‘Filibustering’ America to a Republican State

For someone who is as bad at vocabulary as me hearing ‘filibuster’ meant to look into the dictionary. Doing exactly the same I found out one of the definitions as mentioned below:

“verb [intrans.] [often as noun] (filibustering) act in an obstructive manner in legislature, esp. by speaking at inordinate lengths: Several measures were killed by republican filibustering”

Only Republicans filibuster or what??

I don’t know but I ll try to at least leave some image of how this measure is used by Republicans in United States to ensure the fall of iconic Mr. Obama in the next elections.
Bipartisan support for bills was never the norm in the senate and almost all the bills claiming the support of both Republicans as well as Democrats were either so because none of the sects wanted to be seen as a ‘No’ party or going away from the original draft the other group accommodated the changes to please both sides.

What has changed now?

Well nothing. Let us look into the backdrop of how Senate used to resolve such situations and that meant blocking of bill of any importance by even a single senator. Till as recently as 1920s American senate had no rule to end a filibuster and take a vote. It was only when President Wilson wanted to American involvement into the first world war and to do that he had to end a filibuster and conduct an actual voting that Senate adopted a rule (Rule XXII). In present form this rule asks for a supermajority (60 out of 100) senators to give their assents to end the filibuster.

So what? Didn’t Obama swept through the polls?

Well, yes he did but for the one seat which could have given him supermajority ( Democrats have 59 out of 100 seats).

But wasn’t the stimulus package (TARP) passed successfully?

Ummmmmm…..well Mr. Obama had a stroke of good luck with the defection of Mr. Arlen Spector he passed all that he could with filibuster proof supermajority he had (59+1 = 60/100 yeeaaaaaahhhhhhh….)

Isn’t that true still?

No, not anymore. With the sad demise of last of the Kennedy and the Democrat stronghold of Massachusetts going into the Republican kitty the supermajority stood no more (60-1 =59). What’s more, a senator (Democrat) from Indiana Mr. Evan Bayh got so frustrated with the lack of effectiveness of the current senate that he announced his retirement (Some people doubt whether he would have lost the next election anyway).

Lame Duck? So soon?

Not exactly, Mr Obama has his executive powers safely rested with him. Which he can ( and he had a few times) used to bring Republicans to the voting table. How on earth would you think his predecessor Mr. Bush made all those intelligent decisions.
Duh!

So is he safe?

No he s not. He has failed to pass the jobs bill or the health reform bill and he s being watched on both of these. Apart from the political front (yeah the Iraq and Afghanistan story all over again) and the TARP bill (What’s that? Yeah people forget easily) there s nothing much he can claim he has done. Though if the contents of the TARP would have been passed as a separate bill then this Government could have claimed to be one of the most productive one (Auto, Banking, Stock Markets, Jobs, Infrastructure everything in one bill. Phew it really was something.)

Healthcare, what has he done on that?

No one knows what he has done. Though the bill was passed successfully in the House in its own version and the Senate passed its own version (yeah yeah I know then he had that supermajority but guys he tried right?). Where he fell short was keeping his promises he made on the grand stands before the elections. He assured both the Private health insurers and the pharmaceutical companies before drafting the bill (and we listened to all that big talk about cutting the lobbyists to size). It was only the common people who never were kept in the loop of drafting the bill. No major attempts were made by Democrats to bring Republicans to a common discussion table or call for a debate on the reforms. And thus the main resilience to the reforms came from common people who never understood what is being talked about in the bill. This not only gave the Republicans a leeway to filibuster their way out of the reform bill but they have also leveraged public’s anger against the bill by not voting either for or against the bill. Though theoretically the only step remaining is to bring a combined version of the bill to both the houses and call for a vote but practically Mr. Obama might have messed the most important reform he could have brought to the ageing population in USA.

Jobs, What on that?

