Expectations from the Union Budget 2014- The financial perspective

Expectations from the Union Budget 2014- The financial perspective

Background:

With the downfall of the reign of United Progressive Alliance (UPA) and the rise of National Democratic Alliance (NDA), the expectations of people in our country has changed. UPA government who is known for making pro-populist policies and at the same time remaining silent on inflation, has been replaced by the NDA government who has always been in the favor of long term financial and business growth. Rather than concentrating on the short term populist measures NDA government is expected to concentrate more on long term growth and prosperity. And this pro-business and stringent policies would eventually lead India to acquire the position where there would be minimal requirement of government aids or subsidies.

Now, before the union budget is announced, let’s analyse the provisions that the union budget can bring to fight with the problem of twin deficits i.e. fiscal deficit (difference between the government income and expenditure) and current account deficit (difference between exports and imports).

Figure 1: Indian current account deficit (CAD) as a percentage of GDP

Figure 2: Indian fiscal deficit as a percentage of GDP

Expectations from the Union Budget:

Reforms in the Taxation system

Out of the total people eligible for paying tax, only the people working in private and public sector and few businessmen are paying tax. The current system allows the majority of people to evade tax using unfair means.

To cater to the existing problem, the NDA government is expected to make the process of tax paying and tax collection, easier and more transparent. This will increase the government income and would help in reducing the fiscal deficit.

Hold down Subsidies

Unlike UPA government who used to make populist policies and added burden on unplanned expenditures, NDA government is expected to plan judiciously and wisely for providing the subsidies.

The government is likely to focus more on better governance to reduce leakage in the system which transfers the government money to the people who are not entitled to get the benefit of subsidies.

Higher tariff on luxury items

Like the UPA government, NDA government is also expected to raise the tariffs on the luxury and electronic items like cigarette, SUVs, LCDs etc. This in turn will bring money to the government and would help in controlling both fiscal and current account deficit.

Continue restrictions on gold import

The demand for gold has always been high in our country because we relate our sentiments with gold. Apart from the investment purpose, it is used in all the auspicious occasions.

In order to reduce the huge current account deficit, the government is expected to continue the restrictions on the import of gold, which forms the second largest contributor of import bills after petrol.

Implement goods and services tax (GST)

The inconvenience created by the indirect taxes can be addressed by GST. And the Modi government is likely to design the implementation plan for it and take this on priority. This is going to provide impetus to the manufacturing sector. And would bring growth to our country and would fight with the twin deficits as well.

Disinvestment

To reduce the increasing gap between the government income and expenditures and to control the fiscal deficit, the new government is likely to go for disinvestment in the public sector undertakings.

Improvements in the existing land acquisition act

The current land acquisition act poses a big challenge to the growth of business in our country. Big projects like Posco’s steel project in Karnataka, Arcelor Mittal’s steel project in Odisha are stuck due to long and complicated process of land acquisition. Under the current land acquisition system a company has to wait for 5 years to get the ownership of land. Hence the current act needs to be amended. And the Modi government is likely to take this up.

There is an urgent requirement to make the process of land acquisition hassle free, which will attract foreign investors. In the long run this is going to bring capital inflows to our country and would help in reducing the fiscal and current account deficit.

Privatisation

Government enterprises running under loss is likely to be privatized to increase the accountability of the top management team. This would help in improving their condition and would also help in generating revenue, which in turn would reduce fiscal deficit.

Skill development programs

Out of the total labor force, the majority of labors in India are unskilled. But the industries have huge requirement for the skilled labor force. And with the progress of manufacturing sector the current demand is going to rise further.

The new government is expected to go for skill development programs to solve the existing problem.

Encourage savings

The government would probably provide incentives to increase savings, like reducing the lock in period which is 5 years for the fixed deposit which qualifies for the tax benefits. 

  

Insights:

The new government is going to wisely cut on the expenditures, fix the loop holes in the governance to prevent leakages, and work for the long term growth of the country which in turn would generate revenues. And this will help India in combating the problem of twin deficit.

"This article is written by Sneha Shrivastava, a PGDM student of 2013 batch  She can be reached at pgp13110.sneha@iimraipur.ac.in "