The Miscalculated Economics in the budget 15-16..

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.

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7 thoughts on “The Miscalculated Economics in the budget 15-16..

  1. Kotha. Teja Prasanna Kumar says:

    As per the tax collection point of view, indirect tax is the good source..So this budget gave importance to the indirect tax collection sources…I agree with you that Common people will suffer if indirect tax rate increase…
    So I would have felt happy…if they would have increased indirect tax rate only for luxury goods rather than increasing the common rate of 12%…

  2. Shashank says:

    The fall in consumer demand will be a short term phenomenon, whereas in long term make in India will create huge local and export demand of goods.

    • Consumer demand here will be effected through long term.
      With the kind of projects started, the ones like Ganga and swach Bharat, will take a hit on consumer pockets.
      And both the above examples being long term.

  3. Mahender reddy says:

    Good one rupal..
    In fact the increase in rate of service tax was just trailer only as the minimum rate of indirect tax as per GST, which is going to implement from next year will be 15%.. Govt is trying to increase the FDI n prevent the funds to go out of India by initiating the single window facilitation, gradual decrease in corporate tax rate n make in India allowances. By this supply n competation will grow , after that automatically prices will be decreased. So there is no adverse effect on People n tax collection by govt. But it will show a huge impact on economic growth in indirect way by creating more employment, balancing the foreign currency, funds circulation etc….

  4. Cotha S Srinivas says:

    Hai Rupal,

    A nice attempt and good analysis. Definitely, I feel we should look beyond figures in the budget. Budget is not just the income and expenditure of a country, it is beyond that and it should answer the needs of the entire economy.

    Regarding this budget, my opinion is that, it could have been more dynamic and bold steps should have been taken to address the economic issues in the country. The Five areas to be concentrated are Health, Education, Infrastructure, Services and AM Sector (Agriculture and Manufacturing)

    Of course, everything can’t be done in one budget and everything can’t be done by finance minister alone. It should be a team work which has to collectively work for the betterment of the economy.

    What common man and poor man needs is food, health, shelter and timely justice (which doesn’t happen in this country)

    Hope “Ache Din Ayenge” and our country will progress.

    Once again congratulation to your attempt. Keep it up. By the way have you read my A to Z for India. If not let me know, I will mail you the same.

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