Well, the same fate as with the healthcare bill the jobs bill never saw the light of the day. With grim forecasts about the jobs in 2010-11 everyone expects the unemployment rate to be just below a double figure mark at about 9%. Many cynics (including the author of this blog) believe the rate can rise as the interest rates strengthen in near future and the effects of Government stimuli starts to show strains on the overall economic growth. This can but naturally derail the talks of fast recovery and employment generation by increased consumptions. But Mr. Obama is too smart to know all this and more and he also must be knowing that all this can ultimately lead to Republicans sweeping with bigger numbers in the coming November polls.

What else?

Well almost everything written down here is a layman’s view on political situation in America. Many may start thinking about the advantages of a uni party system (also known as Communism in many circles) as practiced in China. No sir, I don’t agree with that. The democratic error in growth rates will reap great benefits to all the democratic countries (according to Dr. Amartya Sen). And other factors like social unrest and lack of criticism of policies in longer run will prove to be larger burden on the whole political framework than the issues like filibustering (I just love this word!!!) or lack of political consensus. Though let me be politically correct and state that communism has its own advantage. Shifting from a style of politics and reaping its advantage may take a country several decades so as of now I think Democracies are better off being democratic rather than envy the growth of some red dragon in the far east.

All the best to Mr. Obama and his team to trump the cards in his favour in coming months and it would be very interesting to see how he shapes the coming months for the benefit of America. India in particular can learn a lot from America first thing may be to decide upon the electoral seats on the basis of population or else a single senator representing a million people might be obstructing the bill supported by representatives of a 100 million people.

IIT and the "Brilliant" schools

“Kya kar rahe ho aaj kal”……

“Ji mai IIT se MBA kar raha hun”….

“Acha IIT me MBA hota hai”….

After about 2.5 million such conversations I thought its high time I post my frustrations on a blog. It has become highly imperative for me to tell people about why MBA in IIT is not only important but necessary for India.

If you are a student from any A,B,C business school then you would be jealous to know that IIT MBA programs follow a semester system each one including 7-8 subjects. Looks cool aint it. Less pressure and stuff like that. I know looked cool to me too until I joined IIT Delhi for my MBA degree.

You know in terms of number of subjects covered in two years I agree we are not that brilliant as many of the “Brilliant” B-schools of India. But sometimes I wonder that why are there three different papers in Finance in those “Brilliant” schools when we cover all the three in a single semester in one subject. I haven’t yet got any satisfying answer.

I sometimes again wonder why is it that we are supposed to slog ourselves for three – four months in preparing some original knowledge for the Management as a practice as a whole in form of Term Papers in each subject. HAHAHAHA….. This time I do have an answer to this.

It is this thrust on developing some original knowledge in Management systems here that can open your minds to perspectives you could have only achieved 6 years down the line slogging yourself for those complete 6 years in an industry just like you would in any of the “Brilliant” B-schools.

Another aspect of IIT s which I personally appreciate and I am not sure how many old men like me will agree (I am 24 years but in IIT with 18-19 years b tech students in hostel I do feel old sometimes J ) is the energy which these young undergraduate students from b-tech stream fill in each individual in Hostel.

I can not think of a b-school where I would have woken up at 5:00 AM in the morning going for a football practice for my hostel team and then realizing the second oldest person in the team is 3 years younger to me. Though if you are as optimistic as me you would still go and compete against them and this kept my whole day energized thinking of how to beat these young turks. And all this, after you have slept at 3:30 AM finishing your marketing assignment (After all this is a b-school guys).

These young guys infuse in you an energy which you would surely find missing in any of the “Brilliant” b-schools where at 24 too you feel like a 17 year old just because every one else is so much experienced (I am calling them old you fools).

Now let me come to the disadvantages of IIT MBA. One being that at current IIT Delhi 09-11 batch there are only 53 students. Though this assures you of some surety with respect to the placements as IITs can any day bring companies for 53 students BUT guys L You ll not be able to socialize with 300-400 people that you do in the most “ Brilliant” b-schools (What percent of them the students get placed in a recession is again a gigantic topic of discussion and I am no lawyer of any particular institute).

