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What Modinomics means: Government less a spender, more an enabler

The Centre’s fiscal deficit has been pegged at 3.2 per cent of GDP, only a tad out of line with the Modi government’s original roadmap of reducing it from 4.1 per cent in 2014-15 to 3 per cent by 2017-18.

Written by Harish Damodaran | New Delhi | Updated: February 2, 2017 4:42:25 pm
Amid speculation whether a BJP victory might bring the former chief minister back to Goa, the defence minister has missed Delhi events. Prime Minister Narendra Modi. (File Photo)

Narendra Modi may be anything, from Superman to Tormentor, depending which side you are on, but one thing he certainly isn’t — a populist. For proof, one needn’t look beyond his government’s latest Budget.

The 2017-18 Union Budget has hardly deviated from the path of fiscal consolidation despite advice from many economists and corporates to show some “flexibility”, especially with no signs of a private investment revival and demand destruction in the wake of demonetisation.

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The Centre’s fiscal deficit has been pegged at 3.2 per cent of GDP, only a tad out of line with the Modi government’s original roadmap of reducing it from 4.1 per cent in 2014-15 to 3 per cent by 2017-18.

But since GDP estimates have a credibility issue, which has only gone up post-demonetisation, it may be more instructive to consider the absolute deficit numbers themselves.

Between 2007-08 and 2011-12, when the then UPA regime went on a spending binge in the name of countering the 2008 global economic crisis, the fiscal deficit soared four-fold from Rs 126,912 crore to Rs 515,990 crore.

The last two years of UPA under P Chidambaram brought this down to Rs 502,858 crore by 2013-14. That has changed little since the present government’s taking office: The deficit in 2016-17 is pegged at Rs 534,274 crore (revised estimates) and budgeted at Rs 546,532 crore for 2017-18. And these are nominal figures, not adjusted for inflation.

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The noteworthy part about the Modi government’s commitment to fiscal discipline is that it seems to come from “within” and not “forced” by runaway inflation or loss of confidence in the rupee — as was the case in the UPA’s last two years.

For Modi, macroeconomic stability is, evidently, an article of faith. Grounded in the reasoning that low deficits translate into reduced government borrowings, which, together with control over inflation, allows for lowering of interest rates. These, in turn, are conducive for private investment and consumption spending. The government is there but less as a spender and more as an enabler of activity that is primarily private sector-led.

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No government before his could plausibly have adopted a monetary policy framework targeting annual consumer inflation at 4 per cent – which cannot be done without keeping farm produce prices depressed. The latest budget not resorting to any pump-priming — despite an extended investment famine, languishing exports, and the uncertainties unleashed by the November 8 double-shocks of demonetisation and Donald Trump’s victory — only reinforces the point about Modi not being a populist in a fundamental fiscal and monetary sense.

The above approach — of populism, if at all, only in word — is also reflected in actual budgetary outlays towards the various programmes unveiled by the Modi dispensation.

We can identify about 17 of them: Make in India, Startup India, Stand-up India, Digital India, Skill India, Jan-Dhan, MUDRA (Micro Units Development & Refinance Agency), Swachh Bharat, Smart Cities Mission, AMRUT (Atal Mission for Rejuvenation and Urban Transformation), Namami Gange, Atal Pension Yojana, PMUY (Pradhan Mantri Ujjwala Yojana), PMFBY (Pradhan Mantri Fasal Bima Yojana), PMKSY (Pradhan Mantri Krishi Sinchayee Yojana), PMGAY (Pradhan Mantri Gramin Awas Yojana) and Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY).

The total allocations for all the schemes put together — money that the government is directly putting — is projected at around Rs 80,200 crore for 2017-18 and Rs 70,660 crore in the current fiscal as per revised estimates.

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These sums aren’t particularly huge, when compared to the Rs 52,500 crore-plus that the UPA dispensation earmarked for a single, though not as impressive-sounding, programme called the Agricultural Debt Waiver and Debt Relief Scheme, 2008.

Or the Rs 40,000 crore it provided in 2009-10 for MGNREGA, which is, of course, a legacy programme that even the Modi government has had no choice but to persist with.

The fact that some of the new schemes are only rehashed/renamed versions of already existing ones – PMGAY was previously Indira Awas Yojana, DDUGJY used to be Rajiv Gandhi Gramin Vidyutikaran Yojana, and PMKSY basically subsumes the Accelerated Irrigation Benefit and Integrated Watershed Management programmes – again confirms that this is a government very selective when it comes to actually spending money.

On the other hand, the same Modi government hasn’t shied away from finding new avenues to raise resources.

For the ensuing fiscal, it’s targeting revenues of Rs 29,700 crore from the Clean Environment Cess, Rs 13,300 crore from the Swachh Bharat Cess, Rs 8,800 crore from the Krishi Kalyan Cess and Rs 4,050 crore from the Infrastructure Cess. Apart from these special imposts, it has taken advantage of lower global crude prices during its tenure to hike the excise duty on diesel from Rs 3.56 to Rs 17.33 per litre and from Rs 9.48 to Rs 21.48 per litre for petrol.

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Taking annual consumption of 9 crore kilolitres of diesel and 3.2 crore litres of petrol, the revenue gain to the exchequer adds up to over Rs 162,000 crore.

In fertilisers, too, the fall in international prices has been used mainly to derive subsidy savings rather pass on the benefits to farmers. Between March 2014 and December 2016, landed prices of di-ammonium phosphate, for instance, have eased from nearly $500 to $320 a tonne.

The same period, however, has seen domestic retail prices of this nutrient decline marginally from about Rs 24,000 to Rs 22,500 per tonne, even as the Centre’s subsidy has come down from Rs 12,350 to Rs 8,945/tonne. There cannot be a better example of a government refraining from playing to the gallery – in this case, using the opportunity from declining world commodity prices for fiscal consolidation, instead of pleasing farmers/consumers or launching new programmes with long-term monetary implications.

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The question to ask is how much politically sustainable is this approach of “populism only in word” going to be.

While Modi’s oratory skills and reaching out to voters are well known, his being a deficit hawk is something that goes against the very grain of populism.

If he still manages to return to power in 2019, it would be the first ever instance of fiscal prudence/supply-side economics selling even politically in India – which the previous NDA regime under Atal Bihari Vajpayee had attempted but without success.

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