This budget has to be measured against a context: The Indian economy has been tied in knots. The macro-economic indicators indicate a placid surface. But underneath, the rumblings of discontent are palpable: Growth has slowed as a result of demonetisation, the principle indicator of a vibrant economy, private investment, is down, gross capital formation has dipped, the two building blocks of a competitive economy, health and education, are still in a shambles, and most importantly, India seems nowhere close to figuring out a jobs strategy. The government is also constrained by possible global headwinds.
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The Narendra Modi government is past the halfway mark. Its economic performance has been competent. But the impact of its economic measures has not been near the point where it can go to the electorate with a triumphal economic narrative. Its mobilisation strategy, therefore, still depends on elements of ultra-nationalism and communalism. The big dividend from demonetisation did not come. So there was pressure on the government to find some way of giving relief, which it has done largely in the form of tax cuts.
In this context, the budget inspires confidence in one key respect: It has not succumbed to political temptations. It is an exercise in forward-looking but cautious prudence. The narrative was framed around the themes of transformation, energisation and cleansing. But the cleansing part was decidedly the most prominent. The narrative of cleansing the body politic continues. The proposals on political funding — allowing electoral bonds, presumably to protect the anonymity of donors, and lowering the limits on cash donations — will, at least, deepen the discussion on political financing. It could be argued that lowering the threshold of cash donations from Rs 20,000 to Rs 2,000 will only require more ingenuity on the part of accountants but not lead to much cleansing. But it signals that political financing is now a subject that political parties will not find it easy to evade. There is a commitment now to use better data to increase tax compliance. There is a promise of more punitive measures against absconders.
But whether this cleansing will turn out to be a mere ritual cleansing or a genuine cleansing in India’s tax regime is an open question. Since demonetisation has not yielded immediate dividends, the pressure on the state to be punitive will be high. India’s tax rates are not high; but the habit of adding surcharges on top income earners whenever the government needs extra revenue sends mixed signals about the tax regime’s stability.
There is an interesting story to be told around housing as a central element of modern political economy. Even in the West, creating housing ownership was considered a political winner: It was both a stimulus and made voters happy. Of course, there it was financed by cheap credit, which made its macro-economic implications more uncertain. Although the Indira Awas Yojana was started by the UPA, it is fair to say that, more than anything else, this government intends to make housing for all its calling card for 2019. All motivations converge on housing: It is genuinely popular amongst the people and if well-designed, has the potential of giving them security and dignity, economists who usually declaim against “freebies” exempt housing from criticism, seeing it more as a worthy stimulus, a corrupt and dysfunctional real estate sector is usually happy with a thrust on housing, and construction is an employment generator.
The two other pillars of the energising agenda are the focus on small and medium enterprises and infrastructure investment. The tax cuts for SMEs and the general foregrounding of their concerns is an interesting political statement. For too long, big capital has dominated the state-capital relationship, grovelling in front of the state for handouts to dig itself out of holes of its own creation. The UPA’s cardinal mistake was to make every facility and exemption available for big capital — from cheaper credit to captive infrastructure. The signalling that small and medium enterprises face an undue burden is an important statement. It does leave the government with the dilemma that, as the Economic Survey indicated, the problems of big capital still have the potential to drag India down. But not succumbing to the temptation to give budgetary sops to them is generally a good idea. The enhanced allocations to infrastructure, particularly railways, are welcome. But they are a symptom of the fact that public investment will continue to have to drive the economy for a while.
The transforming agenda is, on the face of it, the least impressive. Each scheme will have to be assessed in detail. But the pattern of spending on rural India is now familiar, the same combination of allotments from the MGNREGA to more irrigation schemes. There are some micro-measures in terms of agriculture extension that could potentially be interesting. But it is still hard to see how this combination will lead to a doubling of farmers’ incomes.
Other key elements of the transformation agenda, like health and education, seem like retreading old tyres stuck in mud. There were intriguing promises on reform of the UGC. But even last year’s promises on education reform have not been fulfilled; quite the contrary, with the possible exception of the IIM Bill, the actual practice of the government on education still bodes ill for the sector. The health sector remains, like with previous governments, neglected. Some schemes, like the MUDRA, for instance, seem less of a success than the government’s faith in them suggests. And most importantly, the government’s unwillingness to invest in sovereign functions and governance reform (they cost money) will produce a long-term vulnerability.
The budget underscores a big political fact: Despite surface drama, India’s economic policy making probably has too much consensus rather than too little, there is more continuity than change. And macro-economic prudence has more often than not tempered populism. It makes India stable. But whether this steadiness will be equal to the challenge of a turbulent world and the demographic challenge is an open question. After inflicting a needless shock, the government is trying to steady the ship. But how much will the ship move forward, is still an open question. The Indian private sector is still in a shambles; the state has shown more willingness to reform itself than the private sector. But perhaps deep down, the government’s caution is also an acknowledgment of the fact that we are collectively not exactly sure what will restore dynamism to the economy. This budget is a sober response to fear and uncertainty. But whether it will be up to tackling the gathering storm in global capitalism, only time will tell.
The writer is president, CPR Delhi and contributing editor, ‘The Indian Express’
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