Another disadvantage particular to Delhi is that IIT Delhi being situated in heart of the city provides a lot of distraction to even the most saintly fellows like me. South Delhi is not an easy place to study, believe you me. Though from other perspectives it is a truly truly awesome place to be in. I am away from all the bad habits like drinking in sexy pubs and roaming around the most glamorous of markets so I don’t enjoy this much you know.

Well, I think I tried to explain how lonely it is in IIT with my football team, my classmates, my foreign exchange student friends, my local friends and my hostel friends especially if you are enrolling for an MBA.

Also if you are a spiritual person unlike me then there is one more reason for you to hate IIT ‘s MBA program, it brings a materialistic attitude in all the students (MBA fee currently for two years will hardly touch Rs 2 lacs ) in a view that they all start feeling happy with the Return on their Investment (even 2 lac for 2 years is an investment). This may not be the situation in other “Brilliant” b-schools so again they beat IIT MBA programs with 10-12 lakhs in fees.

Urggggggghhhhhhh I am damn disappointed.

I think to cool down my temper I ll be going for a lawn tennis session its just 11:30 PM right now. Will update you guys on any other difficulty I am facing in IITs.

P.S. : I still have no idea how many of the “Brilliant” b-schools have Tennis courts.

Sub-Prime Crisis – An Indian Perspective

No one can deny the extent of current financial crisis which many term as the biggest economic crisis since the Great Depression of 1929, though many more think of it as even bigger a crisis. Many term it as a depression while the more optimistic of them still hold out to a milder context in recession.

What is a Sub-Prime loan?

‘Prime’ and ‘Sub-Prime’ are both used to define the credit rating of borrowers in U.S.
While the term ‘Prime’ is reserved for borrowers with good credit rating based on their track record, the term ‘Sub-Prime’ is used to describe borrowers with below par track records. This segment generally contains the poorer and younger population.
A ‘Sub-Prime’ loan is a loan catering to the latter segment of people.

Why were the loans disbursed?

The housing prices in the US more than doubled in 2007 since the year 1997. This incentivised the loan disbursement by the banks to the Sub-Prime creditors on the logic that the lenders would be able to pay the money back due to increase in property value. This allowed people with below par credit ratings to access loans which would never have been given to them by common financial logics of following the credit ratings. The federal government too did not interfere as it saw an opportunity where even the poor and the young could own homes.
Ideally these loans would have gone only till the time the liquidity was sapped from the system. With stock markets on historic highs and the whole economic system bubbling with excess cash, many hedge funds and mutual funds saw an attractive opportunity in the form of Sub-Prime loan portfolios. This way the Sub-Prime lenders were provided with fresh funds to lend to the Sub Prime creditors and the cycle continued.

What went wrong?

These Sub-Prime loans have been devised for creditors with poor financial track records and below par credit ratings. This made the lenders charge a higher rate of interest compared to the Prime category of loans. This in turn cascaded to higher EMIs for the loans. This increased the risk on the portfolios as the people who were lent the loans already were not so strong financially and these increased EMIs put the repayments to risk. With so much liquidity flushed into the system the federal government did nothing to control the liquidity or to remind the lenders of financial prudence. More and more complex products were devised by the lenders defying all the logics.
This continued on till the housing bubble busted in 2007-08. Primary reason was that the housing supply surpassing the demand. The house prices started falling. The Sub-Prime borrowers started to default on their payments as with already stretched finances they did not want to pay for the house which was falling in value.
Since the collateral for all such loans was the house itself, all such defaults lead to more and more houses being put up for sale and hence the supply increasing even more and thus the further drop in prices. This constituted a sort of vicious cycle. There are pockets of houses where the prices dropped almost 50 percent of their peak. This decline in housing prices made the matters worse for the lenders who now had the collateral valued less than the loan lent. This prompted a majority of mortgage players to book losses.

