Modi’s Budget Bluffs

I want to quickly comment on the recent budget of Modi’s third term government. 

Firstly, government’s budget gets way too much attention than what it should ideally get. This is just a proposed budget, the actual budget will be different. Government’s daily policy actions have more impact on the economy than the budget e.g., Modi’s demonetization had far higher impact on the economy than that year’s budget. 

Now, after creating a perception of raising tax exemption limit to 12 lakh rupees, Prime Minister Narendra Modi bragged about this budget and said, 

This Budget is a force multiplier. It will increase savings, investment, consumption and growth rapidly. I congratulate Finance Minister Nirmala Sitharaman and her entire team for this people’s budget, the ‘janata janardan ka budget’,” 

Anyone who took introductory classes in economics will immediately know that Prime Minister Modi is either lying or is completely ignorant about the laws of economic science. I believe both are true. Modi is ignorant and also lying in that state of ignorance. 

Savings, investment, and consumption cannot increase simultaneously in any economy. Either savings and investment (and with them future growth) can increase together, or just consumption. All three can never increase together. Why? By the very definition of these three phenomena. Let us see.

Gregory Mankiw’s famous textbook on Macroeconomics (7th edition) defines saving, investment, and consumption in the following way:

  1. Consumption: Goods and services purchased by consumers.
  2. Private saving: Disposable income minus consumption.
  3. Investment: Goods purchased by individuals and firms to add to their stock of capital.

Saving, investment, and consumption — all three will come from earned disposable income. Suppose my post tax disposable income increases by 100 rupees after Modi’s budget. If I spent that 100 rupees on consumption I.e., buying groceries, that leaves 0 rupees in my saving. Saving is defined as a portion of disposable income not spent on consumption (see above). This means there is an inverse relationship between saving and consumption. What I consume I cannot save, and what I save, I cannot consume. Both cannot increase simultaneously. 

Now, investment comes out of saving. In my above example, suppose instead of buying groceries, I save my 100 rupees and invest those 100 rupees in buying a toaster oven for my bakery (suppose I am a baker) to increase my production. In this case, my consumption drops by the same amount as my saving i.e., 100 rupees. Here again, what I save (and invest), I cannot consume. 

The above discussion means, if Indians will spend the supposed tax break money on consumption, then they will not be able to save and invest that money. Because saving and investment is what increases future economic growth, any increase in consumption by the public will lower future economic growth. Alternatively, if Indians want to increase future economic growth by using their increased post tax income into increasing saving and investment, then they will have to lower their consumption. That is, they will have to sacrifice their present consumption for a better growth and standard of living in the future. 

Everything together cannot increase. It is an impossibility. 

By claiming that his budget will increase saving, investment, consumption, and growth Prime Minister Narendra Modi is misleading the public, which is his nature. He is basically lying and bluffing. Unfortunately, there are no real economists left in his government (or in the country) who can call his bluff. His lie will be amplified by his lapdog mainstream media and his IT cell people. Because opposition parties also lack true economic knowledge, they are also very unlikely to expose his economic lies and ignorance. 

Modi also claimed that his budget will increase future direct tax income of the government. A rule of thumb about this is, whenever something increases government’s revenue, it is bad for the people. Basically Modi has become a magician now. He is claiming that his budget will miraculously increase saving, investment, consumption, future growth, and government’s direct tax revenues all together! As I said above, this is an impossibility.    

Above I also said that Modi has only created a perception about raising the tax exemption limit to 12 lakh rupees. The reality is actually quite complex. In an ideal world where government follows all canons of taxation, the meaning of no tax up to income of 12 lakh would be zero tax if your income is 12 lakh rupees per annum. But that isn’t the case with this budget. As this article shows, you will pay substantial tax (and not zero tax) if your income is 12 lakh rupees per annum. The whole thing is nothing much more than mere semantic juggling. If government wanted to give people tax relief then they would have announced zero tax if your income is 12 lakh per annum, period. 

And, in any case, whatever little more money that government is claiming to put in the hands of people via this budget will be stolen by them in the form of increased inflation and other taxes elsewhere. 

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