The Ballot-Box Budget

CNBC-TV18's Managing Editor, Senthil Chengalvarayan - I sit to write this about two hours after the Finance Minister wrapped up his budget speech. In all that while I was at our news desk helping think up headlines. The one I liked best and the one that we are running with is "A Ballot-Box Budget". Now we are not being derogatory at all. In fact we go on to add that while industry has been left to largely bat on it's own, it will get a boost from all the consumption that this budget will unleash. But more on that later.

A Ballot Box budget, because clearly this is an election year budget, and I mean that literally. If the monsoons are okay we could well see an election in 2008. A loan waiver, an effective cut in income tax rates, the pay commission...it all adds up.

Now what do I think of the Farm loan waiver. Experts on television called it a Moral Hazard. A disincentive to the honest guy who repaid his loans. Well there is a point there. But we live in a real world. These loans would have never been paid back. And historically since the time the British ruled Indian there have been farm loan waivers every twenty years or so. We were due for one. The system is against the farmer, it is another matter that the politician who refuses to reform a tax system that prevents a common market for agri products and an efficient hedging mechanism is responsible for this system. But whatever the reason every few years a time comes when the burden of farm loans just gets too much. I would agree that in the long term the solution is not periodic waivers. It is a moral hazard. The long term solution is genuine Farm Reform, the setting up of cold chains, commodity markets, more micro finance etc etc. But till that happens the poor farmer is really that a poor farmer.

It's clear now, as I write this that Banks will not have to bear the burden of the farm loan waiver. It will come from the central kitty in some form. I would welcome a cash payout that would go into the calculation of the fiscal deficit and not as a bonds that will go under the line!! Whatever form it is good news for banks who will get money that would have largely been written off as Bad Loans.

That gets me to my next point. Just as that money brings liquidity back into the banking system, there are a number of other measures which brings liquidity into the markets, both the stock and the real markets. The cut in excise duties, the cut in income tax rates will all put more money into the pockets of Indian consumers. A rough back of the envelope calculations shows that a person earning Rs 40,000 a month or Rs Five lakh a year will save Rs 55,000 on Income tax. All of this will either be saved in a bank, spent on consumption or invested in the equity markets. All of which is good for corporate India. If it is saved it is more money in banks, and more money with  banks could eventually lead to lower interest rates, money invested in the stock markets will boost company values, and money spent on consumption will lead to greater demand. And there is more money in the pipeline to boost demand the sixth pay commission. So in a sense this budget is betting on growth...consumption led growth not investment led growth.

Another positive. A line that the Finance minister said about the need for Budget Reform. He admitted that although the Fiscal Deficit is shown as 3.1% of GDP, it is not quite true as this left out fertiliser and oil bonds and other subsidies which according to estimates could add another 2% to the deficit. He also said he hoped that we'd soon be calculating the fiscal deficit more truthfully. That would be a welcome exercise in transparency.

And now for the disappointments. Okay we were not expecting a cut in corporate tax rates, but the surcharge could have been reduced. And did he have to tinker with the short term capital gain tax rates. A 5% increase is not going to do too much for revenues. But in an already fragile market environment it is bound to hurt sentiment. Was that necessary? But lets be grateful that no other tax was touched.

Infrastructure is the other big disappointment. Unless it is in the fine print, I haven't spotted any big idea here. Yes there was talk of more Ultra Mega Power Projects and more money for Central Public Sector undertakings that will possibly find it's way into infrastructure. But there is no word on how India hopes to attract the the USD 490 billion that the Planning Commission estimates is needed for infrastructure in this five year plan.

So that's really it, if you ask me what I see missing in this Budget, it is Ideas. Ideas that would have catapulted us closer to China. For, lets face it, that's who we should be comparing ourselves with. At the moment China contributes 18% to incremental Global Growth, we are second, but a distant second at 5%. That's commendable. But not enough. So I would have liked to see more ideas for growth. But I suppose this time the Big Idea had to be ELECTIONS.