A Commentary on Budget 2013

There is a lot of hue and cry over the Budget 2013.  There are a lot of contentious articles blaming Finance Minister of putting huge burden on the middle class. I am just trying to think aloud of FM’s rationale behind this.

Let us start with the basic question, what comprises this “Middle Class?” A broad income based classification, brings forth three classes: lower class, middle class and upper class. As per Tendulkar’s Committee report, population below poverty line is 29.8%¹, say ambitiously assuming, 2% of population are rich, which in this case, earning over 1 crore per annum. This gives middle class share to be around 68.2%.

Our FM has put up a surcharge of 10% for this 2% rich population. Government is bound to undertake welfare programs for this lower 29.8%² segment because they are poor. So how righteous is it to say that he should also exempt this huge chunk of 68.2%, when tax collection is the major source of revenue for government to carry out various planned and unplanned expenditures. Of course being reasonable, he has further classified this middle class into upper middle class and lower middle class and has tried to take appropriate measures for liberalizing the lower middle class by giving them tax exemption of Rs 2000 for income below Rs 5,00,000 p.a. and has tried to rope in the upper middle class to compensate. Now isn’t his basis looks justified from an equity argument, which is the fundamental role of any government. Further, we should also think from a national interest, considering that country is under a fiscal deficit of 5.2%. 

The basis which FM has tried to undertake for selecting this upper middle class are those who eat in Air Conditioned hotels, those who travel in cars, those who use expensive mobile phones and accordingly he has tried to levy taxes on those fronts. Isn’t it reasonable?

¹These population figures are estimates from 2010.

²I am being too generous in saying, welfare schemes for only 29.8%, when World Bank report 68.7% Indian population earning less than Rs 40,000 p.a. based on purchasing power parity.