Opinion: Budget 2018 was more than just about elections, it may lead to long-term growth

Was it not Abraham Lincoln who said: "You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time."

The morning after Prime Minister Narendra Modi's government placed its last budget before the next general election on the table, described by some as a please-all, it is clear that  you cannot please them all forever: the World Bank in ease of doing business, economists looking for fiscal discipline, the urban salaried class seeking income tax reliefs, mutual fund investors seeking tax-free gains, and rural voters  eyeing higher incomes.

It is nobody's surprise that the focus has shifted to rural areas in Finance Minister Arun Jaitley's budget for April 2018-19 as the next general elections loom ahead, but for anyone looking beyond the grouchy "they-have-let-down-the-salaried-class" rant, the message is this: the budget is good for India's long-term growth, but beware of the inflation monster which is going to come tiptoeing, and maybe, charging. We can spare you the textbook economic theories about how it is difficult to keep inflation low and growth high for long periods. Tradeoffs are inevitable, both politically and economically.

The correct attitude to look at the budget is by viewing a giant demand engine that could shape up in India's rural areas as a result of the promised Rs 14.34 lakh crore of spending on agricultural and rural activities in the next financial year.  For companies like ITC and Hindustan Unilever, this means a demand for consumer products from higher rural incomes. Tens of thousands of small and medium enterprises serving anything from beedis to tractors are also potential gainers. They will spin jobs and generate incomes that help growth prospects in urban areas.

The caveat is that international oil prices are at new highs and the rural incomes fuelled by the budget could add what economists call "demand pull" to the "cost push" generated by higher oil prices. That's not all, prices of agricultural commodities, especially pulses, have been ruling low for a while now. When farm incomes go up as a result of the budget boost, chances are high that the prices of agricultural commodities also go up. A big part of the agrarian crisis is linked to farmers not getting remunerative prices for their produce. The flip side of this is that urban consumers have been enjoying low inflation. That honeymoon may be about to end.

Therefore, if you are an urban middle class Indian, it makes sense to look at prospects of long-term incomes as an opportunity and short-term inflation as a threat. Looking beyond the fact that there are no significant tax breaks -- if at all -- for the salaried class (unless you are a senior citizen), and peeping beyond the capital gains tax and dividend tax that will hurt mutual fund and share investors, the silver lining lies in the fact that pent-up industrial capacity will get used and manufacturing growth may revive. That means good news for long-term shareholders or mutual fund investors. Also,  inflation tends to lead to a revaluation of assets held by companies and thus tends to increase the long-term intrinsic value of shares.

So, do not be scared of share market jerks because they may hold long-term potential. But be smart in your spending in the coming days as spending on household food items may surge.

Economists have the sophistication to crib about missed fiscal deficit targets and how private investment has been held up, but that's their job. It pays to be on the right side of economic cycles, in which incomes and prices are tied up like Rahu and Ketu in Hindu astrology. Look beyond the immediate carping and you may find opportunities lurking behind the threats.

How about starting a business that might help farmers? You know, rural areas could do with some entrepreneurs. It may be raining money out there soon.

 

Madhavan Narayanan is a senior journalist who has covered politics, diplomacy, business, technology and other subjects in a long career that has spanned organisations including Reuters, Business Standard and Hindustan Times. He is currently an independent columnist, editor and commentator. He is listed among the top 200 Indian influencers on Twitter. He tweets as @madversity.

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)

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