Home » Expert Speak
Subscribe for News letter
Fetching Data...
Site Map Why Finalaya

Expert Speak

Union Budget: Pain of an AamAadmi

G+ Profile |
Category:  Economic  
| 26-02-2016 01:22 PM

Compared to 2010, the cost of living for an average middle class family in most cities has gone up by a minimum of 20%. But we are still about 70% cheaper than the United States of America, and that should be a good starting point for this discussion which is otherwise filled with some hard hitting realities. The salaried class is the worst hit for more reasons than one. We have attempted to highlight some of the areas of concern that the FM would hopefully address in his budget.

All eyes on implementation of 7th pay commission

Small concessions in direct taxation have been neutralized by a higher cost of living, leaving lesser actual disposable income. However, the 7th pay commission report is now getting ready to be implemented effective January 1, 2016, albeit with a higher percentage of pay hike than what has been recommended and that should put some additional cash in the hands of central government employees. State governments may not lag behind, though the private sector is likely to drag its feet at least for some time to come.

Stagnant Industrial Growth while the IT sector shines

Industrial growth has stagnated translating to fewer employment opportunities in that sector. Engineering colleges around the nation are fighting for survival for want of intake. The state of higher education in India is far from impressive with a handful of exceptions.  The IT sector continues to ride the waves. With more multinationals waiting on the wings to expand their presence in India, the Finance Minister might explore ways and means to sustain the momentum and perhaps provide more impetus. Most states have focused on developing appropriate infrastructure for the IT industry and that augurs well for the economy as a whole and employment generation in particular.  We need those jobs by the day or by the night – don’t we?

Soaps for IT sector setting shop in smaller cities and towns

The IT sector could benefit significantly if the budget provides a thrust to developing tier II and tier III cities in India into productive hubs. Implemented with vision, it can be a win-win measure for all stake holders. The spin off from the impetus when provided can generate more support and ancillary jobs in the semi rural and rural towns of India.

Affordability of homes for the middle class

Driven by avarice, housing cost in most cities has gone through the roof. This can potentially trigger a Fannie Mae somewhere down under. Many banks and Public financial institutions that have given home loans to these high budget homes could come under significant stress with series of defaults staring on their face. Several cities also have large number of unsold properties.  The chart below provided by magicbricks.com has its own story to tell.

The aam aadmi needs affordable homes or at least 2BHK flats in the urban and semi urban areas. The average EMI in a Tier I city for such homes should not exceed Rs.10, 000 over a 20 year term. A focused effort to build such homes will have inverse pyramid effect on the economy.

Key reforms in tax administration is the need of the hour

There is a strong case for a complete revamp of the tax system in this country. Temporary measures focused on fatter revenues fail to address the larger issue. Equitable compliance and a transparent system can be shot in the arm for this age old system. The current scenario on tax evasion and other related concerns must have engaged the attention of the FM and a robust tax regime coupled with an efficient tax administration can usher in enhanced compliance and thereby stronger revenues.

Primary education  is highly commercialized and it is a nightmare for the middle class to provide quality education even for two children per couple.

Primary education for kids has become a serious business and parents are required to chip in with substantial sums of money quarter after quarter.  Unfortunately many players treat this simply as a business and earn huge profits from it. Cutting across occupations and social status, no one questions the goings on in these institutions and adding to the financial woes, most managements across the country are arrogant. In the name of disciplining kids, they treat the parents very shabbily. In a recent instance, the High Court of Punjab and Haryana appointed a committee to examine profits earned by private schools. Findings of the committee were shocking even with the very first school they focused on.  The fee kept increasing year after year in spite of several crores earned in profit every year. More agonizingly, the committee also noticed accounting discrepancies as well as recording lower profits than the actual.

These findings in Punjab are merely the tip of the ice berg. It is an epidemic across the nation affecting nearly every family, irrespective of caste creed or religion.  For generations to come, the aam aadmi would be thankful to the PM, the FM and the Government in general if this contagion can be arrested. School uniforms can be rationalized so that respective schools do not run a subsidiary business out of it. New outfits like Ola and Uber can be encouraged to devise an appropriate school transport system, may be in the metros for a start. The government should fix the fees after carefully scrutinizing the facilities provided by the school, quality of teaching and other infrastructure. There should be no interim demand from the schools under any pretext whatsoever. Admission process in the so-called high end schools should be more transparent and the practice of hefty donations must stop.

Occasional eating out in a mid segment hotel has become a luxury

Most of us have this experience, irrespective of the town or city that we live in. But how often have you noticed that we end up nearly 20% of the bill only in taxes? Often times, we look at the menu card and believe that the price mentioned there is what we pay. But only when you receive the bill, you realize that you need to cough up as much as 20% over and above what the restaurant charges you. As though this is not enough, some hotels even charge you a 10% service charge – not service tax. The table below illustrates this.

The aam aadmi is already parting with a lion’s share of his measly earnings in the form of direct and indirect taxes.  Scrapping the taxes on food served at least in the mid segment restaurants will give him access to some perceived luxury at least.

Reduction in petroleum prices not reflected in transportation costs

The cost of petrol and diesel has reduced by about 40% between the last budget and now. However, this reduction has not been passed on to the consumers by public transport, goods transport, taxis and related segments.  Central and state governments were in a hurry to raise these rates when petrol and diesel prices were climbing up. In broader terms when oil costs $30 a barrel, Indian consumers should be paying about Rs.30 to a liter of petrol. Conversely, more than 50% of the prices we pay represent taxes and duties of varying hues.

Erosion in healthcare

The proliferation of private ‘5 star’ hospitals or corporate hospitals is an eloquent testimony to the erosion in our healthcare system.  Public hospitals that played a major role in providing easy access to medical care for the poor are diminishing in numbers as well as quality. The private hospitals mean time claim to provide world class medical care. Though these claims are to some extent admissible, the charges to put it mildly are exorbitant.  These hospitals need to be made accountable for a range of undesirable practices they follow and their charges need thorough revamping.

Promoting medical tourism could be an effective measure to ensure optimal utilization of the expensive infrastructure created by the corporate hospitals. But, such measures should also be accompanied by appropriate riders to make the costs viable for the visiting patients as well as the locals.

Multiple taxation

Most products that the common man uses nearly every day, suffers multiple taxation. For instance, when you buy a washing machine, there is a direct tax component in the form of sales tax and VAT. But the landing cost for your vendor includes excise duty paid by the manufacturers, taxes he paid to his vendors on components, taxes suffered by the vendor on raw materials used by him and that vicious circle goes on endlessly.

The proposed introduction of GST can bring some relief to the aam aadmi.  However, the government should also ensure that the resultant benefits are passed on to the consumer than enriching the traders or manufacturers.  As a nation, we are perhaps used to keeping those extra bucks than passing it on to whom it is legitimately due. Effective enforcement alone can treat this disease.

 A silver lining in the cloud

Road travel has become more comfortable with the toll roads. In the midst of all other pains, it appears that we are now enjoying those long rides on these nice roads. Thanks to international machinations, we can afford a few more snacks en-route. Does that soothe you a bit, in the midst of all the pains?

Petroleum prices can come down by at least Rs.5/- per liter. That would help the aam aadmi by a lunch/dinner, rather than the snacks on those long haul trips that he undertakes once a while. After all we have coughed up much more when the international crude prices were ruling at about $100 to a barrel.

Raghav Chandak Lead Financial Analyst

Over 7 years of experience with competencies in Financial Data Research & Modeling, Financial Product Development & Management and Financial data distribution.