Union budget 2013-14 and inflation

Prof E. Bijoykumar Singh *

Everything seems to be topsy-turvy when inflation continuously erodes your purchasing power. When I joined Manipur University in 1983 my first pay packet was something like Rs 1400. My grandfather, an elementary school headmaster, earned Rs 12 per month. With that amount and proper fund management by my grandmother he could establish himself reasonably well in life. He could provide post graduate education to all his children. Gone are those simple days when hard work used to get rewarded.

Now I wonder whether in spite of everything I am better off than my grandfather. Inflation or the rising level of price is the main actor behind this drama. Other actors are supporting casts coming into picture to safeguard our purchasing power. We need lots of money to meet our requirements. We become disoriented when inflation erodes our purchasing power.

A person may be corrupt because he needs money to educate his children and there is ample scope for taking bribes. A person enters into illegal trade because he is convinced that he can make quick money and probability of getting caught is also low. Even if you are caught one can bribe one's way out. In fact there are infinite ways of earning quick money.

Every year whenever a budget is presented one hotly contested issue is the inflation rate likely to be generated by the various measures announced in the budget. The ruling party will claim it to be pro growth and less inflationary while the opposition routinely will denounce the budget as inflationary. No doubt a budget is a big thing but one should not attribute the entire story of growth and inflation to the budget. Much of our current crises are associated with global events- thanks to globalisation.

The sub-prime crisis in the USA overwhelmed the international financial system. In India we nearly missed having runs on our banks. Y.V. Reddy, the former RBI governor and Chairman, XIV Finance Commission was given the credit for saving the economy going the European way by his steadfast refusal to introduce full currency convertibility in India.

Our FM did not succumb to the need for populist measures, this being the last budget of UPA-II. Injecting additional money indiscriminately would have been like disturbing a beehive of inflation without any protective gear. One is amazed at his restraint. It becomes clearer when the underlying theme of governance and objectives of the budget are spelt out. Higher growth leading to inclusive and sustainable development is the underlying theme of the government. The FM has spelt out his objectives to link policy with welfare as follows:

"To create opportunities for our youth to acquire education and skills that will get them decent jobs or self employment that will bring them adequate incomes that will enable them to live with their families in a safe and secure environment."

This statement is interesting because the employment our FM is talking about is not the employment we have based on time criterion. I have always argued that such measures should combine both income and time criterion. The kind of employment with a monthly payment of Rs 4000 after working 10 hours a day is not the kind of employment our FM is talking about. He is talking about remunerative employment.

The main causes of inflation in India have been imported inflation as in the case of crude oil, supply demand mismatch as in the case of oilseeds and pulses and rise in aggregate demand as the economy grows. Though inflation based on WPI has come down to 7% and core inflation to 4.2%, food inflation still remains worrisome. It means the rate of growth of prices of food items is still high. As it has a high weight in WPI, inflation rate may again start rising.

Goods whose excise duties, sales tax rates and import duties are raised become costlier and a budget is inflationary to that extent. Duties on raw silk and set top boxes have been raised from 5 to 15% and 5 to 10% respectively to protect domestic producers. The duty on luxurious motor vehicle and motor cycles has been raised from 75% to 100% and that on Yacht and similar vessels from 10 to 25%.

Specific excise duty on cigarettes, cigars, cheroots and cigarillos has been raised by about 18%. Excise duty on marble is raised from Rs 30 per sq.mtr. to Rs 60 per sq.mtr. The duty on mobiles costing more than Rs 2000 has been raised from 1% to 6%. Not many will be affected because 70% of the imported mobile phones and 60% of domestically produced phones cost less than Rs 2000.

Service tax is imposed on all air conditioned restaurants irrespective of whether it serves liquor or not. Anyone who enters such a restaurant will have to pay a service tax. Those persons who consume them feel the first impact. For me fortunately I am not going to consume any of these items during 2013-14 except for the set top box for my TV. I do not know the difference in price between domestically produced and imported box. I never go to any AC restaurant on my own. My old good Maruti 800 is okay for me. I always purchase sub 1000 mobile.

Even the 10% surcharge on personal income tax is theoretical for me because I am not in that exalted club of 42,800 super rich Indians with a declared annual income of Rs 1 cr. This may be true for all of us in Manipur. However, despite everything we are in general equilibrium. It is not only what happens in the tax rate that is going to affect the inflation rate. Many other measures may raise productivity of factors of production.

Higher productivity leads to higher income which in turn enables us to get over the adverse effect of inflation, however high it may be. Besides, there are many imponderables. A natural calamity overtakes us and budget is abandoned. In spite of such a budget, a few months of blockade may drastically change the game plan. Our vulnerability has not diminished given the resounding victory of NPF in Nagaland.

I only hope the end of the election will also end the hostile posturing of leaders on both sides. Just as our brothers have become exhausted, the Union government also may be hiding its exhaustion which may come out any time.

What our FM said quoting Swami Vivekananda regarding India is equally true for Manipur. Swamiji said "All the strength and succour you want is within yourself. Therefore, make your own future." I only hope he is not thinking about import substitution.