OVER THE LAST 40 years that I have been closely examining the Central Government’s budgets, one thing has become absolutely clear to me: how ‘good’ a budget is can be gauged by how loudly the opposition howls. It doesn’t matter which party is in power; all that matters is the decibel level of the protest from the opposition benches.
It is also well known that governments hide more than they reveal about the health of their finances. Incurred expenditure is always higher than shown and revenues are always lower than projections. But by the time the final numbers come in three years after the Budget has been presented, they bear no resemblance to what Parliament had been told and had voted upon.
Judged by the first yardstick, the sixth and last Budget of the Modi Government is an outstanding success. The reason: regardless of how shrilly the opposition screams, it cannot vote against it. That is, if it doesn’t want to commit suicide. The Budget Session ends on February 13th and it will be interesting to see if the Interim Budget for 2019- 20 is passed. Chances are that it will, because how can any political party oppose such a Budget?
Judged by the second one, it is par for the course. You only have to read the reports of successive Finance Commissions to see this.
The opposition is howling now because the latest Budget does something that all governments dream of doing: namely, put some money into everyone’s pocket without taking away any from everyone’s pocket. The question now is not whether this will increase the size of the fiscal deficit, which it will of course. The question is if people will be pleased enough to vote the BJP back to power, if not quite as enthusiastically as in 2014, then at least with some grudging gratitude. Fewer than 282 Lok Sabha seats perhaps, but, say, around 180-200 seats, which will put the NDA firmly back in power?
I, for one, hope this happens because we will have a good and stable government then which is not drunk on the power that 282 gave it. That way, it will not make as many huge errors as UPA-I did. As we shall see a little later in this article, Narendra Modi does nothing in half measures. Even his mistakes are gigantic, like Demonetisation.
As for the positive aspects, the key long-term feature of this Budget is the proposal to give small farmers Rs 6,000 per year. Not much, as many have said, but it is better than giving them nothing at all or pretending to give them subsidies that go to producers of seeds and fertilisers, leaving the Government to bear the burden of cheap water and electricity. MGNREGA, the Mahatma Gandhi National Rural Employment Guarantee Act, was a foolish effort in that direction instilled with the Protestant notion that if you want money, you have to work for it, or at least pretend that you are working. Now farmers with land up to two hectares will get it for doing nothing. Called the Pradhan Mantri Kisan Samman Nidhi, the scheme’s Rs 6,000 of assured income will be given to all farmers with land holdings of less than five acres. The amount is proposed to be provided in three equal instalments with effect from December 2018. The Finance Ministry says disbursals will start immediately. This is what the Telangana government did last year and was voted back to power.
For workers in the unorganised sector, too, the Budget has proposed a pension scheme to be called the Pradhan Mantri Shram Yogi Maandhan Yojana, which intends to give a pension of Rs 3,000 per month when the worker completes 60 years of age. A worker who joins the scheme at age 29 would need to contribute Rs 100 per month. The Government will provide the rest.
These sums are not very large. But they signal the inauguration of the much-talked-about minimum income guarantee. This is what Rahul Gandhi had said the Congress would do if elected. Now the BJP has done it. We will have to wait and see how large an electoral benefit the party gets. The Congress too—as a party—has been talking about this kind of income support since 1992, but had not had the courage to announce and implement it. As a result, it is now two sets down in the Grand Slam tennis match that is now underway.
THE OTHER MAJOR income proposal is the announcement that people earning up to Rs 5 lakh a year need not pay any income tax. The tax saving that such people will witness may not appear very large in absolute terms. But we have to see it in the context of the high taxes everyone now pays, thanks to the GST. Any increase in disposable income will be welcomed by them. The increase in the standard deduction from Rs 40,000 to Rs 50,000 will have the same pleasing effect. People who pay tax will have a little more to spend.
Just as Indira Gandhi is remembered for changing the rules of the game, Narendra Modi is also likely to be remembered for doing the same thing—except that he has changed them for the better whereas Indira Gandhi's changes led to wholly perverse incentives for all players
How about the macro fundamentals? Credit rating agencies will be unhappy because they will point to the fiscal deficit and the giveaways. Will the deficit be contained at 3.4 per cent of Gross Domestic Product (GDP)? They will ask. Even economists who lack political sense will complain. But in the end, it will depend on the increase in revenue collection. There are signs that this has already started to happen, with GST intake crossing Rs 1 lakh crore in January. If the level of economic activity increases, so will revenue from GST.
But budgets are soon forgotten—often within a week of their being presented. Even governments quickly develop memory loss. They simply never have the money to be able to afford even a medium-term, let alone a long-term, memory.
What remains in public memory, however, is the style of economic governance. In the years to come, just as Indira Gandhi is remembered for changing the rules of the game, Narendra Modi is also likely to be remembered for doing the same thing—except that he has changed them for the better whereas Indira Gandhi’s changes led to wholly perverse incentives for all players.
One of the most serious problems that the Congress style of economic governance had created was the belief in free lunches for which the tab would be picked up by the taxpayer. Between 1971 and 1991, when the Indian economy’s back finally broke, the Government’s attention was mostly focused on equity rather than efficiency. This wasn’t because of any great concern for the poor, but because the poor had the largest number of votes. This view of the economy, as something to be milked so that the ruling party could win votes, resulted in something that has held India’s industrialisation back for 50 years: it made all three factors of production—land, labour and capital—the costliest in the world. It is because of this that Modi’s ‘Make in India’ has failed. It is because of this that fresh investment has not happened. It is also because of this that industries relocating out of China have gone to Bangladesh, Vietnam and the Philippines instead of coming to India, which is simply too costly.