Complexities of the products

One major reason behind the crisis was the unwarranted complexities in the financial products being traded in the mortgage market. Firstly, the first hand lenders securitised the mortgages (loan portfolios). These Mortgage Backed Securities (MBS) were sold to other market participants and they sold it further to other players and so on.
This is one of the reason why none of the players knew how much toxic assets they carry and the situation remains so until the dust settles down. This is also the reason why financial corporations like Citibank and AIG even with all the financial powers could not forecast the amount of hit they are going to take as the scenario becomes a bit clearer. This not only did affect the ignorant lenders but also the more prudent ones like Freddie Mac and Fannie Mae. These two mortgage giants did not disbursed the loans ignoring the credit ratings but when the mortgage market went bust they also received heavy jolts and booked losses in excess of $12 billion and had to be nationalised.

Impacts of the crisis

What followed was the slowing of U.S. economy with a huge vacuum created in the credit markets. The credit markets went dry as the banks did not have enough to lend. This hampered the credit raising ability of many corporations which included manufacturing firms like GM, Chrysler. Hence these corporations already battling it out in a slow U.S. economy further suffered the brunt of credit squeeze hampering their day to day operations.
The banks did not trust the toxic exposure of other banks and this prompted them not to lend each other. This draught in intra bank lending escalated the credit crunch and led to further distrust on the balance sheet of other banks.
Also what followed was the increased number of defaults and foreclosures hurting the already weak economy. Not only the lenders but the corporations providing Insurance to these toxic assets were also hit hard. Insurance giants like AIG and Ambac who provided CDS (Credit default swaps) to these toxic assets thus ensuring that in case of any default they will insure the securities. With increased number of defaults they also bled as they initially did not lay stress on the quality of MBS they are insuring under the CDS.
Global banks and corporations had to write down the debts with largest hit taken by Citibank and Merrill Lynch in U.S. and UBS AG in Europe. However the hit on Asian institutions was limited one with Bank of China writing down the maximum of $2 bn. However many big shadow financial institutions like Bear Stearns, Merrill Lynch and Lehman Brothers filed for bankruptcy. Bear Stearns was brought by J.P. Morgan chase while Merrill by BoA. The collapse of AIG was avoided by the Fed by providing a bridge loan to it and thus avoiding the collapse of complete financial structure.


The total economic impact due to these MBS are difficult to calculate as still the picture is unclear about who is holding how much toxic an asset. Between January 1, 2008 and October 11, 2008 only the losses by U.S. corporations amounted to about $8 trillion as the assets in hands of different corporations reduced to $12 trillion from a high of $20 trillion. But this was just the tip of the iceberg.
At a global perspective this crisis threatened the countries with large reserves like Japan, China who invested quite a huge amount of money in U.S. securities.

