The slippery road to wealth.

To spend or not to spend, that is the question being debated by pundits in India. It refers to the budget which has committed to stick to a fiscal deficit target of 3.5%. Fiscal hawks want the government to stick to its deficit target, no matter what. While the Chief Economic Adviser, Arvind Subramanian wanted the target to be relaxed and expenditure increased, in an effort to boost growth, the Governor of the Reserve Bank, Raghuram Rajan warned," As Brazil's experience suggests, the enormous costs of becoming an unstable country far outweigh any small growth benefits that can be obtained through aggressive policies. We should be careful about jeopardizing our single most important strength during this period of global turmoil, macroeconomic stability." Commodity prices, especially that of crude, are down which gives the government plenty of extra money to spend, by reducing its import bill. As the price of crude has dropped so the government has been increasing the excise duty on fuel, raking in over Rs 1 trillion in revenue. If there is a global recession we may need to increase spending to stimulate growth, so we must consolidate at present. Others take the opposite view. For them "....it was necessary to to breach the Lakshman Rekha for the fiscal deficit at 3.5% of GDP. The second was additional resource mobilization through taxation, which could have increased degrees of freedom for the government." The budget has done precisely that. There was a cess on service tax and another on cars. Car sales have fallen 2 months in a row and higher taxes may cause a further fall in sales, which will reduce tax collections. A tax has been imposed on dividend income above Rs 1 million and a surcharge of 15% on incomes above Rs 10 million a year, are taxes on the rich. According to these people ".....the size of our market, in terms of population if not income, is the biggest asset." Is it? Only about 3% of people pay income tax. That is because most wealth is in real estate, a lot of which is inherited. Thus there are millionaires on paper who do not earn enough to pay taxes. Secondly, the vast majority of poor spend more than half their income on food and essential items so most of service tax is realised from the middle class. Cost of healthcare and education have spiraled and while these add to the GDP they are not productive. China provided a stimulus of $586 billion in 2008 which was widely praised for reducing the length of the global recession. Now China is struggling with a debt of $28 trillion which is a drag on the global economy. Pundits urge India to institute structural reforms but the discussion is always centered around how to increase subsidies to the poor and not on how to create wealth. We can be poor or we can be rich, we cannot be both.