India's New Budget Will Cut Deficit With Higher Taxes, Hurting the Average Citizen

Before unveiling the crucial Indian budget earlier this year, Indian politician Pranab Mukherjee opened with a Shakespearean quote: “I must be cruel only to be kind.” What followed was largely in sync with the quote as the budget proved cruel both to industry and the aam aadmi, or the average Indian citizen.

Fiscal tightening remained the priority for this budget, along with reforms in economic policies and measures to suppress inflation in the country. It was a tough task to touch on all issues in India effectively, given the unhelpful political context and gloomy market environment. The budget did touch on all of these issues, but it was addressing the fiscal deficit that the budget was most effective at addressing.

India’s deficit is currently at 5.9% of GDP and is severely affecting investment in the country. Fixing the national deficit was therefore crucial for the government and for India’s continued economic growth. The new budget seeks to bring down this deficit to 5.1% of GDP this year through higher taxes and deregulation of subsidies on gas and diesel, a move different that was different from the expected populist policies that were thought to be promoted in this budget.

On the reform front, the new budget will seek to attract foreign funds to bring the economic growth trajectory back to India. Allowing FDI in retail and qualified foreign investors to get access to the corporate bond market were some of these policies.

But it was the aam aadmi who will be most disappointed with the budget. The recent Congress’ fall in election, corruption scams, and with the general election in 2014, a populist budget was in everyone’s mind. But the hikes in taxes to bring fiscal deficit under control shut out any populist notions. Custom duties were also raised on gold, of which India is the largest consumer, to reduce the investment in this unproductive commodity, which was also responsible for the fiscal deficit.

On the whole, the budget is pragmatic and revolves around measures to fix the fiscal deficit, turning out to be both cruel both to industry and aam admi by raising taxes. As Mukherjee said, “Economic policy, as in medical treatment, often reqires us to do something, which, in the short run, may be painful, but is good for us in the long run,” in the longer term, if all goes well, we may see the fiscal deficit reach the normal state and thereby see Indian market retaining their lost impressive growth and also see a decline in inflation. But in the shorter term, it will likely be only miseries. 

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