The Hindu Business Line : Short-term pains for long-term gains

All attention must be focussed on sustaining the journey at a higher trajectory. If for that purpose we need to sacrifice something in the short term, so be it.

The Finance Minister rose to deliver his Budget speech with the spectre of inflation looming large over his shoulders.

To some, a 6 per cent inflation rate may appear benign. It is certainly not so. Inflation is a non-secular monster affecting different segments differently and dramatically. India has chosen the path of reforms with a human face. Reforms with "human face" in political economy terms means benefits of growth accruing to all sections in measures commensurate with their needs and aspirations in a manner that will lift most of the under-privileged to a status of dignity and comfort.

Inflation tends to skew the percolation of the benefits of growth towards unintended target segments. Therefore, I watched the Budget speech with bated breath.

The Finance Minister came out well, from a long-term perspective. It was a Budget which represented commitment to continuity of reforms, the India Growth Story and the ability to offer measured responses to the challenges of our times.

Economists have been telling us for the last few years that if India is to eliminate poverty, the economy must consistently grow over 8 per cent with a minimum of 30 per cent savings and investment rates.

The Finance Minister reiterated the simple mantra that lack of high growth - not high growth - is the cause of poverty. Therefore, all attention must be focused on sustaining the journey at a higher trajectory. If for that purpose we need to sacrifice something in the short term, so be it.

The major threat to our growth story emanates from a high rate of inflation and consequentially high interest rates.

The proposal on cement in that respect maybe symbolic and should be looked at as such.

The Finance Minister did announce several measures that will lead to easing of some of the supply-side constraints and to a large extent eliminate distortions in interest rates caused by hidden tax subsidies to mutual funds.

This should eliminate the tax arbitrage between bank deposits and mutual funds on interest incomes.

The other moderating influence on interest rates can come from soothing the heated real-estate market, which in any case was happeneing at the time of the Budget. Yes there are some problem points such as the FBT on ESOPs at exercise price which in effect penalises high growth companies, and the service tax on rentals. The Finance Minister needs to relook these.

Lastly, as the Minister stated in his speech, the substantive outlays he could make towards poverty alleviation programmes, Bharat Nirman schemes, primary and higher education became possible because of increased profitability of India Inc and improved tax compliance.

The India story essentially remains intact and we are well on our journey to earning our place in the sun, short-term pain points not withstanding.

(The author is CMD, Kotak Mahindra Bank Limited.)