected. Therefore, instead of growing this market, which is handicapped today with one single instrument and only retail and corporate participation, the tax will be a dampener.
Fifthly, there are liberal allocations for Bharat Nirman, rural roads, plantation industry etc. However, what would be more pertinent there is the administrative issues of implementation. This becomes important here because while monetary allocation targets are met in these cases, the same does not hold true here.
Now let us look at the pure economic variables. The FM has admitted that growth is lower this year, but the Budget has no clear strategy for spurring growth. In fact, it is assumed that growth will be there at 10%. The few changes in the excise and customs rates will not have a major impact on consumption to start a growth chain.
Further, inflation has been stated as being a concern. If one were serious on inflation, the agricultural plan should have been on, as mentioned earlier, as food along with oil prices have been mainly responsible for inflation in the last two years. The Budget has not addressed this issue. Besides, the Budget has implicitly assumed an inflation rate of 5% for the next year (15% growth in nominal GDP which will mean 10% in GDP and 5% inflation).
Lastly, the Budget gives confusing signals on interest rates. While the fiscal deficit is down, there will be less pressure on the available liquidity in the system. The government has implicitly assumed a marginally higher interest rate of 6.4% this year with interest payments (Rs 190,000 cr) well exceeding total borrowings (Rs 145,000 cr). This is indicative of the fact that notwithstanding the signals that will be given to the RBI, it may be difficult to lower interest rates in the coming year.
Pareto Optimal Budget Scenario: FE 1st March 2008
The Budget resembles a Pareto optimal situation, where no one is worse-off while some people are better-off. And yet, after all these displays of benevolence, the numbers read very well with a lower fiscal deficit number in absolute terms as well as a ratio of gross domestic product (GDP). This sounds just too good.
If tax rates are being cut almost across the board, and only a few irritants have been ushered in by the finance minister—like the hiking of short-term capital gains tax in the capital market and introduction of a commodities transaction tax along the lines of the securities transactions tax introduced earlier—they should not really matter if the big picture looks good. The FM has based his approach on the one used last year, when a buoyant Economy helped push up tax revenue on both the direct and indirect taxes fronts to ultimately bring down the fiscal deficit to 3.1% of GDP.
In fact, P Chidambaram has reiterated that a simple tax structure with better administration and compliance can deliver good results. Now, the big question is whether or not the good growth numbers witnessed today will be the same in 2008-09.
By the FM’s own admission, there is a slowdown in industry, and since this will be the fulcrum for future growth, there is a big gamble being taken. The approach appears to be based on the tenets of the famous Laffer Theory, where lower taxes and more incentives lead to higher tax collections based on buoyancy.
But, can we be sure of this?
Evidently, this is a wager being taken, as the FM has not been parsimonious with his expenses and there have been liberal doses of expenditure that have been doled out to poorer sections, which is welcome, of course.
It appears to be a case of the FM chalking out his expenditure and then assuming collections based on an optimistic growth scenario. Given that this was the last Budget before general elections, there appeared to be no other way out.
It may be pointed out that these principles of supply-side economics have worked well in the past, albeit only periodically. It cannot be a continuous policy, though, as has been witnessed in the past. In fact, even in the US and UK, where this theory first originated in the early 1980s, it was not found to be sustainable.
So, what do we see here? First, individuals are... happy because they pay less tax. Corporates should not be unhappy, as their rates have not been affected, even though they were hoping for the surcharge to be removed. In fact, some industries have got the benefits of customs and excise cuts. Some minor FBT cuts have been announced to placate them. The capital market will be ambivalent—but then, it is always so, since it has become a habit. The corporate bond market is to be given a boost, which will be good, especially with currency futures also getting the government’s nod, with equal emphasis on credit derivatives and bond Markets. This means that the old cliché of a moribund debt market may no longer hold.
On the other side, Indian farmers must be happy that their loans are being written off and they can still get new loans. There are enormous allocations for education, health, rural infrastructure, etcetera, which if implemented well can only have positive results. A new PDS system is being experimented within a couple of states, which if successful will set benchmarks for others. The focus is completely on financial inclusion, which is a handy slogan that can be taken to the pulpits next year with these Budget numbers. The threshold for taxing the smaller services has been raised, which keeps another group out of the tax net.
