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In Modi’s Budget Bouquet, Roses Only for the Election

The Wire
By Professor  

Interim Budget day dawned with a classic Mint Metric from economist Bibek Debroy, who stated:

On What does the Government Propose to Spend?
To what purpose and with what end?
Dawns the day
With the budget bouquet,
In the final months, what is the blend?

Debroy’s timely lyric helps us understand both, the rationale and intent of the budget bouquet, presented by acting finance minister Piyush Goyal. While, as with all Indian budgetary announcements, the devil lies in the details of the finance Bill, it’s clear that Goyal and his government had two broad targets. They are low-income farmers and lower-middle income groups.

On what does the government propose to spend?  

The interim Budget qualifies as a vote-on-account, i.e. essentially seeking parliamentary approval for allocation of government expenditure (say, paying salaries, ongoing programmes etc.) for the first four months of the fiscal year (i.e. up-until April, 2019). Its importance lies in how well it functions as a pre-poll signaling point – quite similar to earlier instances of similar interim Budget presentations (made by Pranab Mukherjee in 2008-09 and P. Chidambaram in 2014-15).

In this regard, there are a few positives but also a number of missing links that merit our close attention and review.

On positives, a direct tax rebate benefit offered to citizens with an annual income of Rs 5,00,000 is surely welcome, and one which is likely to benefit the lower middle income groups directly (only if the current government is voted into power). This was quite expected in an election year where the BJP faces a stiff test on garnering votes from low-middle income groups and those working in the unorganised sector who suffered the most after demonetisation.

The tax break, as a positive step, is likely to widen the direct tax base over time, where most lower income groups with a gross income between Rs 5,00,000-6,50,000 (earlier avoiding and evading income taxes) may prefer to accrue other tax related benefits (with tax-relief investments up to Rs 1,50,000) and formalise their incomes. Further, a hard-nosed attitude towards digitising IT return processes and simplifying return claims, while lowering tax slabs for lower income groups remains vital for any government. Nothing, however, was said about what should have also accompanied the tax proposals – the idea of taxing higher income groups.

At the same time, recent reductions made in Goods and Services (GST) tax rates for a number of essential commodities and services would simultaneously allow a higher purchasing value for lower income groups in the short to medium term, especially at a time when real wages have been consistently falling . The push for infrastructural investment on roads and in railways (including more outlays for development in the North East) is noteworthy, considering the good track-record of the Narendra Modi government (under Nitin Gadkari as minister) in constructing highways and freeways across states.

Another announcement on starting a (new?) social security pension scheme – the Prime Minister Shram Yogi Mandhan – paying Rs 3,000 per month as pension to 42 crore people, employed in the unorganised sector and those earning less than Rs 15,000 per month is a positive on the whole. Even though the nominal amount notified here as to be paid pension remains quite marginal, as against the actual household consumption needs of people.

The main caveat here is something that is applicable for most Central schemes with questions on standard implementation processes (quite often centralised), accruing high agency costs and unwarranted bureaucratic discretion. As observed recently, within Ayushman Bharat itself (i.e. offering medical insurance to 50 crore low income people-as announced in 2018), bureaucratic agencies are already creating exclusion lists with categories of people who do not qualify for benefits under the scheme.

Thus, regardless of how good it may sound, most centralised social welfare schemes in an already complex, bureaucratic web of Yojanas must be read with careful caution. This includes the recently launched PM Kisan Samman Nidhi for lower income farmers. Outcomes matter way more than outlays in India’s economic policy landscape and such schemes have dismal record in actual outcome based-impact scenarios.

And this takes us to the second question from Debroy’s limerick.

To what purpose and with what end?

One key concern from the finance minister’s speech was how there is little or no acknowledgment at any point, on the extent to which certain aspects of the Indian economy continue to face chronic macro-economic problems. This reflects a lack of purpose and direction in the financial outlays announced – say, on subvention of interest on loans to farmers which will be applicable for already stressed public sector banks in rural areas.

Starting from a poorly performing manufacturing sector, a macro-employment crisis particularly affecting urban and rural females (from the latest NSSO numbers), and, a highly stressed public sector banking sector (suffering from low credit growth in food and non-food sectors), it is hard to see this Budget doing much to address any of these points.

Even in claiming to focus on women-led development, a regular budgetary emphasis on Ujjawal Yojana – as important as it may be – seems to be the only idea, according to the government (seeing women as household care providers only).

Missing links

The biggest missing links from the budget announcements, as consistent with previous years of Modi-led BJP government, are in two areas: higher education and improved healthcare access. The utter lack of priority showcased by the current government in creating an enabling environment for both these areas have been a bane for India’s current social development state. While unemployment rate has peaked for the youth to more than 6% (highest in four decades), increasing institutional and financial access to both, higher education and medical care (with rising out of pocket healthcare costs) are major concerns.

Also, with the direct and indirect tax concessions made for lower income groups and small companies along with increased outlays on revenue expenditure side (say, the increase in defense allocations to Rs 3 lakh crore), the overall fiscal landscape (and consolidation path) is likely to stay eroded in years to come. A more exclusive focus on reduction in government debt to GDP ratio (as announced in the Budget speech) to say 40-45% of GDP too needs a much planned, coordinated approach.

India, so far, is one of the rare developing economies with a reasonably balanced government to debt GDP ratio (say, as compared to China’s mounting debt burden) and a fiscal consolidation plan. While I do feel that, in absence of high domestic private investment levels, the government can afford to invest more and relax its fiscal deficit target slightly (say, to 3.5% of GDP), if and only if the GDP continues to grow at a 7.5-8% level in real terms (and 11.5-12% in nominal terms). Still, working on a fiscal consolidation path needs to be any government’s priority, especially in an inflation sensitive large economy like India.

Overall, the budget boutique from the government blends a mixed purpose for its citizens now, and especially in the years ahead. While incentives for lower-middle income groups and vulnerable farmers are welcome in the state of crisis-like situation we are in, on addressing the status-quo in areas such as employment creation (across sectors), ensuring women-led development and prioritizing educational access and healthcare affordability, this Budget fails to strike a chord.

Deepanshu Mohan is assistant professor of economics at Jindal School of International Affairs, O.P. Global Jindal University.