Budget, Elections and Spending

It's known that this year's budget is mainly focused on reducing govt spending, and putting more money in the hands of people by reducing overall income tax on individuals. But this doesn’t mean that the total income tax collected will be less. Improved economy means total income tax collected by the government will be more. Some economists believe that people are rational. That is they believe in Ricardian view that if government reduces taxes today it will make up for it by increasing taxes in the future.
I just went back in time a little bit to see how rational I was back then when I was working or how rational some of my friends are who are still working. I didn’t know that Ricardo existed back then. It simply means I was not rational ☺. There was a certain level of bank balance I wanted to maintain all else went into spending. If I had more money there were more chances that I would spend at least some considerable part of it on restaurants, real estate etc rather than saving it up. So consumptions should increase by some factor. I don’t believe it increases household saving too much. The reason is the number of taxpayers in India is around 35 million at the moment (google search ☺). Most of them (in my opinion) have a certain targeted savings, which they always try to maintain as long as they are having a job. The rest should be used to buy cars, household appliances, houses etc. This is at least what I observed when I was working.
If government is reducing its expenditure it has to be balanced by increase in investment and consumption etc (This is classical economics can be got from a book). But I want to bring in the factor of Elections to recession. The election commission has spent more than 10,0000 crores. Taking an average 200 contestants from a state and an average outlay of 5 crores from each contestant. In total around 28000 crores would be spent. But from where does this money come from? This is mostly black money. Think of it this way if there was a total Rs.100 in the economy and black money was Rs 20. That means this Rs 20 is something, which is stashed somewhere and is not in circulation. So we can say money supply is Rs.80. This sudden spending by individuals not only creates jobs for the unskilled people during elections but also suddenly adds money to the system, which was earlier simply not there for use. So using our IS-LM curve we can say that government’s liberal attitude during election year not only increases total output but this sudden infusion of money into the system also increases the output further. So elections in recession are not so bad after all.
The interesting thing is government is reducing its expenditure just after the election year. This should at least cut down the opportunities for politicians to make some money out of granting government contracts and others. Thereby decreasing black money accumulation and reducing money supply. So this should be a blessing in disguise to the economy. I wish there was some way to get the black money stashed in some of the government employees and put it back in the system ☺. But anyway this stashing up of black money might have favorably impact on inflation ☺
I am no authority on economics. Post your comments I want to learn from all my blog viewers ☺

Should you go for an MBA?

It is at this point last year after the IIM A interview that I started thinking about what if I converted my call? What next? At that point my answer was fairly simple take it. Who else doesn't want to? There are over 2 lakh guys vying for a seat. But once I joined the institute I began to think :). Most of us here were discussing is it worth it? The course is so rigorous that you don't get much time to enjoy many things like a nice long sleep without having to worry about quizzes, assignments, grades etc, do nothing, watch movies all day, and to simply roam around.
Then by the time I got used to the rigor it was time for summer placements. Day 0 was good but for those who did not get placed in Day 0 it was stressful. I am one of those guys. Now I seriously started thinking whether I was right in giving up a well paying job and no stress work to come here? There were lot of intangibles to consider like my job profile will be much better, An MBA will always give some Value add and people with MBA are normally given more responsibilities etc. But once you become a Management student the most important question you need to ask is Whether it makes any economic sense:)?
So I opened a spreadsheet. I used some of the concepts I learned from painful Finance and Accounting classes to see whether coming here really makes an economic sense. Some of the assumptions I have made are on an average a student joining IIM A would have earned 4lakh per annum after tax. If in case he did not come here and continued with that job by the end of another 2 years on an average he would be earning 9 lakh per annum
For serious MBA guys: The other factors I have taken into consideration are discount rate is 15% ( which is what one could have earned from investing in Mutual fund, I have neglected risk factors involved :)) Tax slabs are taken as per 2010 tax budget. The link to my spreadsheet for interested people
https://docs.google.com/leaf?id=0B5senRMGKBIgYTgzZDRiMzQtZmIwMS00YTUyLTk2MTEtNjg5OTUzYTcwZjg0&sort=name&layout=list&num=50
If I assume that I would have been earning 9lakh per annum if I stayed in my current job at the end of the year that I complete my MBA then I need to earn on an average Rs 1427870.893 to break even in 5 years. In case you are wondering what this break even is that means to equal what I would have earned by investing the money I spent on MBA plus what I would be earning as salary I would take 5 years if I get a job that pays me around 14 lakh (including tax) per annum. Not bad huh? Of course this not a perfect model people can come with different assumptions and make a better model. So I have attached the link to my spread sheet. If you change the number of years to 4 then you should be earning close to 16 lakh. You can play around with it
So it seems like it does make sense to get an MBA if average salary offered in IIM A turns out to be above 12 lakh. Based on the fee you pay and the number of years in which you want to catch up with a friend who is not doing MBA but continuing with his job you can find out what should be the Average salary package in that particular school
Here is what my excel sheet consists in brief
Discount rate 0.15

Investments -625000 -625000
Opportunity loss in leaving job -400000 -460000
Mess charges -40000 -40000
Other food charges -8100 -8100
Going to restaurants -4500 -4500
Travelling expense -20000 -20000
Misc charges -4800 -4800
Money earned from Internship 60000 0

Cash flow -1042400 -1162400

If Invested in MF -1378574 -1010782.609

Cash at the start of 3rd Year -2389356.609

Interest to be paid per annum -125000
Tax 2010 tax breaks
Number of years you wish to break even in 5
Interest tax shield -187500
Salary that you should earn after tax per annum 1210669.918
Adjusted for Tax 1427870.893
The two columns are for 2 years ...
Do post your comments

Modified the excel sheet a little bit to allow for some flexiblity. Sharing the link to it
https://docs.google.com/leaf?id=0B5senRMGKBIgOTEzNWJlZDItYjQ5Mi00NjY2LWJlMDgtNDEwMDE2NDhmOGM1&hl=en