Net disposable income should improve across the board: Free Press Journal: 17th March 2012

Formulating the Union Budget was always going to be a difficult task given that the economy has not been faring that well and there have been numerous pressures on the FM to provide the right impetus to various segments of the economy.

Therefore, there are two sets of issues that need to be addressed here - the first relates to how it affects the lives of the common man and the other is whether it is able to address issues relating to the economy, which are more macro in nature.

The high inflation scenario in the last two years has actually brought down real incomes of households by between 15- 20%. Ideally one would have liked a direct adjustment to the tax exemption limit by the inflation number.

But as this is not possible given that the Direct Tax Code has already set the basic rules for the same. Against this background the budget has blown hot and cold. There are certain concessions given on the taxation front though the inflation potential is latent in the system. Net disposable income should improve across the board, though admittedly one would have liked to see greater concessions here.

The other issue, which has been a concern for households is whether or not they would get to save more through the provisions made in the Budget.

The present limits of Rs 1 lakhs for tax savings scheme and another Rs 20,000 for infra bonds did need to be revised both from the view of providing households with additional space here as well as getting in long term funds to support investment especially in infrastructure.

Therefore, the Budget has made some concessions here in terms of providing tax set offs in a new equity scheme. But, there have not been any big measures that would radically channel funds into various savings schemes.

The reason can be that the government has tried to lower the loss of tax revenue from any of its measures.

The third concern for individuals is, of course, inflation.

One may recollect that the government has as part of the fiscal stimulus in 2009 lowered the excise rates by 2%. There have been strong arguments that there should be a revision of these rates for both excise and service tax to 12% to mobilize more revenue as this would only mean reversing an earlier measure. The budget has raised the service tax, excise duty and customs duty which along with the higher freight rates announced just before the presentation of the Railway Budget will tend to put upward pressure on prices.

Presently it is not possible the gauge the impact of these price increases, though the direction is known.

The macro economic impact of the Budget is also very important considering that there have been slippages last year because the assumptions made at the beginning of the year did not hold. The sense that we get is that the government expects a higher growth rate this year which will enable them to increase the revenue collections.

The overall direct tax rate changes are to lead to a decline in collections while those on indirect taxes will increase revenue. There has been an earnest attempt made to control the fiscal deficit which is encouraging though admittedly we will have to see if the goals are translated into results during the course of the year. The number of 5.1% looks reasonable provided as all the conditions are satisfied.

In terms of reforms, the budget has made attempts to bring about greater investment in infrastructure and also address issues in agriculture.

Flow of funds to infrastructure would increase, though again admittedly this has to be persevered with over a longer period of time to actually generate tangible results. The latter is more through improving the flow of credit by putting a higher target for banks. The interest rate subvention at 7% will be useful for the farmers at a time when inflation has been high.

On the whole, the budget appears to be fairly balanced as it has tried to do whatever is needed to provide relief to the middle class as well as provide the right inputs to industry to expand further so that the growth process is also kept on track, which is finally important at the end of the day. One would have liked to have gotten more concessions - both individuals and corporates, but given the tight economic conditions and the pressure to enhance revenue; this was the best package that could be delivered.

Quite clearly other bodies such as the RBI and commerce, disinvestment, and agriculture department should follow up with appropriate measures to ensure that the budgetary impetus is sustained in the same direction.