The Hindu Business Line : Betting on purchasing power of common man

The Budget addresses the needs of the large number of people at the bottom of the pyramid – where people are not very rich but are the ones who get up early in the morning on election day to go out and vote.

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Chennai, March 1 Budget 2008 focusses on increasing the purchasing power of the common man to grow the economy by driving consumption. It brings down costs for the large number of people at the bottom of the pyramid.

In this context, the Rs 60,000-crore farm loan waiver is neither the “ghost nor the devil.” The beneficial multiplier effect to the economy is several times more than the waiver, says Mr G. Ramachandran, a financial analyst and risk and hedge architecture consultant.

The good news for the others is that the tax rates are not likely to increase in the coming years. The increasing consumption would bolster the tax to GDP ratio and Governments will not have to hike tax rates to grow revenues.

Addressing Budget Impact 2008, an interactive session on the Union Budget organised by Ernst & Young and the Madras Chamber of Commerce and Industry here, he said, the Budget addresses the needs of the large number of people at the bottom of the pyramid – where people are not very rich but are the ones who get up early in the morning on election day to go out and vote.

The Finance Minister, Mr P. Chidambaram, has specialised in the nice art of a managerial perspective in using tax collection to ensure revenue flow to meet Government’s obligations on the revenue side and the capital side. The basic idea in the Budgets of the previous two years and in the present one is to promote consumption.

It addresses the fiscal compulsion posed by the huge running cost of Government. India ranks 126th globally in terms of fiscal costs and what people get out of the Government. The Finance Minister reinforced the tax buoyancy of 2006-07 and 2007-08 to pay for the costs, he said.

At the same time, he has steadfastly kept on course the schedule of the Fiscal Responsibility and the Budget Management Act 2003.

The Budget for 2008 takes firm steps in ensuring that the feel-good factor in the economy since 2001-02 continues and stretches the good times to a large number of people representing big consumption, opportunities and votes.

Mr Chidambaram has hung on to consumption for growth by making the common man meet his needs at a lower cost. Driving consumption is the option to increase tax to GDP ratio, Mr Ramachandran said.

The good news is that Governments will no longer need to increase tax rates to grow this ratio and it is possible that in the next two decades the tax rates for corporates or individuals are not likely to increase. Personal income tax is likely to drop to 20 per cent in the next four or five years, Mr Ramachandran predicted.

On the other possible grouse – investments in infrastructure being low, he said that there was no need for disappointment. Rather than the demand for infrastructure it is more important to look at those paying for it.

Once the basic needs are met then the people would drive the demand for infrastructure. Again, capital formation for infrastructure does not drive GDP growth but consumption does.

The Government has high costs and higher tax inflows are needed to meet the outflow. Revenue has to be kept high by growing the economy by sustaining consumption.

This is done by touching the lives of the ordinary people – the large numbers at the bottom of the pyramid – by bringing down excise duty on goods needed by them and ensuring a huge surge in consumption.

It is in this direction that the reduction in service tax threshold, excise duty and import duties reduction have happened. When you cut costs you increase purchasing power, Mr Ramachandran said.

Agriculture credit has always been difficult to deliver – high interest rates, nobody bothers to lend. The loan waiver breaks this logjam.

The Finance Minister has clearly said that the loan waiver is not a restoration of capital values.

Banks do not lend for crop loans. Only commission agents and other private lenders handle over 60 per cent of the crop loans, which mature in less than a year. Banks by and large handle about 95 per cent of the non-farm loans, which run a few years.

Mr Chidambaram has committed to giving the banks the liquidity – pay the interest cheques that would fall due every year.

So wholesale or aggregate capital or balance sheet or capital restoration is not envisaged.

The waiver would bring down pressure on the farmer and the price pressure on farm goods and in turn create a multiplier effect whose benefit to GDP in driving consumption would be five or six times more than the Rs 60,000-crore written off.

Also, from the point of view of shareholder democracy, the Government is a big owner of the banks, a large part of the equity of the banks is with the Government. If a shareholder would like that to be done then so be it, Mr Ramachandran said.

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