Sail in ship of ambition and anchor at harbour of success

Budget 2009 — Explaining to a ‘aam admi”

Well let me try to explain the details ( not some figures ) and ttheir impact on Indian economy .This will be a pretty long post . So warning the reader before he proceeds .

Budget 2009 can be discussed under following heads

1. Intention of the Govt as expressed in Budget

2. Direct Vs Indirect Taxation — A folly always repeated

3. New Pension Scheme

4. Goods and Service Tax

5. Fertilizer Subsidy

6. Farmer Loans , Agriculture

7. Oil Sector

8. The great empowerment of Indian aam admi — Disinvestment

9. Banks and Insurances

10. Our Srilankan Brothers

11. National calamity Fund

12. Rashtriya Swastha Bhima Yojana

13. Pradhan Mantri Adarsh Gram Yojana

14 . Employee Exchanges

15. IT sops

16 . What my Rural bhai got what he lost.

17 . What my Urban bhai got what he lost .

18. Why market reacted negatively for this budget .

1. Intention of the Govt as expressed in Budget

The intention of the Government is very clear , put more money in hands of the people and this is ofcourse the way to tackle recession . Only when people have money , people can spend  and only when people spend economy can grow .. Confused How ?

Ok  for simplicity lets say there is only 1 Factory which produces good “x” and there is 1 house hold of “Ramu” . ( for simplicity)There is only 1 product in the market and only that is need by Ramu to live survive and so on. Our Ramu goes and works in the Factory and Factory pays him salary . (For simplicity) lets say Ramu does not save anything but spends all his salary on the good which factory produces .

Now Suddenly one day Goddess Laksmi came and said in Ramu’s dreams to spend more even though he doesnt have money . Lets say Goddess Laksmi says “Ramu I ll give u the extra money go n enjoy ” .

What will Ramu do ?

Ramu who used to purchase 1 good of factory now will purchase 2 goods .==> Factory has to produce more ==> factory needs Ramu to work more ==> factory will pay more ==> ramu will get more salary .

So broadly this is how economics work though i have simplified .. So always growth is possible when people start spending and this is what our FM wants and this is very clear coz of

1. Income Tax rebates , doing away with surcharges ==> More money in hands of Urban .

2. NREGA ==> 39,100 cr and farm loan 6% ==> More money in rural

So govt clearly wants people to spend more . Remember this I will use this again in later part when I speak abt disinvestment .

2. Direct Vs Indirect Taxation — A folly always repeated

This time budget Our FM has kept Direct Tax changes is revenue neutral and Indirect Tax is supposed to fetch Rs 2000 cr more . Time and again We have done this mistake , we are doing it again .

First of all we need to understand what is “direct tax” and what is “indirect Tax” .

Direct Tax ==> Tax borne by same person on whom it is imposed .

Example our Income Tax . I have to bear my Income Tax . I cannot ask my company to pay my Income Tax 🙂

Indirect Tax ==> Imposed on someone and borne by someone

Eg all these VAT etc .. Tax on goods ==> Initially Merchants pay ==> But later collect from end customers .

In most developed countries Direct Tax > Indirect Tax , but in India we have Indirect Tax >> Direct Tax .

The main problem here is if ” Indirect Tax is more poor is hit ” since the price of goods will increase but with direct tax the rich [ I mean Tax payers] is hit [ This is considered “ok” because they have sufficent cushion to survive , but poor will cut his one time meal to survive ( generally woman in the house ) ==> Malnurtion and bigger problem again to the govt]

So I am very sad despite after many reforms committees reports we are doing it yet again .

3. New Pension Scheme

A good description of NPS can be seen here . Basically now everybody can have a pension scheme . major advantage

1. A min investment of Rs 500 .

2. Very low Fund management charge

3. Disappointingly it has tax on withdrawal unless u convert it to annuity at the end of 60 yrs .

4. Its has e( equity) C ( mixed) and G( govt bonds) so balance risk taking course .

5. “The trust that Govt wont cheat ” . Afterall it is a 40 yr long commitment !!

To these above advantages Now NPS trade in equity and derivative market wont attract STT .. This means more profit from NPS than other MF .. which will be availbale in market . [ provided they r into same companies and managing same portfolios] .

4. Goods and Service Tax

For long now GST has been in discussion . 13th Finance commisson is also looking into it . Empowered commitee of all State FM’s have finally given nod .

Basically after introducing this GST lots of this tax that tax etc goes and single unified taxation comes into effect . Thus petrol in Bangalore will not be >> than petrol in delhi and so on ..

But  GST has some inherent challenges also .The model being adopted is called “dual model ” where by both centre and State levy the tax

First big headache, State loss

States will be under loss , if GST is implemented because states which were charging some tax on crossing their borders is now gone .. So state will be under loss . Though centre has agreed to bear the loss for 5 yrs .. State always feel wary abt centre . This buget NO MENTION OF CENTRE BEARING LOSS .

Second big Headache , Taxing services .

Now service are being brought under taxation ==> HUGE work on building new infrastructure to track service usage etc .

For eg till now service tax was collected by Centre , but now with GST there r States also involved . So details like if a telephone call is made from Delhi to Mumbai where will it be taxed ? Delhi or Mumbai etc has to detailed out and a effective IT structure and new training of officials is needed .

5. Subsidies

Subsidies debate has been for quite long almost from green revolution time .

