Monday, March 1, 2010

A Bountiful of Hope

As the FM opened his kitty, the nation, particularly the youth, who form over 50% of the population, had lots to cheer about. Starting out with the basic need for education, where an allocation of Rs. 31,036 crore has been made for schooling, and 3675 crore for elementary education, the budgets heralds the coming of age of the Human Resource Development policies of our government. The intent to have a young educated and skilled generation is clear, with the target of raising a skilled workforce of 50 crore people by 2022. Even with a sharp increase in overall social sector spending, aimed at short term ‘good’, overall, fiscal prudence ruled the roost, so as to not burden the future generation with too much debt.

The proposal to have a new and modern India for a better tomorrow is etched deep in the budget, with 46% of the total outlay being allocated to infrastructure. Cities, the dream destination and beacon of hope for the young multitude have seen a steep, but much needed raise in budgetary allocation. The proposal to provide tax concessions on green technology such as CFLs augurs well for the long term sustainable future of our nation.

In the short run, however, the adjustment of the tax slabs will take care of bracket creep, providing the working class with a higher disposable income. This will further fuel domestic demand, especially amongst the young and the ‘nouveau riche’, who have a considerably higher marginal propensity to consume. As such, cheaper gadgets like cell phones will only add to the demand.

The partial roll-back of the stimulus, however, will mean that the economy, facing considerable inflationary expectations, and starting to overheat, can let off some steam. This will lay the roadmap for a low-inflation high growth trajectory and lead us towards a more vibrant future, something that the hebetic generation greatly desires.

PS: The abridged version of the above article appeared in TOI, Lucknow edition on 27th Feb,2010.


Monday, February 15, 2010

To roll(back) or not!

As the government mulls over the withdrawal of the stimulus package, two things have become clear: One, the package actually worked, since the numbers posted by India Inc. in the last quarter have been impressive, considering the situation of their global counterparts. The GDP growth rate has been above expectations, and the country has weathered the storm pretty well. Second, the economy is beginning to overheat, consequent to all the cheap money and low taxes, causing inflation to spill over onto industrial goods, with price rise reported in cement, metals and auto.

A quick analysis of how the package actually worked reveals that to counter falling exports, we stoked our domestic demand, especially the rural market, and lured the investors and consumers alike to join the party. Consequently, flagging auto sales picked up, realty prices bounced back, and the retail sector looked up again. Now, the consumer sentiment mood has improved, and the economic situation has somewhat reversed. The general opinion is that rates and taxes have been ‘too low for too long’, and it is imperative that the stimulus policies be rolled back now to reign in prices, and provide relief to the aam admi, whose cause the ruling party has championed for long.

The critical question is by how much. Lessons from the 1930s tell us that if the entire stimulus is withdrawn at once, a double dip downturn is likely. The best approach under the circumstances would be to have a gradual withdrawal, with two-three phases of rollback. This will cure the price rise, without causing too much cooling off at once. Mr. FM, let the budget just provide the first of the series of rollbacks.


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