Other important factors

Though the factors mentioned above may be the immediate contributing factors there are other long term factors too which should be taken into consideration. The increase in real wages in U.S. was 75 percent from 1950 to 1975. So the extra goods produced by the U.S. were consumed without any problems and hence the U.S. economy grew.
This increase in real wages stagnated from 1970 to 2005 and grew at 2 percent in this period. Also the reduction in amount of work per week by an average U.S. worker decreased and thus the average weekly wages of an average U.S. worker has been on decline.
On the other hand the productivity has improved more than 70 percent in last 30 years. Thus out of total increase in profit which would be more than 70 percent only 2 percent was diverted in labour wages while the rest was parked with corporations. So the increase in production could only be consumed by population by borrowing from banks. The bank-corporation nexus emerged and with the money parked in the banks these banks grew phenomenally.
The average population in the mean time carried on consuming the products but with fewer incomes they had to borrow more on mortgage. At one time the ownership of homes decreased from around 70 percent to less than 50 percent as mortgages rose. Also the housing market emerged stronger as the consumption was linked to this housing market and so the demand for more homes by citizens of all background rose. Since demand kept on increasing the home equity also kept rising and as the house was collateral and it decided the amount of loan lent to a person so a housing boom was created.
Till now the mortgages rested with the banks that through their subsidiaries shed these toxic assets to their investment arm or shadow financial institutions like Investment banks and hedge funds in the form of MBS (Mortgage Backed Securities). Thus as the bubble was being created these securities were being sold to almost every institution having a financial exposure.
Since the wages were stagnant, the U.S. citizens could not sustain consumption. This cut down on consumption cascaded to fall in demand for houses. As the demand dipped, the home equity too fell sharply. Shadow financial institutions tried to sell these securities but there was no security left it was a junk toxic asset. This further declined the home equity and this made people default on mortgages. These things worked in a vicious cycle. People were unable to roll over their debt as the home equity fell and thus foreclosures made their way. This created the ruckus in financial markets. Also hit hard were the insurance companies who with CDS instruments insured these toxic assets.
Another factor which was primary to this crisis was the Current Account Deficit which U.S. ran in recent years. Defying the traditional logic which says the rich country would be in surplus and poor country in deficit did not hold true for U.S. The east asian economies after the 1997 debacle built up the current account surpluses through many factors including undervaluing the currency. This factor is much pronounced in the U.S. trade partnership with China. The heavily undervalued Rimnibi made sure that China runs heavy current account surpluses over U.S. This made U.S. to borrow more thus, increasing the liquidity in the market. Also countries with huge reserves like China and Japan also invested there surplus money into U.S. securities thus increasing the liquidity of the U.S. markets. This prompted the corporations to lend recklessly ignoring the financial prudence.
Another factor was the emergence of neo-liberals in the U.S. economy who have always demanded the markets to rule themselves and decide what is good for them. This has reduced the role of an agency like the Federal Bank who could have stopped such an escalation of reckless lending and complicating the financial products.

Indian perspective

Looking at this crisis with an Indian Perspective the exposure to these toxic wastes was not huge. It was more of a crisis of trust among the banks which culminated in the credit crunch. India which was more concerned with the problem of inflation which was hovering at above 10 percent level suddenly had to balance a scenario with credit squeeze and inflation at sub zero levels. Rising CRR and other benchmark rates which were a trend in India during late 2007 and early 2008 to soak excess liquidity had to suddenly brought down to ease of the credit squeeze.
Though India was more or less robust during the whole crisis there were some chinks in the regulatory armour which did lead to some impact on some sectors.
The hugely hit sector was exports sector which according to some estimates has laid off more than 1million people especially in export hubs in Gujarat and Tamil Nadu. The Government did act but too late too little was done with these sectors as they were grappling with fall in demand in U.S. and European markets.
The IT sector which also saw some rough whether due to bankruptcy of many important clients and fall in demand for existing customers had to resort to cost cutting measures to maintain a healthy bottom line since the top line was either stagnant or declining.
The revelation however was the rural economy which proved to be a boon for India in these tough times. The rural India or Bharat as it is being referred to in many columns kept on consuming because of many reasons among which the farm loan waiver scheme and record monsoon in 2008 were the main reasons. This consumption was clearly visible in FMCG results as well.
Other long term factor which saved Indian economy was a savings driven structure contrary to the consumption driven structure of the west.
Though India was robust it was hit in two channels i.e. Consumption channel and Investment channel. After the record FII in 2007 it was the bears that rose to the occasion and with heavy action in U.S. many prominent players packed up their holdings and went home. Also in consumption channel the real estate which was rising steadily in India fell down and exposed the weak structures of Indian reality firms.