Being a politician, Modi has sought to fix the capital problem first. After all, labour and land reforms both come with millions of losable votes. In fairness, he did try to reform both land acquisition and labour laws. But severe political opposition made him abandon the attempt. Wanting a second term as Prime Minister, he let them be after some initial attempts ran into political trouble.
Being a politician, Modi has sought to fix the capital problem first. After all, labour and land reforms both come with millions of losable votes. In fairness, he did try to reform both land acquisition and labour laws
This easy capitulation also had something to do with the jibe made by Rahul Gandhi during Modi’s very first Budget Session in 2014. He called the Government a ‘suit-boot ki sarkar’ and Modi, who apparently believes that the BJP lost in 2004 because of the ‘India Shining’ campaign, took fright. Since then, he has focused on political rhetoric and improving the quality of service delivery to the poor. All his schemes have sought to show that his is not a ‘suit-boot ki sarkar’. He may also believe that the BJP won that overwhelming victory in Uttar Pradesh in 2017 because of a scheme to give gas cylinders to the rural poor.
This has made his government appear populist, and in a sense, that’s what it has been. But where capital is concerned, in sector after sector, his government has introduced changes that seek to squeeze more out of scarce capital. This is not the place to go into all the details. Suffice it to say that if these incentives and disincentives are not tampered with by successor governments—for example, the new bankruptcy law—the Indian economy will start using capital far more efficiently than it has since 1972. And once it does that, the cost of capital will begin to come down. The new interest rate subvention policy announced in the Budget is a beginning.
This is no mean achievement in an economy that has been riven by vested interests looking for private gains at the expense of public money, whether tax funds or bank funds. Modi has not put a full stop to it because deeply ingrained practices take a long time to disappear. But he has tried hard and laid the foundation for it.
That said, there have also been quixotic aspects of Modi’s approach to economic problems. The worst mistake he made was when he demonetised 86 per cent of India’s currency on November 8th, 2016. It was a completely unnecessary step, given that the objective he had in mind was the elimination of black money. The idea was to extinguish a few lakh crore of unaccounted-for wealth. In the event, almost all the cash came back into the system, thus rendering the whole exercise pointless not just in economic terms but also politically.
But it may not have mattered so much if it had all been futile merely in political terms—which it was clearly not. The problem is that Demonetisation did real damage to the economy by slowing it down and reducing employment. Till date, no one knows why he did it, that too against expert advice. All we can say is that it was due to a completely inadequate understanding of the dynamics of black money and a conviction that he had a one-time solution for it.
The sixth and last budget of the Modi government is an outstanding success. The reason: Regardless of how shrilly the opposition screams, it cannot vote against it. That is, if it doesn't want to commit suicide
Nor was this tendency, to insist on having his way, confined to Demonetisation, which was bad enough. He also insisted on rushing the introduction of GST before the technological and administrative systems were ready for it. Not just that, he also made sure that this tax on 62 per cent of products was kept at zero, which led to the remaining things being taxed at rates far higher than they would have otherwise been. This also slowed the economy down.
Demonetisation and GST came in quick succession, within seven months of each other, and have led to the overall belief that Modi’s style of economic governance is whimsical and causes damage. Had he been more willing to pay heed to experts, this would not have happened.
The same sort of thing was in evidence on his approach to farmers. He made the very error which Atal Bihari Vajpayee had made in not increasing agricultural support prices for four long years. Farmers had turned against Vajpayee. And now they seem to have turned against Modi. Not all of them, perhaps, but enough of them to make a difference in the General Election.
And then there is the ban on cattle slaughter. True, this is something that the Directive Principles of State Policy in the Constitution ask for. True, that it is consistent with the religious and cultural beliefs of millions of Hindus. True, too, that it has a political angle to it. But what the Modi Government did not work out was the economic angle. This is simply that old cows are costly to maintain and become a nuisance to everyone when they are abandoned by farmers who cannot sell them.
The political consequences of this came home to roost in the assembly elections last December in Madhya Pradesh, Chhattisgarh and Rajasthan where the BJP was voted out. Even though the ban was not the only reason, it was enough to create a negative feeling, especially when Hindu hoodlums began to use it to extort money and lynch Muslims.
Overall, therefore, it would not be wrong to say that Modi’s style of economic governance, though largely well-intentioned, has also been very political—mind you, not populist—and whimsical. No amount of positive spin can remove this general impression, which has been further reinforced by his Government’s clashes with the Reserve Bank of India and its approach to tax collection, which has bordered on harassment. These things may not be the Prime Minister’s fault, but it is he who has to be answerable. In mitigation, one could say that when faced with a near-empty fisc and massive agenda, he chose the less harmful way of financing government programmes by collecting taxes rather than printing notes, which is what the Congress has done.
NIT-PICKING AND biased criticism aside, Modi got one thing absolutely right: the macroeconomic condition of the Indian economy. There are three main variables—say, like blood pressure, sugar and cholesterol—that indicate the health of an economy. Modi had inherited a near-crisis and macroeconomic disaster in 2014. No one can take it away from him that he has fixed the problem of inflation, which was near double digits and is now below 4 per cent. Forex reserves, which were melting rapidly, have been built up again. And the fiscal deficit has largely been brought under control.
This suggests an approach to the economy that has not been driven by populism because the NDA has paid a heavy political price for bringing these three main macroeconomic indicators under control. This price is lower aggregate demand in the economy with all its negative consequences for industry and employment. Those birds are coming home to roost now as the opposition harps on them. But there is no question that the next Government will be very happily placed, just as UPA-I was when NDA-I was displaced in 2004.
This is the main irony of India’s economy over the last two decades. The NDA repairs the economy, which the UPA then damages. One must hope that this does not happen again.