The Finance minister on Saturday tables the budget for FY 15-16.
While the world economies eye upon the budget expecting enormous big bang reforms, the budget only makes an incremental approach towards bringing the economy back on growth track. The FM delivers the budget admists the challenges the country faces, largely being fiscal account deficit, growing investor dissatisfaction (among various other challenges).
Thus, the FM doesnot enjoy much room to leverage the growth of the economy while managing the fiscal account deficit, inflation (among other challenges).
However, the efforts made through the budget indicate a variety of measures, some furthering the economy on the growth path, and few others – ‘the major ones’, contradicting economic growth it self.
While the single window facilitation would ease the conduct of business in India, the coupling of growth with such measures goes for a toss due to miscalculated economics.
This budget idealises the ‘Make in India’ program adopted by the government. Though intending to propose measures to further the program, the proposals are contradictory to the program, as the same challenges the basics of economics.
The budget increases the indirect taxes rates.
By and large, if one looks at the effect the budget proposals will have, one will hardly disown the urge of impact on demand economics, that is, ‘decrease in consumer demand in the domestic markets.’
This impact will largely result from increase in the indirect taxes rates which will lead to increase in prices of goods and services. The general economics concept of ‘price elasticity of demand’ will lead us to conclude that the demand shall decrease when the price increases, eventually leading to ‘cut’ in the supply, as production & accumulation of consumer goods makes no sense.
This falling demand impacts the ‘Make in India’ program and the program gets a huge set back even before it takes off.
Understanding the impact from tax buoyancy perspective:
Tax buoyancy is the relation between the growth and the tax revenue.
Tax is said to be buoyant if the tax revenue is impacted more than proportionately than the proportionate increase in the growth.
The falling demand effects the tax buoyancy negatively. There is no doubt that the tax buoyancy of the Indian economy is majorly responsive to the indirect tax revenue rather than direct tax revenue. One only has to study the responsiveness of the tax buoyancy against the decreasing volume of consumption by the indirect tax payer (the consumer).
This is as simple as assessing the ‘price, volume & revenue’ relationship.
Decrease in demand results in decrease in consumption. Therefore cutting down the indirect tax revenues contribution causing an imbalance in the so considered ‘optimistic’ tax buoyancy estimates.
The Government, though intend to make India a global manufacturing hub and further the economic growth, misses to assess the demand & supply economics.
How far reaching effect the miscalculated optimistic measure makes is a question that the fundamental economics will answer in times to come.