Role of RBI

Unlike many central banks across the globe RBI perhaps was the only one which held up its cards till last moment and though it did tried to ease of the money supply it never went emotional to decrease the rates to a sub 1 percent level as was seen across the globe.
The main reason being the 12 percent inflation which the RBI was fighting before the recession swept past India. It knew that once the economy bounced back it will again have to handle inflationary pressures on the economy. What also comforted RBI was the meagre exposure to toxic assets for Indian banks and the strong Public banks balance sheets.
RBI reduced the CRR by 50 basis points to 5 percent in January 2009. This infused the liquidity to the amount of Rs. 20,000 Cr into the system. Now the banks had to park only 5 percent of the amount with RBI and the rest could be used to lend and thus increasing the liquidity.
RBI also reduced the repo rate and reverse repo rate by 100 percent to 5.5 percent and 4 percent at the same time, thus de-incentivising the parking of bank funds with RBI. This means that RBI would charge less on the funds borrowed from it thus asking banks to increase lending and also the reverse repo rate decrease paid less interest over the amount parked with the central bank thus asking the lenders to use it to lend to private consumers.
Though this was done with good intentions the private lending did not pick up as private banks still were hesitant to lend. Another effort was made on April 22nd 2009 when RBI brought in a second rate cut which made Repo and Reverse Repo at 4.75 and 3.5 percent respectively.
Since September 2008 RBI has reduced the Repo and Reverse Repo by 425 and 325 basis points in an attempt to boost up the liquidity and private lending. But with inflationary pressures again mounting over the economy with Oil rising up and commodities becoming hot again it is to be seen how much time the RBI takes before it raises the rates again.

Though India showed its robust economy to the world during this recession it would be rather cruel to say it did brought some positives for India. If not for recession Satyam fiasco would have been covered up. Also the strengths of Indian public banks were appreciated by the world as by the Indian aam adami. The faith in savings based structure was restored and a more efficient RBI showcased its efficient policy making. The rush of deposits in national banks helped them lend to the needy sectors like education and infrastructure. Though the crisis is not over yet but the worst certainly seems to have passed.

APPENDIX
RBI – Reserve Bank of India
CRR – Cash Reserve Ratio
FMCG – Fast Moving Consumer Goods
FII – Foreign Indirect Investment
MBS – Mortgage Backed Securities
CDS – Credit Default Swap

ACKNOWLEDGEMENT

www.rbi.org
The Economic Times
www.forbes.com
www.wikipedia.com

Union Budget 2009 : Between the lines

Union Budget 2009 - 2010 – An Analysis

With economy showing signs of revival and threat of a bad monsoon, all eyes were on the finance minister Mr. Pranab Mukherjee to deliver an inclusive budget which caters to both India and Bharat. As stated by the FinMin the purpose was to stimulate consumption and thus the growth. His hopes for an early rise from the troughs may pin too much on the monsoon but his budget underscores the broader objective of putting money into people’s hands especially in rural India.
Though the largest budget day fall in the history of Sensex of more than 800 points may not truly denote the merits of the union budget but there may be a thing or two for bears to rise above the bulls on Dalal street for days ahead.
Discussed below are some of the budget proposals as laid down by the finance minister in the Parliament on July 6, 2009.

Agriculture

With more and more districts declared draught hit in this years fledgling monsoon there was an urgent need to address some of the farm issues and Mr. Pranab did just the same by increasing the credit flow target by 38,000 Cr in 2009-10. Also the interest subvention scheme for the short term crop loans and the extended moratorium period for debt waiver scheme also helped the cause. Allocation under the AIBP and RKVY increased by 75 and 30 percent respectively will increase the irrigation benefits to much larger land mass and also provide advanced technology which will help increase the crop yields.
The most important step for agro reforms was the intention to move towards nutrient based subsidy regime and also to move to a system of direct transfer of subsidy to the farmers. This will increase the yields as farmers can use all the fertilizers needed instead of just the urea based fertilizers.
These sops on agriculture as well as rural consumption can give a much needed boost to food processing industry. This can give them the scale to operate at much lower operating costs and thus making them competitive in global scenario which would also be supported by the roll out of GST mentioned in the budget.

Money for Bharat??? Will they consume???

