Pedestrian economics: FM’s budget silents about inflation

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By Paranjoy Guha Thakurta

Union Finance Minister Pranab Mukherjee’s Budget will certainly stoke inflationary fires that are already raging. It is, therefore, amazing that sections of the same media that had been urging the Finance Minister to contain inflationary expectations have now gone to town heaping fulsome praise on his Budget proposals. True, income-tax payers are exultant. They have reason to be. Market fundamentalists are delighted at  Mukherjee’s attempts at fiscal “consolidation.” Stock markets have reacted favorably to a Budget after many years. But wait. What about the proverbial  aam aadmi in whose name our netas swear by?

The same commentators who were vehemently insisting that inflation control should remain the focus of the Budget are strangely silent about the fact that the Budget proposals would further increase the prices of a wide range of products of mass consumption, including food. Inflation alone would undo much of the gain that is supposed to accrue from the economic policies of the government. The same government that has been shouting itself hoarse about how “inclusive development” is its “article of faith,” has presented a Budget that would spur inflation which, in turn, would effectively negate — if not reverse — much of what is being sought to be provided to the poor in cities and villages by shrinking their real incomes.

There are few who believe the finance minister’s claim that the hike in diesel and petrol prices would increase the wholesale price index by only 0.4 percent. That proportion has been mechanically arrived at by calculating the increase in the rate of inflation based on the weight of these two petroleum products in the overall index. The fact is that a substantial portion of the diesel consumed in the country is used for transportation of goods and also for powering agricultural pump-sets. An increase in transport costs results in across-the-board inflation that is disproportionately higher.
Simply put, retail prices of various commodities go up by a proportion that is higher than what the increase in transportation costs would strictly warrant — what economists describe as a “cascading effect.” Even  Mukherjee, who is more of a politician than an economist, unlike Prime Minister Manmohan Singh, understands this aspect of the Indian reality but has chosen to ignore it.

The two percent hike in excise duties would also add  to inflationary expectations. When excise duties were reduced by six percent in two installments – first by four percent in December 2008 and again by two percent March 2009 – the prices of products on which such taxes are levied hardly came down. Unfortu-nately for the consumer, the reverse does not usually happen. As in the case of cars for instance, the increase in excise duties led to an instantaneous rise in product prices. Manufacturers invariably tend to try and pass on the higher tax burden to the consumer.

Those with an assessable income between Rs. 1.6 lakh and Rs. 5 lakh would gain by around Rs. 20,000 a  year, those with an income between Rs. 5 lakh and Rs. 8 lakh would gain roughly Rs. 50,000, while those with an income in excess of Rs. 8 lakh would gain even more. The government is arguing that the change in personal income tax rates would result in more money being placed in the hands of consumers who would now spend more. This, in turn, our netas and babus hope, would help increase industrial production and add to the demand for services, all of which would result in the overall rate of growth of gross domestic product (GDP) going up. And then, four years down the line, India will proudly proclaim to the rest of the world that it is indeed the fastest growing economy in the world and we will all be able to hold our heads high in the comity of nations.

Actually, we are fooling nobody but ourselves. How many people pay income tax in our country with 1.1 billion people? Answer: there are roughly 30 million income taxes assesses at present (or less than three percent of the population), of which roughly 25 million actually pay income tax. Approximately two-thirds of those who do pay income tax don’t really have much of a choice — their salary cheques come with taxes deducted at source. The Finance Minister has himself said that his proposals would not benefit each and every income-tax payer. The short point: lower income tax rates would benefit a miniscule section of the country’s people.

This Budget has reversed a welcome trend in tax collections that was witnessed in recent years. The Union government was earning more from direct taxes (that are inherently progressive in that the rich pay more than the poor) than from indirect taxes like excise duties and customs duties (that are regressive in the sense that all pay the same quantum of taxes irrespective of their economic status).  Mukherjee’s tax proposals on direct taxes for 2010-11 will result in a revenue loss of Rs. 26,000 crore while his tax proposals related to indirect taxes will result in a net revenue gain of Rs. 46,500 crore. In other words, the pattern of tax collections of the Union government will indicate a more regressive tax regime.

The stance of the government becomes evident if one takes a look at the “statement of revenue foregone” which indicates that revenue foregone by the Union government (on account of exemptions and concessions) jumped from Rs. 4,58,516 crore in 2008-09 to Rs. 5,40,269 crore in 2009-10. As a proportion of aggregate tax collection, this proportion went up from 68.6 percent to 79.6 percent. The quantum of the revenue foregone can be contextualized if one considers the government’s estimate of the country’s gross domestic product or national income for the coming fiscal year which is placed at Rs. 69,34,700 crore.

A cynical interpretation of the Budget would be that the government is not particularly bothered about containing inflation for the aam aadmi because the next general elections are more than four years away and Bihar is the only major state going to the polls later this year. The Prime Minister is fond of saying that there is no difference between good economics and good politics. This Budget represents pedestrian economics and lousy politics. And this comes from an income-tax payer.

Paranjoy Guha Thakurta is an educator and commentator

Courtesy: Deccan Chronicle

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