Yesterday the government came out with its reaction to the criticism over the disappointing interim budget. The 2% cuts in both excise duty and service tax, touted as the "final stimulus package" comes in at a time when the Obama government is rolling out the USD 780 Billion package. Comparing the two may not be the right thing to do, but then the kind of effort put in by the US government in these times is aimed at creating more credit flow to the struggling industries. The Indian government's reaction to the credit crunch ( certainly not as severe as in the US) isn't really optimal. Indian firms even today (despite cuts in interest rates by the RBI) are struggling to raise funds at reasonable rates(under 15%).
Coming back to the 2% cuts, they certainly do not translate to an increase in demand or a significant reduction in the costs. From all this, one thing is very clear. The India's fiscal deficit is not only large, but is getting wider. The S&P's downgrade of Indian economy only strengthens the point. Whoever is going to win the election, not only has a huge task of pushing the economy into a revival mode, but also look for additional sources of revenue to bridge the fiscal gap. And it is a huge challenge given the already wide deficit, because the coming government cannot go on a spending spree, say on infra or other areas.
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I for one would not buy this statement that such kind of sops are useless. Knowing that raising money in this country is not difficult, I would say that yes the interest rates are high considering the developed countries but may be thats one of the reasons that we are not as severely hit as the bigger bulls.
ReplyDeleteAs far as the fiscal deficit is concerned, all developing economies have an increasing fiscal deficit. If the government starts to look at increasing revenues than the wlefare would be the first thing to get affected and at these recessionary times, thats the last thing they would (considering the elections are running dead close as well).
I am not sure about my knowledge of finance but quite clear of my economics and being the devils advocate alwaz have been the first one to start a debate.
Srini mate, love ur pieces though.....
Happy writing.....
The cuts in excise duty and service tax are sops and not stimulators.I strongly disagree that OBAMA stimulus is the correct response for India.US banks unlike India were deregulated, went bankrupt and played with other people's money leaving a huge hole to sink th eentire world economy.
ReplyDeleteindia's case is not the same. our industries are suffering cause of three factors
1.Exporters do not have a market to export
2. Agriculture has been neglected for last seven years. Food prices have sky rocketed reducing disposable income
3. Development expenditure has been given a backseat and fiscal expenditure is rampant. Unlike USA we do not have the liberty of printing currency at will
on the flip side we are giving money to the developers (realty sector) enabling them to hold on their land banks and keeping prices at astronomical levels. Even if we reduce prices of say cars who has the money to buy them and where are the roads.
Think out of the box.We need different approach and a charismatic leadership to take us through
Great Start
ReplyDeleteHappy writing!!!
Hi rohit,
ReplyDeletethanks for the comment...
I didn't say that the sops are useless, but I don't agree that they are going to be of significant importance. Consider this: no consumer is going to change his decision to buy/not buy a color TV that would have cost him Rs. 10,000 prior to the sops, has become cheaper by Rs. 200!
I do not agree that raising funds is not a problem, and also that fiscal deficit is not to be taken seriously. Infact I think that is the most important economic issue at the moment.
Thank you Jayaram sir,
ReplyDeleteIt's a privilage to have your comment on this.
I agree that the Obama style of reform(if I can call it reform) doesn't suit us. But then the government has hardly shown interest in looking at our banks' performance, helping them tide over the NPA inflation phase. Yes, the CRR and SLR cuts certainly helped the banks. But then they are not lending adequately. The BSE bankex is bleeding too indicating something is fundamentally wrong with valuations (I am a firm believer that the market knows everything).
I agree that there needs to be an alternative for exporters to survive in these times. I don't think there is a better time to put in efforts to increse domestic demand.
Ex Fin Minister is of the view that the rural demand is intact and growing, whereas the urban middleclass is timid nad not spending. I'm not sure if he realized that unless they help the rural population with alternative employment, there is going to be a dip in that demand too.
Thanks Kalpesh,
ReplyDeleteBut please do comment on what I wrote as well :)
hi Srini,
ReplyDeletevery good and very interesting. This 2% cut in excise duty and service tax will be usefull to small and medium enterprises.