One major highlight of the budget is the different strategies under which money is arranged for the real Bharat that is the rural India which saved the economy from the recession threat.
The first step to be discussed here is the increase in the minimum wages to Rs. 100 under NREGS. This coupled with the increase in allocation of NREGS by 144 percent to Rs. 39,100 Cr is capable of spurring consumption in the most unlikely corners of rural India which covered more than 4.47 Cr households in 2008-09. This means that the people will now have minimum Rs. 100 for 100 days i.e. 10,000 rupees to spend. This amount of money with people who have never seen this amount before will not only help them improve the living standard but also leave something to get themselves indulge into.
What will be the return on this? Well, the budget laid out another proposal by the Finance Minister to increase productivity of the schemes under the NREGA by converging it with some of the other ongoing schemes under water and food resources, rural roads and agriculture and forest resources.
This scheme again opens up an opportunity for financial inclusion of rural masses which is dismal if one refers to the recent BCG report stating that 135 million homes do not have access to formal banking.
Provisions are made to cover all BPL families under RSBY and allocations are increased by 40 percent. Allocations are also increased in NRHM by Rs. 2,057 Cr. This is a solid step in ensuring the aam adami from the health related uncertainties.

Fiscal Deficit - Should we be worrying?

The fiscal deficit has increased from 2.7 percent in 2007-08 to an astounding figure of 6.2 percent of GDP in 2008-09. The growth rate in the last fiscal which stayed at an optimistic 6.7 compared to the sub 6 percent forecast by numerous agencies may have played a part in Governments efforts of staging a sort of economic coup by focussing on a growth rate of more than 7 percent in the current fiscal.
The only worry remains that of the policies of fiscal prudence are being tested a tad too much. Finance minister stated that the fiscal deficit may rise to 6.8 percent of GDP. According to DBS economist Ramya Suryanarayanan with state level deficits added in the combined deficit may rise to an astronomical level of 12 percent of GDP.
Considering the debt-to-GDP ratio at 80 percent the Minister needs to take a stock of rising fiscal deficit before we are reminded of the East Asian Crisis of 1997 which peculiarly had the same flavours of disaster.
The total expenditure of Rs. 1,020,838 Cr is a 36 percent hike in expenditure for 2009-10. Coupled with a record borrowing of $98 billion this budget may dry up the liquidity well pretty fast. This Government borrowing can decline the credit lending to private players as they will have to compete with Government bonds in the local markets. This can put the growth story back to square one. Also concerning is the behaviour of banks where lending is concerned. Now with mandatory 24 percent investment of deposits in Government debt the banks will be forced to keep the rates high even if the RBI behaves otherwise. This can again put a risk of credit squeeze.
In the past too RBI cut the rates by 425 basis points while it was matched with a cut of 150-200 basis points by the banks. The boon of a robust economy during recession can prove a bane as inflationary risks rise due to these huge borrowings by the Government. A proactive role by RBI can only see that the recovery does not slow or even ends with this fiscal crisis.

Information Technology

IT industry was one of the hardest hit industries in the economic slowdown. They were though cheered up by the budget proposals. The tax sops for IT industry was extended by one year and this will immensely help them in retaining their competitiveness and also help them revive with the bouncing economy. Also, the multiple taxation on packaged software will help them cut some costs on that end and the removal of FBT will relieve the employers from paying more for retaining talent. Also an independent mechanism will be put in place to deal with independent captive units of MNCs. Also encouraging was the Government spending planned for Unique ID card for all citizens and computerization of employment exchanges along with huge infrastructure projects. This will generate some revenue from the domestic market as the companies are finding it hard to attain contracts from foreign clients.

Tax Proposals

Government’s resolve to implement GST at the earliest will help attain cost competitiveness for many industries. Adding that with the removal of surcharge over income tax which will increase the post tax income by as much as 5 percent are all pointing towards increase in consumption in coming months. Also increased were the exemption limits and the deductions limits under certain heads. Also weighted deductions on in-house R&D expenses will boost the R&D. The 100% deduction to the donations to electoral trusts will surely help removing the black money out of electoral process. The overall revenue loss rose to about Rs 4 lakh Cr on exemptions.

