The aam aadmi’s guide to Budget day

The countdown to the Budget has entered its final phase. On February 1, finance minister Nirmala Sitharaman will present the last full Budget of this government’s term to Parliament. So, this is not the time to give her any more unsolicited advice or present her with yet another Budget wish list. By now, the Budget is all but done and dusted, the i’s dotted and the t’s, crossed. medium97434561Mandatory quotes have, doubtless, also been chosen carefully. Unlike in her last Budget speech, where she contended herself with just a solitary quote from the Mahabharat’s Shanti Parva, this time round, when there are as many as nine states — Rajasthan, Chhattisgarh, Madhya Pradesh, Karnataka, Telangana, Tripura, Meghalaya, Nagaland and Mizoram — heading for elections, she is unlikely to take any chances. So, expect a smattering of quotes from Basveshwara (Karnataka), Vallabhacharya (Chhattisgarh), Atukuri Molla (Telangana), Dadu Dayal (Rajasthan) et al.Masala BudgetEconomists might tell you the Union Budget is a (dull?) statement of government’s projected receipts and expenditures for the next fiscal year. Don’t fall for that. As Budget speeches of successive governments have shown, they are anything but. Budget speeches are an opportunity for political grandstanding. And if, as is the case with this Budget, it is the last full Budget before a general election, the Budget speech is likely to read more like an election manifesto, an opportunity to showcase all that her government has done over the past four, nay, eight, years in office. With a promise of more to come.Fortunately for the finance minister, after three years of travails on the macroeconomic front, Lady Luck seems to be smiling on her. She opens on a strong wicket. Gross domestic product (GDP) growth is expected to touch 7% this year, the highest among major economies of the world, inflation is down, and all high-frequency indicators suggest the worst is behind us. The only fly in the ointment is falling exports and consequent high current account deficit (CAD) —4.4% of GDP at the end of the second quarter — raising the spectre of a return to the days of the infamous twins CAD and fiscal deficit (FD). Unless she is careful and reins in FD. medium97434284In this scenario, I’m going to write about what the aam aadmi and aurat should look out for in the Budget.a) Check whether the Budget is expansionary or contractionary. An expansionary Budget is one where the Centre does not tax too much but, at the same time, is generous in spending, so that we end up with a large FD. A contractionary Budget, on the other hand, is one where the Centre keeps a tight check on its purse strings. Other things remaining the same, a caveat that economists are fond of repeating, an expansionary Budget is better than a contractionary one. In the short term — since, in the real world, other things do not remain the same. Fortunately, it is possible to square the circle. It is possible to have an expansionary Budget that does not completely forsake the long term. If the deficit is because government is spending on infrastructure — roads, railways, bridges, power and fertiliser plants and so on — rather than salaries, pensions and subsidies, the economy gets an immediate shot in the arm by way of higher government spending. At the same time, it gets the long-term benefit of infrastructure spends that lay the foundation for higher economic growth. Or, in economists’ jargon, ‘crowds in’ private investment.Financially healthyThe aam aadmi and aurat must, therefore, keep an eye on both the size and ratio of FD, and its quality. Remember, the size of FD determines how much the government will have to borrow next year — and that, in turn, impacts the rate of interest in the economy since sovereign borrowing — being risk-free — sets the base for all other interest rates in the economy. medium97434834Other things remaining the same —ah, there we go again — higher government borrowing translates into higher interest rates in the economy. That is bad news for borrowers, but good news for savers. An expansionary Budget also means higher inflation, and that is bad news all around.b) Changes, if any, in the personal tax regime. This government has set great store by having a stable tax regime and has largely stuck to its word. But don’t rule out some tweaks in the exemption-free regime to incentivise more taxpayers to move to the regime introduced in the 2020-21 Budget. Likewise, expect some changes in taxation of capital gains to do away with the arbitrary differences in holding periods and rates depending on the kind of capital asset.Also, watch out if the anomaly of taxing unrealised interest income on bank fixed deposits while exempting unrealised capital gains on equity is ended, with the icing on the cake reserved for lower GST on health insurance premium.That’s a lot of work lined up for the coming Wednesday. All the best.Untitled Carousel 96081635