The Union Budget 2016 has been crafted under the most extraordinarily challenging economic environments India has seen. The external environment is both uncertain and volatile, the inherited logjam caused by stressed banks and the stressed private sector has yet to be broken, poor monsoons have caused immense rural distress, and demand, a central pillar of growth, has been tepid. Many of the measures needed to face up to this challenge are not, strictly speaking, budgetary. Nevertheless, the budget is of political interest on three counts. The government’s previous budgets were rightly criticised for the lack of a clear framework. Does this budget break new ground? Second, does the budget signal any appetite for political boldness? Third, which constituencies does the budget address?
This budget is certainly a huge improvement over Finance Minister Arun Jaitley’s previous budgets. It has a much greater sense of purpose and direction. It signals macroeconomic credibility by adhering to fiscal deficit targets. In an age when politicians are derided, the reluctance to recklessly spend our way out of trouble requires political acknowledgement. In many ways, this budget is rich in ideas; but also ones that make it hard to assess. It embodies in muted form what the Economic Survey calls “persistent creative encompassing incrementalism”. But one corollary will be that the judgement will also be incremental, as the various promissory notes on which the success of this budget rests unfold. The budget represents what might be called the abiding centrism of Indian economic policy. Heated debates may spin from left to right; but governance finds its centrist measure in several ways. The budget continues a greater reliance on indirect taxes as opposed to a concerted effort to expand the direct tax net. This is politically expedient, even if regressive. But no political party will transform the citizen-taxpayer relationship by a move to more direct taxes. Second, there is a deep consensus on the welfare state. On that front, the continuity between this government and the previous one is remarkable: From the continuation of MGNREGA and health insurance to a package of interest subsidies. The potentially most far-reaching change is the promise of giving Aadhaar statutory status and making it the basis for direct benefit transfers; but that is for the future. Subsidy reform, if any, will be incremental in the meantime. Third, even the most muscular of governments cannot sustain an aggressive defence build-up. Fourth, there is no appetite for a massive roll-back of the state where it is not needed. There will be some crisis-driven disinvestment but no radical reimagining of the state.
The budget will buttress the sense that the government has been practically sensible in small steps, but not bold. It continues on the path of fiscal devolution set by the Finance Commission. The ambitious provision of LPG connections to all is quite revolutionary, for its health, gender justice and aspirational effects, though its political-economy effects on the subsidy bill will become clear over the next few years. It is bringing the poor front and centre in unexpected ways. It goes to great lengths to reverse the government’s pro-corporate image. The increased outlay on infrastructure, particularly the Pradhan Mantri Gram Sadak Yojana, is a no-brainer. Rural connectivity is great for growth; and power and logistics are key to India’s competitiveness. Symbolically, this budget speaks to the government’s potential strengths: Power, infrastructure, railways, and petroleum and gas. This government is investing in four ministers: Piyush Goyal, Nitin Gadkari, Suresh Prabhu and Dharmendra Pradhan. A lot will hang on their capacity to implement.
The budget also speaks to the government’s weaknesses. Despite the promise of new insurance schemes, it is hard to avoid the conclusion that health and education still remain blackholes for this government. The allocations in education are up only marginally; there are no new ideas except the half-baked one of facilitating some “special universities” to escape regulation. Despite the fleeting appearance of the middle class as a political force, the focus on rural and the urbanising rural is back. Politically, the budget was expected to signal a shift in priorities. The odd changes in taxation provisions for future provident fund withdrawals make it a budget hostile to the middle class. This will have interesting political repercussions. Arguably, the boost to the real estate sector might benefit some sections of the middle class. But its intent is clearly to revive a collapsing real estate sector. There is no question that rural India needs a lot of investment. The real issue is whether the scale of support promised will be enough to stimulate rural demand in the short run and transform agriculture in the long run. There is reason to believe the outlays will fall seriously short of both objectives. So it will leave the question of rural support for the government up in the air.
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But the most pleasant surprise is the direction in which we want to go on the environment. An additional cess on coal and taxes on cars are signals of a long-overdue resolve that the environment is no longer a luxury. There are small administrative victories like the abolition of the distinction between plan and non-plan expenditure. But equally, it is disappointing the budget does not invest enough in the state itself. The state has serious capacity constraints, and some of them will require a great deal of investment. The state has also signalled a much greater resolve on reforming tax administration. The devil is in the detail, though a lot of the detail for small enterprises is encouraging.
The politics of the budget will, in the final analysis, depend on whether India’s animal spirits are revived. Following the candid lead of the Economic Survey, the budget acknowledges the deep institutional quagmire that has stymied the economy. The provisions for bank capitalisation seem, by some accounts, low. If it turns out not enough to restore credibility to banking, we could still be in trouble. There is a promissory note of a lot of new regulatory institutions or the emendation of existing ones. The state is moving ahead. We don’t know if Indian capital is ready to play by the new rules. But for the time being, it could be said that this is an artful budget. It displays a cautious prudence. But it also confuses the government’s more rabid economic rightwing supporters more than it annoys its opponents. In that sense, it represents the triumph of a sensible democracy.