For Subsidies : People say subsidies for poor is needed if inequalities has to be destroyed .

Against Subsidies: People say subsides destroy competitiveness and also the value . They quote eg of water . If water is free people will use drinking water to wash their bufffaloes also . If water is charged then people will conserve even a single drop of water .

Anyways taking the existing inequalities in country subsidies cannot be done away with . Govts step to REDUCE susbidies is welcome .

Mainly 3 subsides are of  importance

1. Fertilizer Subsidy :

a) Govt is moving to nutrient based susidy instead of current product pricing regime .

b) Till now govt would deal with fertilizer companies and make sure fertilizer available at cheaper rates . This is a big mistake because the actual benifitter is the company than the farmer . In practical situation rich farmers make maximum utilization of this scheme , which was introduce to protect marginal farmers . NOW GOVT IS MOVING TO GIVE SUBSIDY TO FARMER NOT COMPANIES . A very welcome step

2. Oil Subsidy

The LPG gas you get or Kerosene is sold at cost less than cost price …

3. Food Subsidy

Food Security Act is coming !! The next big ONE after RTI and NREGA . This is one of the reason I love Sonia Gandhi .. She is “the woman” . These schemes , NO ONE IN THE WORLD has dared to try and We are the pioneers . “Neccessity is the mother of all invention ” . No doubt with India being 66 / 88 in global hunger index ==> More than 50% of my brother and sister sleep with half empty stomach , food security is needed . But the controversy is the “details of the ACT” .

Whats the controversy ?

The ACT would mean 25kg of Rice / wheat at Rs 3 per kg to BPL families .

The problems with this def

1. Wrong definition of BPL . BPL in India Rs.11.80 a day per adult in rural India and Rs. 17.80 . This age old def itself precludes bulk of deserving people outside .

2. BPL and Antyodaya 9 poorest of poor conflict.

When you draw a line say like this ———————————————

person A

”             B

”               C

All A , B, C are BPL . But A is close to the line and C is fartherst . C needs more immediate help than A . We call C as “Antyodaya” .

Till Now C is enjoying a scheme called ” Antyodaya Anna Yojana ” gets 35 kg of Rice for Rs 2 . Now with this act AAY is scrapped and all come under same roof so , for him it would be 25 * 3 = 75 Rs. Before under AAY he was getting 35 kg for 2 so his monthly bill was Rs 70 . Now with this he is paying 5 Rs more and getting 10 Kg less .

For A and B

A BPL family’s ration bill for the 35 kg of wheat it is entitled to is today around Rs. 157.50 at the average rate of Rs. 4.50 a kg. This includes the cost the States add to the Central issue price of Rs. 4.15 a kg. Since the Act proposes cutting the BPL quota by 10 kg, the benefits of lower prices will be negative and families will end up spending Rs. 195 for the same quantity of cereals.

So effectively the ACT in its present form fails to provide the “additional security ” instead disturbs the current one .

6. Farmer Loans , Agriculture

Farmer Loans . Many of my friends had clamoured when Govt had announced farmer’s loan wavier . But friends Farming is the most riskiest business in the present day world . The very fact that getting insurance is difficult says the uncertainity and risk my farmer brothers are taking .

1.Govt has decided to give upto Rs 3L loan at 7% and 1% rebate if he pays back promptly

2.Raised the credit flow

7. Oil & Gas Sector

1. Tax breaks on profits from productiona and sale of Natural gas and oil from upcoming NELP VIII

2. This is only for upcoming not already existing ==> So RIL out

3. Tax benifit for private if set up refinery before 2012 ==> Advatage Essar

4. National Gas Grid !! Wow finally we will have pipeline highways

So if you are buying any stock advice is to hold Essar .

8. The great empowerment of Indian aam admi — Disinvestment

I have been telling from long time , The common man is not being involved in the growth process . He is not “owning” a business . Disinvestment is one of the steps of financial inclusion of “masses” where by masses will start holding a share in the growth story of India .

Govt is expecting to rise Rs 2000 cr from market via disinvestment . There is a small glitch here , with the competion of corporates and Govt to raise money from market but obvious interest rate will go up . If it goes up in recession then a lot of problems are in the bag .. Be ready ” the common man” .

9. Banks and Insurances

FM made a strong statement that not less than 51% stake will govt hold in banks and insurances . So that means not increase in FDI here .. So no quick solution to the trouble .

10. Our Srilankan Brothers

Rs 500 cr for Srilankan brothers . A very good move . I appreciate congress for this . I will write abt Sri Lanks sometime

Ha .. I am sleepy .. rest are some direct things like modernising employee exchange , PM Adarsh gram yojana , Our FM has showered great favours on Women ( Hope women use it and claim their right share ) .

In nut shell

1. Though a deficit of 6.8 % . The low inflation now acts as a cushion . FM says to get the deficit right in 3 yrs lets see . But this was unavoidable . With 6th pay commison ,  relief packages .. [ AAI in distress as I write thing , I guess Jhadav is having night mare as i write this :)]. So I am not against it .

2. More money in hands of people

3. More planned disinvestent .

The market has not understood the bidget completely yet . I see a bright shining future for my country , and budget has been good and balance .

I hope I have made budget core simpler .

Good Night


1 Comment»

  Taxation services india wrote @

Great Article.
Your description is brilliant. I liked your article very much and I would love to read your further posts.

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