It is often seen that a lot of people, even the ones educated in stream of commerce and finance criticise the government just based on short term benefits impacting him or her. No doubt government is custodian of public money and hence we all think that we should get back our money in some form or other but we also need to know that if we were in place,what we could have done better and whether that would have benefited all or only few sections of society and without impacting common people? It is like parent having to look after more than one child and cannot think only about one but overall betterment of family and that too with a long term view but also short term at times. For us to understand this we need to be aware of certain terms before analysing Budget. Doesn’t mean we have to be economist but only a normal finance brain should be good enough.
Fiscal Deficit: It is the shortfall of government income over government spending. So for eg : If government earns Rs.100 via collection of taxes and has spending of Rs.105 it means Rs.5 is its Fiscal deficit. Fiscal deficit % would mean that if in above example GDP is also 100 then fiscal deficit would be 5% of GDP.
GDP= Government spending+ Consumption+ Investment +Net Exports. This formula is self-explanatory for our limited understanding as of now.
Inflation: A general increase in prices and fall in purchasing power of money
Objective of any government: To keep fiscal deficit minimum and maximise GDP and keep inflation in check.
Now let us take a look at why this three can’t be achieved so easily especially at the stage at which our country is in or rather any developing economy is in.
Requirements of keeping Fiscal deficit in check
- Government needs to have higher income at its disposal.(Which means higher taxes as it is one of the largest contributor of government income) OR/And
- Government needs to cut down on its expense
- GDP needs to be high so that percentage of fiscal deficit is low even if in absolute terms it may be high
Requirements of high GDP
- Increased government spending
- Increased Consumption
- Increased investment and net exports
Requirements of lower inflation
- Higher interest rate
- Keeping printing of money under check as more money at disposal will reduce value of money and thus give rise to inflation
- Tight fiscal policy which means higher government spending and /or higher income tax
- Privatisation and deregulation may help to reduce cost of business leading to lower inflation
If we analyse carefully lot of them are inversely related. For eg:-
- If to reduce gap between spending and income if government prints more money it will give rise to inflation so that’s not a good idea.
- To increase government spending it will have to collect more tax again not good for consumption and in general people’s sentiments.
- If taxes kept low then difficult to invest through government spending in infrastructure,Education,health etc. which is necessary for overall development
- To increase the tax base there needs to be certain rules which are strict and if corporates do not comply needs to be penalised but that temporarily sends a feeling of fear and lack of initiative by corporate to invest or take a risk fearing what if it fails? Fall in corporate investment impacts economy in a very negative way
These three terms if understood properly and its interrelation with each other we can then understand what government is trying to do before criticising or appreciating.
How to keep a balance
- Increasing the tax base and compliance ratio. Currently no of people filing tax returns are low as compared to the persons required to file return. Although it’s considerably increased over last 5 years. Once it increases then the burden on every individual can decrease due to which in spite of reducing tax rates government will still get its revenue due to increase of compliance ratio.
- Encourage corporate to invest more because best investment will always be investing in business and country’s youth. By encouraging entrepreneurship it also creates job opportunities.
What we may expect in this Budget 2020
- There are good chances of increase in slab rate and thus giving more in hands of consumer to increase the consumption which has negative effect of may be increasing fiscal deficit and a bit of inflation but to revive the general mood of economy it is needed sometimes. Government will have to balance it out though.
- On a specific note there are chances of DDT being abolished and taxed back in hands of Shareholders.
This budget might be the one where short term revival of economy is being considered by government so that general mood of people which is down is lifted .So revival through increase in consumption will be the main target of government. So measures will be in that direction is what I feel.