Budget 2017

MODI NOW PUTS THE AAM AADMI AT THE CENTRE OF HIS ECONOMIC NARRATIVE

Finance minister Arun Jaitley presents an aam aadmi budget, steering clear of any overt populism or big-ticket announcement post-demonetisation

IN LIFE OF PI, the Oscar-winning movie about a shipwrecked Indian’s fantastic tale of survival with a ferocious tiger in a boat adrift on the Pacific, the insurance agents have a hard time believing him. So Pi spins an alternative narrative that eliminates the tiger and brings in humans. And then asks: which story do you believe?

After unleashing the demonetisation tsunami, Modi had donned the mantle of the great reformer and moderniser who was unafraid of taking risks and offending his core supporters if he believed an action would result in the greater good of the nation. He had positioned himself as the new messiah of the poor and had also appropriated the role of a crusader against corruption.

Now past the half-way mark of his tenure, Modi was acutely aware that the budget could make or mar his chances of being re-elected as prime minister in 2019. He was also conscious that while there was broad-based support for his drastic moves to root out black money, he had to now provide some balm for all the pain the demonetisation had inflicted. On the immediate horizon were the assembly elections, particularly in Uttar Pradesh, where a defeat for the BJP could mar the remaining years of his tenure.

There were other equally critical considerations. Demonetisation had considerably slowed India’s economic momentum and his government was forced to admit that GDP growth would be down from 7.5 per cent to 6.5 per cent. Private sector investment and expansion had almost ground to a halt, with key sectors reporting a drop in demand and profits. Banks, saddled with bad loans even before demonetisation, remained conservative and were cautious about lending to corporates despite now being flush with funds.

The prime minister was also deeply concerned with the job famine across the country, exacerbated by the shortage of cash, particularly in the informal sector. One indication was that there was higher offtake of employment under the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) in the current year—clearly a sign of distress.

Internationally, there was a worrying turn of events with both Brexit and Donald Trump’s victory signalling the beginning of a possible deglobalisation process and a new era of protectionism. There was a global slowdown in demand and economic growth. There was concern that there would be higher outflows of foreign investment from emerging economies like India back to the US. The traditional export-led growth model India had banked on for two decades was beginning to falter.

MODI WAS FACED with some tough choices. Everyone expected him to give the economy a booster shot to arrest the downward spiral and bring GDP growth back to 7 per cent levels. While formulating the budget, Modi and Jaitley, however, resisted the temptation of indulging in fiscal adventurism or straightout populism. Instead, they homed in on four critical areas of concern: how to boost investment, how to generate demand, how to create more jobs and, however counter-intuitive it seemed, how to maintain fiscal prudence.

For Modi personally, there were two more imperatives—he was clear the budget should underline his pro-garib image. Also, it was important that the budget showed that demonetisation was not a full stop but a comma in his battle against black money. So Modi and his team decided to risk it all and bet big on Bharat—that other India of the less privileged masses in rural and urban areas.

To boost investment, with big capital showing no appetite for expansion, they decided to increase spending on major public welfare undertakings and schemes. But instead of announcing a host of new schemes to win applause, as has been the habit, the team focused on augmenting spending in key sectors, particularly infrastructure, that were already showing good results. The most visible was in the road sector, where Jaitley claimed

that the NDA government had built 140,000 km, or 160 km a day, since they came to power in 2014. His budget provided Rs 64,900 crore in 2017-18 for this sector—a 12 per cent hike. Since the construction sector was largely informal, any surge in investments would see the creation of more jobs, particularly for unskilled workers.

TO BOOST DEMAND and employment, Modi and his team then homed in on another demographic imperative in India: apart from roti (food),

kapda (clothes), every Indian desires a makaan (shelter) that s/he can call home. The budget and the prime minister’s New Year’s eve sops contain a raft of measures and incentives designed to boost demand and investment for the housing sector, both in urban and rural areas. Among them was the decision to give affordable housing the infrastructure tag, which would help lower interest rates on bank loans, and also a proposal to build a staggering 10 million houses by 2019 under the Pradhan Mantri Awas Yojana.

Then, instead of relying on big business to deliver on jobs, they decided that “small is more beautiful” by backing the Micro, Small and Medium Enterprises (MSME) sector. MSMEs account for the bulk of economic activities across the country—they are the largest employers. This was also the sector that faced the brunt of the ill-effects of demonetisation. Ironically, these businesses were paying an effective tax rate of 30.3 per cent while the rate for large industries was 25.9 per cent. So, in one shot, Jaitley reduced income tax to 25 per cent for smaller companies with annual turnovers of up to Rs 50 crore.

Somewhat the same approach was taken to provide relief to small wage-earners with incomes of less than Rs 5 lakh and bring back the ‘feel-good’ factor. These constitute as much as 80 per cent of the total taxpaying public of 37 million. For them, Jaitley reduced the tax rate to almost negligible levels, claiming that this would widen the tax base in the future by encouraging more people to file returns. While the high networth taxpayers and the middle class may chafe, Modi was able to put money in the hands of the people who faced the most hardship during demonetisation. It also helped in reiterating that his government favoured the have-nots.

Two others pieces completed this finely balanced budget. On curbing black money generated by political funding, Modi knew that he would have trouble modifying the Representation of the People Act to bring in more stringent controls, as his party lacked a majority in the

The PM and FM homed in on four key areas: boost investment, generate demand, create jobs and maintain fiscal prudence

Rajya Sabha. So he used the budget to turn into law measures that would bring down the volume of anonymous donations and also introduced a system of electoral bonds to keep track of funding.

Finally, Modi resisted the strong push to throw fiscal prudence to the winds. Had he taken that path, it might have won him brownie points at home, but there was the danger of it leading to inflationary tendencies just when the government had boasted that it had managed to keep inflation strictly under check. Also, after the demonetisation drive, which was strongly criticised by many foreign investors, Modi was keen to project to the world that his government believed in consistency, continuity and fiscal consolidation, and as an official put it, “drew a lakshman

rekha for us that we would not be allowed to cross”. He was also careful not to announce schemes that would make him fall afoul of the Election Commission.

Jaitley exuded confidence that his fourth budget would be a gamechanger and in his speech said: “When my aim is right, when my goal is in sight, the winds favour me and I fly.” (For an assessment of the budget, see

accompanying report.) Minutes before Finance Minister Arun Jaitley presented the budget to Parliament, the Union cabinet met to give its concurrence, as is the norm. At the meeting, Prime Minister Narendra Modi, in an unusually stern tone, instructed his colleagues: “Go through the budgetary provisions for your respective ministries with a magnifying glass and see that everything gets under way by April 1.”

Modi is acutely aware that he may falter in the over-reliance on government and its bureaucrats to deliver. The major criticism against the budget is that instead of reducing the government’s involvement, it has only expanded Bharat sarkar’s role in development. The other failing is that Jaitley did nothing to reduce the amount of subsidies on fertilisers and food, which have, in fact, grown in the new budget. Ashok Lavasa, finance secretary, pleaded helplessness in reducing the food subsidy as more and more states are covered under the National Food Security Act. He said the government had gone a long way in plugging loopholes and ensuring that subsidies reach the people through such measures as the Direct Benefit Transfer scheme.

Modi’s critics say that far from thinking of the next generation, the prime minister always has his eyes on the next election. That he is tall on talk and short on action. So, is Modi, the great helmsman, navigating India successfully through these stormy waters to prosperity and glory? Or is he an emperor without clothes who will soon be exposed? Which narrative do you believe?