Disinvestment

The one place where Government tried to pull up the socks was on disinvestment front where a promise of unveiling the complete policy in coming few days and the reduction of Government stake to 51 percent may have left some places to earn the revenue. While the promise to hold public banks and insurance firms with Government may not be as reformist an approach but surely has calmed some nerves of the employees in the sector.

Maharashtra, Tamil Nadu and Bengal

One can not help thinking about the special announcements made for the states of Maharashtra, Tamil Nadu and Bengal and the state elections scheduled for all of these three states in the coming year.
While for the first time Finance Minister has tried to look into the plight of the farmers in Maharashtra who took loans from the money lenders and hence did not qualify for the one-time debt waiver scheme by setting up a task force, it seems a lot of coincidence that the Maharashtra polls are scheduled for September-October this year.
Other important announcement was the increase in allocation of Central assistance to Mumbai to address the problem of flooding. The amount ramped up from Rs 300 Cr to Rs 500 Cr in an election year is again a coincidence. Also even after 3 years the efforts have hardly relieved Mumbai of the flooding woes hence it is not the money that is lacking but the implementation.
Also the extension of moratorium on repayment of crop loans has been increased till December 2009. This may again stress the aligned objectives of Congress and Finance Minister in terms of election strategies.
Allocation of Rs 500 Cr for the rehabilitation of Sri Lankan Tamils may also be well thought of agenda to increase the Congress acceptability in Tamil quarters. The setting up of a handloom cluster in Tamil Nadu may also not be bad idea considering the importance of existing Tirupur cluster being the hub of garment exports in India. Though many people raised the point of Tamil Nadu elections scheduled for next year as a point of reference for these announcements.
The other state where Congress did well in LS elections was Bengal where it is seeing an opportunity to replace the Left rule after a long time. Since the elections are scheduled for next year here too the sops were raining like anything. The setting up of AMU campus in Murshidabad may be aimed at wooing the minority votes away from Left after the recent clashes in Khejuri and Nandigram but it may not serve the true purpose of a full fledged University which is needed badly in that area. Setting up of one handloom mega cluster in Bengal too may underline the importance of Bengal in the national political arithmetic as no cost advantage can be attained after setting a handloom centre in Bengal which does not have a cotton source near it.

Uttar Pradesh

A comeback in UP has had Congress dreaming about the revival in the Hindi belt. This was also a flavour in the Budget. A mega cluster will be set up for carpets in Mirzapur along with Srinagar (J&K). This will help the local economy to a large extent as the adjoining areas in UP are counted among the most backward ones and in past have been blamed for pushing youths into crime. Also the PMAGY for villages with high SC concentration can prove to be a lethal weapon against the Mayawati’s pro dalit campaign in U.P. Also the increase in minimum wages to Rs 100 in NREGS may also help Congress get some crucial positives in electoral terms.

In this budget the Finance Minister has taken a bold step of trying to spend his way out of slowdown. By putting the money straight into aam adami’s hands he has done the right thing but still negatives in the form of inflationary threats and a bad fiscal deficit projections looms over the economy. The North-Eastern states and the J&K were left from the budget at a time when discontent is growing among the states. Only time will tell whether these risks pay off or backfire.

APPENDIX

GST – Goods and Services Tax
BPL – Below Poverty Line
NRHM – National Rural Health Mission
RSBY – Rashtriya Swathya Bima Yojna
NREGS – National Rural Employment Guarantee Scheme
NREGA – National Rural Employment Guarantee Act
LS – Lok Sabha
AMU – Aligarh Muslim University
PMAGY – Pradhan Mantri Adarsh Gram Yojna
Cr – Crore
BCG – Boston Consulting Group
MNC – Multinational Corporation
RBI – Reserve Bank of India
FBT – Fringe Benefit Tax
IT – Information Technology
GDP – Gross Domestic Product
RKVY – Rajiv Kisan Vikas Yojna
AIBP – Accelerated Irrigation Benefit Programme

ACKNOWLEDGEMENT

BUDGET 2009-10 (http://indiabudget.nic.in)
The Times of India
The Economic Times