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Mainstream, VOL LVII No 32 New Delhi July 27, 2019

What Does the Union Budget Signify?

Sunday 28 July 2019

by Anup K. Sinha

This year the Union Budget was, for all practical purposes, presented twice. The first time it was in February 2019 as an Interim Budget which seemed exactly like a full-fledged annual Budget. The next time it was after the parliamentary election results were out. The second time was the full Budget for 2019-20. The two budgets were very similar in one sense: both were in large parts political rhetoric that appeared to have come out of a party manifesto. To understand this year’s Budget one must be aware of the major challenges facing the economy, especially those challenges that can be alleviated through fiscal policy interventions. The Budget as part of economic policy of the elected government also reflects its class interests and core ideology. The fine art of Budget-making lies in the Finance Minister’s skill to blend what the government needs to do to resolve immediate problems facing the economy, with other long-term, ideological ‘ought-to-do’ list of interventions.

If one takes the immediate challenges facing the economy, then one needs to see how the Budget aims to tackle slowing growth, increasing unemployment, and the widespread economic distress of poor farmers and agricultural workers. On the long-term, ideological issues, the Budget would have to ensure that big corporates are not unhappy in any way, foreign capital finds a hospitable environment in which to flourish, and the risk-rating agencies of the world like Standard and Poor’s, Moody’s or Fitch do not downgrade the economy’s risk profile, and the government has enough control over information and education that helps to manufacture consent for the Bharatiya Janata Party’s (BJP) brand of New India in the making, especially amongst the aspirational middle class. The Budget has inadequate measures for the first set of objectives. However, on the ideological aspects the Budget has ensured that it has pleased all its constituencies. It may be worthwhile to examine how these were achieved by the newly appointed Finance Minister.

First of all, to stem the deceleration in growth and make growth rates increase takes new private investments, government consumption and investment spending, and private consumption. Increases in government spending are limited by the need to keep the fiscal deficit range bound within limits set by the international community of risk-rating agencies. In this context it may be mentioned that why a three per cent to four per cent fiscal deficit ratio has to be maintained by all economies is not clear at all to anybody. Private consumption growth has more or less satiated with white goods, automobiles and even real estate showing signs of stagnation. Hence it is of paramount importance, given the situation, that private investment is given a boost. The reason why private investment has been slowing down significantly over the recent past is the lack of confidence business houses seem to have about future demand. It is not the cost of credit that is the constraint though banks, wallowing in their own mess of non-performing assets, have been ultra risk-averse in their lending. This has been more acute since the scams relating to the crème de la crème of Indian business broke out. There is the lurking fear that more is likely to be unearthed soon. Hence investment needs confidence rather than cheap credit. This Budget has introduced a large number of schemes and amendments to laws that allow for easier credit and cheaper finance. This may not work in turning investment flows around in the near future.

Regarding the problem of high unemploy-ment, there is no direct measure in the Budget that will create many more jobs than what business-as-usual does. Introducing a national minimum wage that is binding and making the process of hiring and firing easier through new Codes on Wages and Worker’s Occupational Safety will not create new employment. On the other hand the great hoop-la about new technology and India’s great aspiration to be ahead of the rest would probably kill off more existing jobs than what new technologies would create. Jobs created would be like the ones created through MGNREGA—transitory, casual, low-paying. There will be high-paid high-skilled jobs also available, but that will be for a tiny part of the labour force—the graduates of top class engineering colleges and management institutes. A large part of this segment of the labour force will leave the nation for good in search of greener pastures.

Finally, on the challenges list, the resolution of farmers’ distress and falling incomes has not been tackled directly. The rural poor, including the farming community, have been promised ‘ease of living’ with toilets, cooking gas, electricity and affordable houses with easier credit and interest subsidies. However, it is not clear how receiving such goods from the government, even if they are in the form of 100 per cent grants, can improve the incomes of farmers. The promised annual transfer of Rs 6000 is a pittance for even an individual, let alone a family of four or five persons. The reforms necessary for superior farm management techniques: the use of enabling technologies, better natural resource use, and assured market access and minimum prices are all missing, or scattered here and there in Budget proposals without putting together an emergency package to increase agricultural growth. Indirect benefits of new private investments, for instance, through building up of cold chains and new roads, would be uncertain and time-consuming at best.

Let us turn to the long-term ideological signals given in the Budget. Big corporates have not been asked to pay more taxes. Mid-sized firms (from Rs 25 crore to Rs 400 crore turnovers) have been brought under a lower taxation slab. National capital, being stronger than before, finds it easier to compete and collaborate with foreign capital. There are plenty of enabling tweaks in existing regulations to attract more foreign capital in the form of direct investments as well as portfolio investments. Whether this will fructify or not, especially direct foreign investments, is anybody’s guess. Given the current signs of slowdown in the US economy and the trade war with China and India, the chances of more trade and more foreign investments in the immediate future is not very likely. However, foreign investors have been given a (continuing) signal that the Indian market is wide open and warmly inviting.

The next ideological issue was the exhibition of fiscal restraint and discipline; keeping the fiscal deficit target at 3.3 per cent of the Gross Domestic Product (GDP). This will undoubtedly please the risk-rating agencies of the world. Two comments are in order. One is a reiteration of the statement made earlier that why a 3.3 per cent deficit is so sacred is not known. We could have done better with a greater fiscal stimulus to a weakening economy but we are perennially worried about the risk-report cards. The second comment is that there seems to be a dissonance between the aggregate figures cited in the Economic Survey and the actual numbers for 2018-19 on which the budgetary estimates for 2019-20 are calculated. The NDA Government has been notorious for peddling confusing and contradictory data. The current data does little to repair the trust in government data that was lost by independent researchers and economists.

Regarding education and information: the Budget proposes to make India an international hub of higher education and data in the hands of the government will be sold to the private sector for greater social gains. How this will be done is not clear. The government’s focus on primary education and its content, the focus on creating new courses in social sciences in colleges and universities and the creation of a National Research Foundation to fund creation of knowledge are all prima facie laudable. However, given the commitment to make a New India, the BJP will exert firm control over syllabi, textbooks, and what kind of research gets priority.

One thing about the Budget that can be cheered is the acknowledgement of the need to reduce the nation’s carbon footprint. More electric vehicles on India’s roads will be welcome. The government is also beginning to realise that ecological crises are already here: water scarcity, air pollution, and ecosystem vulnerabilities are here to stay. Managing these will be a tall order for any government. The government’s intention of addressing such issues is welcome.

Authoritarian leaders usually like grandiose plans. The Prime Minister has declared that by 2024 India will become a $ 5 trillion economy. There is absolutely no roadmap suggested on how that would be achieved. Would this target (if achieved) create adequate jobs, have quality health care for all, provide improved education systems, with reduced economic inequalities? If that is not guaranteed, then reaching the goal would leave most people worse off. Only the top one per cent will thrive. It would be a meaningless exercise. In such a scenario the long-term ideological goals of making a New India can be achieved only with greater and greater degrees of control. The symbolic transition from a sahibi briefcase to a bahi khata may not be sufficient then.

Dr Anup K. Sinha, now retired, was a Professor of Economics at the Indian Institute of Management, Calcutta since 1991. He served three terms on the Board of Governors at IIIM Calcutta and also served as the Dean during 2003-06. He then served on the Board of Directors of the National Bank for Agricultural and Rural Development (NABARD) during 2006-2009.

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