Business friendly budgets.,Relation between Fiscal deficit, Inflation,Interest rate and Business

Business Friendly budget Traditionally, the following measures are considered to be business-friendly: Tax holiday Protective duty to keep industries alive Subsidies for survival of losing industries Zero custom duties and VAT on new machineries for indutries

Tax holiday In reality, traditional measures do more harm than good to business. The problem of tax holiday; If industries make profit, the Government loses revenue. As a result, industries who do not enjoy tax holiday pay taxes at a higher rate. Lower tax for all would be a better option. Tax holiday would be justified if tax department is corrupt. In that case, industries may be protected by tax holiday from harassment of tax officials.

Protection The cost of protection is borne by consumers. Lower duties may reduce rate of inflation. Protection may save jobs in protected industry, but it destroys jobs in industries where the product is used as input. For example,protective duty in steel is would save jobs in steel industry. However, it would make the industries which use steel as primary raw material non-competitive and more jobs will be lost in those industries than those saved in protected industry.

Protective duty Infant industries remain mostly dependent on protection. They cannot face international competition. Protection encourages domestic industry and discourages export industry. This reduces the productive potentials of the economy.

Subsidies Industries which are kept alive by subsidies becomes perpetually dependent. It is not the job of the government to subsidize industries which are not viable. Subsidies divert resources to sick industries from infrastructure development. Infrastructure is good for all busines. Subsidy is banned by WTO in exports (except LDCs)

Elements of business friendly budget Income tax- few slabs, lower highest rate Custom duty- fewer slabs, lower rate VAT- lower rate and applicability to all Moderately expansionary Emphasis on infrastructure development and investment Lower but effective regulation

Fiscal deficit and business Fiscal deficit may stimulate inflation which is harmful for business High Fiscal deficit may crowd out private sector initiatives Fiscal deficit reduces flow of credit to private sector High fiscal deficit may lead to debt trap

Inflation and business Inflation rate- the percentage increase in the general level of prices Nominal rate of interest= real rate of interest + rate of inflation Inflation reduces consumer income and erodes purchasing power. Inflation raises interest rate which increases cost of production and discourages investment

Inflation and business Inflation erodes the income of workers and may stimulate demand for higher wages Inflation creates uncertainty which is harmful for business. Inflation benefits some (borrowers) and harms others (lenders). Everybody is afraid and decision making is adversely affected.

Interest and business Increase in interest raises the cost of production Increase in interest rate discourages investment Increase in interest rate causes problems for firms which depend on borrowed money.