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regular-article-logo Saturday, 23 November 2024

Union Budget 2021-22: Simple solution to a crisis situation

All-in-all, this is a satisfactory budget which shows that the government has got the right ideas about not letting this crisis go to waste

Dhirendra Kumar Published 02.02.21, 03:14 AM
Representational image.

Representational image. Shutterstock

The Union Budget shows that while there are no perfect solutions to the pandemic, there are some good trade-offs that are possible. When everything goes wrong, choices can actually become simpler. Most of us have experienced this since the Covid-19 virus hit us in March.

Routine activities and complexities of life have disappeared and the formula has become simple — just keep yourself safe while keeping work/business going as best as possible.

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This is evidently true of Sitharaman’s budget too. The formula is simple: spend a lot of money, and just borrow what is needed. For the first time in living memory, there is hardly any need for fiscal balance. Year 2020-21’s revised budget estimate is 9.5 per cent. That’s a number that would have had most analysts splutter and foam in the mouth a year ago. And yet no one has batted an eyelid.

Next year’s budget estimate is above 6.8 per cent and the chances of it being exceeded are high and yet that too has generally been met with a ‘What can you do’ shrug by almost everyone. Essentially, the government has got a two to three year free pass on the deficit and can borrow and spend liberally without an excessive reaction. Of course, the economic costs of fiscal deficits will have to be paid. But as the last few months have taught us all, there are no perfect solutions, only trade-offs. At this point, one can carp about this or that detail, but the trade-off that the FM has chosen is the obvious, practical one.

Obviously, since this is a spend-spend-spend budget, what happens now is just the beginning. The budget just provides the money and sets the task for all the other parts of the government to execute on the actual actions.

Once upon a time, that would have been the big question mark on it but given the all-round improvement in execution that has been evident since 2014, this could well be an opportunity that gets realised.

As for savings and investments-related changes, there is a significant shift in the attitude towards ULIPs. As most knowledgeable savers have known for many years now, ULIPs are essentially a subterfuge whereby the insurance industry fools people into buying expensive, opaque and poorly performing investment products that are disguised as insurance to derive benefits from of the tax advantage that has been allowed for genuine insurance products.

In this year’s budget, there are a number of small changes which shows that at long last, the finance ministry has seen through this fakery.

The tax exemption on purchase of ULIPs is now limited to a total of Rs 2.5 lakh per annum across all ULIPs a person may invest in. In my view that’s still Rs 2.5 lakh too much but this is at least some improvement.

Additionally, upon redemption of a ULIP, it shall now be treated in the same way as an equity mutual fund. Essentially, this means that the tax laws are now less skewed against competing investment products like mutual funds.

All-in-all, this is a satisfactory budget which shows that the government has got the right ideas about not letting this crisis go to waste.

Dhirendra Kumar is CEO of Value Research Online

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