Government plays cruel joke on ‘aam aadmi’ on Fools Day

Life just got costlier for everybody. As the union and state budgets kicked in from 1^st April, a whole host of items became costlier. The list includes refrigerators, washing machines, air conditioners, soaps, cosmetics, two wheelers, cars, unbranded gold and silver jewellery, eating out at restaurants, hotel stays. Add to that an increase in price of petrol now almost touching Rs.78 to the litre, and an increase in the ATF(Air Turbine Fuel) price. That’s not all - service tax has been increased too.

What does this mean from the fiscal prospective?

One thing is no brainer that this will fuel inflation. On one hand the Government is goading RBI to bring down rates to increase growth and on the other hand it is upping inflation in every which way. FM is also talking about diesel deregulation, which will further lead to an all-round hike in prices. In such a situation will RBI lower the interest? I suspect not until its next review in June. Considering that rates will remain high, the stock markets will be rangebound with a downward bias.

Global conditions are not conducive to exports growth because of problems in Europe and US. Therefore there is a need to revive domestic consumption and growth. The best way would have been to reduce inflation and follow it up by reducing interest rates. That would have stimulated growth and tax collections. GST and DTC are two other triggers that could spur growth. The FM needs to accelerate these reforms, but for the last 3 years we have been hearing that GST will be implemented in the following year, but it doesn’t seem to be anywhere near implementation.

At the moment the PM and Sonia Gandhi are neither projecting an image of good politics or good economics. The vote against Congress in UP was clearly a vote against high prices. It is another matter that SP has so far been unable to control the bad elements in its party. In all fairness, Akhilesh needs to be given time. But he needs to do something quickly.

Returning to economics, there is already Rs. 35,000 crores in this budget set aside for NREGA, the scheme which 5 years ago was much-touted as a big success. Today, the fact is that it is not reaching the rural masses as it was intended to, according to government’s own sources. There are already rumblings in the Finance Ministry that this expenditure is non-productive. That means money gone into a ‘black hole’. Rs 35,000 crore is 90% of the entire budget of a big state like Maharashtra. There may be more such ‘black holes’ in the fine print of the budget.

There has been near unanimity that GST will help the country in many ways – GDP will go up by as much as 100 basis points, inflation and interest rates will come down. These are not my words, but those of Subir Gokarn, Deputy Governor of the RBI, while he was speaking at a function a few days ago.

Instead of delaying GST, which they now say may come in 2013, there should be a strong and focused effort to push it through. And then, if the opposition resists, it will atleast reflect good politics and good economics on the part of the UPA Government.

However, clearly the intent is not there in the top echelons of the Government to bring the economy back on track. Back-breaking prices is what 2012 has brought and I am sure this wont end in a hurry.