Let us see who can be affected adversely on account of the Budget. The banks are still not sure if the Rs 60,000-crore loan waivers will push them back (the sum is certainly quite large), but the immediate sentiment has been negative. The nascent commodity Markets would receive a setback because of the new transaction tax, which, combined with service tax, will push them back a few years and probably lead to the grey market flourishing.
Now, while the economic survey had spoken a lot about controlling inflation, which was presented as a downside risk, the Budget has actually skirted the issue, probably because it is more in the domain of monetary policy. But the high unbridled growth assumed by the finance minister here is likely to be accompanied by significant inflationary pressures, and given that our investment rate too is expected to be over 36%, one can see a demand-pull spiral being triggered. If this happens, it could have an unintended impact on interest rates. The RBI will have to stay on high alert
If tax rates are being cut almost across the board, and only a few irritants have been ushered in by the finance minister—like the hiking of short-term capital gains tax in the capital market and introduction of a commodities transaction tax along the lines of the securities transactions tax introduced earlier—they should not really matter if the big picture looks good. The FM has based his approach on the one used last year, when a buoyant Economy helped push up tax revenue on both the direct and indirect taxes fronts to ultimately bring down the fiscal deficit to 3.1% of GDP.
In fact, P Chidambaram has reiterated that a simple tax structure with better administration and compliance can deliver good results. Now, the big question is whether or not the good growth numbers witnessed today will be the same in 2008-09.
By the FM’s own admission, there is a slowdown in industry, and since this will be the fulcrum for future growth, there is a big gamble being taken. The approach appears to be based on the tenets of the famous Laffer Theory, where lower taxes and more incentives lead to higher tax collections based on buoyancy.
But, can we be sure of this?
Evidently, this is a wager being taken, as the FM has not been parsimonious with his expenses and there have been liberal doses of expenditure that have been doled out to poorer sections, which is welcome, of course.
It appears to be a case of the FM chalking out his expenditure and then assuming collections based on an optimistic growth scenario. Given that this was the last Budget before general elections, there appeared to be no other way out.
It may be pointed out that these principles of supply-side economics have worked well in the past, albeit only periodically. It cannot be a continuous policy, though, as has been witnessed in the past. In fact, even in the US and UK, where this theory first originated in the early 1980s, it was not found to be sustainable.
So, what do we see here? First, individuals are... happy because they pay less tax. Corporates should not be unhappy, as their rates have not been affected, even though they were hoping for the surcharge to be removed. In fact, some industries have got the benefits of customs and excise cuts. Some minor FBT cuts have been announced to placate them. The capital market will be ambivalent—but then, it is always so, since it has become a habit. The corporate bond market is to be given a boost, which will be good, especially with currency futures also getting the government’s nod, with equal emphasis on credit derivatives and bond Markets. This means that the old cliché of a moribund debt market may no longer hold.
On the other side, Indian farmers must be happy that their loans are being written off and they can still get new loans. There are enormous allocations for education, health, rural infrastructure, etcetera, which if implemented well can only have positive results. A new PDS system is being experimented within a couple of states, which if successful will set benchmarks for others. The focus is completely on financial inclusion, which is a handy slogan that can be taken to the pulpits next year with these Budget numbers. The threshold for taxing the smaller services has been raised, which keeps another group out of the tax net.
Let us see who can be affected adversely on account of the Budget. The banks are still not sure if the Rs 60,000-crore loan waivers will push them back (the sum is certainly quite large), but the immediate sentiment has been negative. The nascent commodity Markets would receive a setback because of the new transaction tax, which, combined with service tax, will push them back a few years and probably lead to the grey market flourishing.
Now, while the economic survey had spoken a lot about controlling inflation, which was presented as a downside risk, the Budget has actually skirted the issue, probably because it is more in the domain of monetary policy. But the high unbridled growth assumed by the finance minister here is likely to be accompanied by significant inflationary pressures, and given that our investment rate too is expected to be over 36%, one can see a demand-pull spiral being triggered. If this happens, it could have an unintended impact on interest rates. The RBI will have to stay on high alert
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