Countrymen: you need to give a damn about Budget 2012

The countdown has begun. In another few hours, Union Budget day will be upon us. For economy watchers, Budget day is possibly the most important day of the year. By now, there are reams of copies on the kinds of announcements Finance Minister Pranab Mukherjee is expected to make.

Do you need to give a damn about Budget 2012? The answer to that is an unequivocal ‘yes’. The Union Budget matters no matter who you are - an ordinary salary earner, an investor, a businessman or even the government. Directly or indirectly, the government’s budget proposals affect us all.

Here’s how:

Aam aadmi: The most direct way Union Budgets affect the common man are through changes in income tax exemption and deduction limits. For instance, media reports suggest that this year’s Budget could contain a proposal to raise the income tax exemption limit to Rs 3 lakh from Rs 1.8 lakh currently.

That will surely affect the spending and saving patterns of a good chunk of salary earners. Other proposals like increased tax deductions on housing loans are also eagerly watched for because they affect buyer demand for homes significantly.

Plus, there are other, indirect ways in which the budget affects the aam aadmi. A proposed duty on diesel cars (which is being talked about), for instance, can eventually affect a potential buyer’s inclination to purchase such cars because they make such cars more expensive. Similarly, cut or hikes in duties of consumer goods ranging from cigarettes to computer laptops will also affect the spending patterns of ordinary households.

Businesses: Businesses are among the top groups that always have had much to look forward to in the Budget, so much so that they often release a ‘wish list’ a few weeks earlier of what they want to see in the Budget proposals.

Most of the time, their biggest hopes revolve around a variety of duty cuts across sectors that they believe will boost both investment and demand. The biggest fear is an increase in the rate of corporate tax or other surcharges.

Currently, high on the ‘wish list’ are boosters to investment and the implementation of the goods and services tax, as well as the direct tax code, according to media reports.

Indirectly, businesses are also affected when governments increase or decrease spending allocations for certain sectors. For instance, a proposal to up spending on removing agricultural bottlenecks by the government usually translates into gains for companies involved with agriculture. Similarly, increased spending in infrastructure means greater gains for infrastructure companies, which will benefit from more project opportunities.

Investors: Investors tend to keep a wary eye on Budgets because the government has a habit of periodically hiking the rate of taxes on trading transactions, especially in the stock market.

Last year, however, was more to the liking of investors: a Budget proposal to allow foreign investors to invest in equity mutual funds boosted sentiment in the markets significantly.

The expectation was that it would lead to more foreign investments and keep markets buoyant. (Of course, the exuberance didn’t last for long as the economy slowed under the whip of higher interest rates, putting off foreign investors who became net sellers in equity markets in 2011.)

Currently, expectations are running high that in the forthcoming budget, the securities transaction tax - a tax applied to all transactions in the cash segment of the market - will be cut. That should make trading relatively less expensive and boost speculation, which to a certain extent, is good for the markets.

The Budget is also usually the time when the government outlines its plan to disinvest stakes in key government-owned companies, with specific targets of how much it intends to raise via this process.

Government: The Budget is important for the government because it offers some indication of what kind of tax revenues it expects in the new financial year and what kind of spending it aims to undertake. It is also when the government makes estimates of the rate of growth for the economy and on what could be the drivers of this growth.

That’s important for all the other parties concerned - investors, businesses and the common man - because they too can make their individual decisions on saving and spending based on these estimates.

While it’s true that many of these estimates eventually turn out to be highly optimistic (especially on growth), they do provide a reference point nevertheless.