Have we just entered a debt trap?

Feb 24 2014, 15:28 IST
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SummaryBusiness schools must train students to analytically understand the Budget and also read between the lines so that they are able to take intelligent business decisions in the future.

The Union Budget, along with the state Budgets, can hugely impact the economy and individual entities therein to different degrees. Industry or the business sector is most impacted by what are known as the ‘crowding-in’ and ‘crowding-out’ effects of budgetary deficits. Hence, higher education, especially management education, must train students to analytically understand the Budget and also read ‘between the lines’ so that they are able to take smart business decisions in the future.

In analysing any Budget, the following things must be watched: the nature and content of changes in taxation (tax base, tax rates, tax process, tax administration); expenditure management; debt management; efficiency and productivity of expenditure; and the impact of taxation and expenditure on the economy. Budgetary deficit has two opposite effects simultaneously on private investments: ‘crowding-out’ effect occurs when the government borrows domestically to finance its deficit, funds are siphoned off from the economy and interest rates jack up, which discourages private investment. ‘Crowding-in’ effect occurs when government expenditure leading to deficit puts money in people’s hands, raising demand for consumer and capital goods, thus incentivising private investment.

Since ever-increasing deficits can lead the economy into a ‘debt trap’, fiscal austerity becomes necessary and with rising level of education even the reasonably educated common man must comprehend and appreciate the long-term need for fiscal consolidation rather than cribbing about rising taxes or falling subsidies. On the other hand, the economic entities must see through the political agenda, impact of various lobbies on budgetary allocations, galvanised figures and take any goodies with a pinch of salt.

For instance, when a finance minister is sure that he/she will not be in power to present the next Budget, he/she will push chunks of expenditures on to the next Budget, but pull next year’s revenues on his/her Budget. Thereby, he/she will pretend to stay under the deficit target without pushing any expenditure items off-budget. In the present interim Budget, although indirect taxes couldn’t be changed in a Vote-on-Account, automobile sector has received lower excise duties. This sector has strong backward and forward linkages and is considered the face of Indian economy. The cheaper loans to honest farmers, one-rank one-pension, interest waiver for education loans taken before 2009 and continuation of higher tax on the super-rich are not pre-election populist measures as such. But there is something else that is worrisome.

‘Debt trap’ is a situation wherein the revenue deficit is high and rising, leading

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