Reboot the Job Machine
Govt must push structural reforms to lift the economy that has taken a hit due to demonetisation
The Budget is not just a fiscal statement but sends signals on the direction of economic policy. Modi Sarkar’s first real budget for 2015-16 (its budget for 2014-15 was just a handover from the UPA government) raised hopes on the policy front as it promised a growth-oriented inclusive set of policy measures titled “Sabka Saath Sabka Vikas”.
It signalled an intent to transform India as it focused on infrastructure spending, created the National Investment and Infrastructure Fund (NIIF) and introduced a new bankruptcy law. The government also accepted the Finance Commission’s recommendation to devolve more funds to states and promised improvements in the ease of doing business while introducing new universal social security programmes for the poor and elderly. It was a budget whose underlying philosophy was hand-ups not hand-outs.
It looked like Modi Sarkar would get the Indian back on track after the disastrous last two years of the UPA government. India started to look attractive and became the talk of the world. A revised (but questionable) GDP series, announced with much chest-thumping lifted India’s growth rate to 7.5%, faster than China’s.
However, with the loss in the Bihar election which followed the ear- lier loss in the Delhi assembly polls, the Modi government lost its brash confidence. Modi described reforms as a marathon not a sprint. Incrementalism became the mantra, with an admission that bold reforms were not possible unless there was a full blown economic crisis. A staid but steady budget was presented for 2016-17. Meanwhile, job growth and private investment slumped.
A GST Bill was finally shepherded through Parliament. Despite its many compromises and complexity, international investors saw this as a positive signal.
A Disruptive Reform
Then like a thunderbolt from God Indra, Modi unleashed an ill-thought-through demonetisation to unearth black money and curb corruption. He railed against the rich and sold demonetisation as a fight for the poor akin to Indira Gandhi’s bank nationalisation and abolishment of privy purses under the slogan “Garibi Hatao”.
The Budget calls demonetisation a “disruptive reform” without giving us any calculus on whether it achieved any of its objectives. The forecast growth for the current fiscal year (2016-17) originally stood at 7.6 % — but is now projected post demonetisation to be around 6.5-6.75 % — a drop of around 1%. Instead of measures to boost recovery, the Budget provides small sops to some groups who are likely to have been affected adversely by demonetisation — tax relief for low-income taxpayers and smaller companies and increased allocation to Mahatma Gandhi National Rural Employment Guarantee Act to help dole out more cash in rural areas.
Fiscal 2016-17 and 2017-18 may well go down as two wasted years for India. In 2016-17 patiently coping with demonetisation and in the coming fiscal trying to recover from its impact. Non-performing loans (NPL) are estimated to be as high as $191 billion (8% of GDP). The Budget provides .₹ 10,000 crore for recapitalising public sector banks. The NPLs are likely to grow many times that in the coming year.
The proposed 2017-18 Budget breaches the announced fiscal path from 3 to 3.2% of GDP, but promises to get back to the fiscal path next year, in order to avoid a downgrade. We will also not be sure until much later whether the fiscal deficit target of 3.5% of GDP for 2016-17 has been met.
The economic survey takes on the rating agencies for being biased against India with its credit rating kept at BBB-, versus the upgrade for China from A+ to AA-. But with declining private investment, rising NPLs and uncertainty created by demonetisation, it is not surprising that rating agencies have adopted a wait-and-watch attitude on India.
The previous NDA government lost the 2004 election on its “India Shining” campaign while ignoring the poor and rural areas. Modi Sarkar was sensitive to being labeled a “Suit Boot Ki Sarkar”. It has pressed a reset button and shifted back to increasing hand-outs. It has made anti-corruption a class war for the poor against the rich. But the hamhanded way in which it implemented demonetisation may have hurt the poor far more than the rich — if it hurt them at all.
Modi popularity’s has risen after he has shifted to becoming a crusader against the rich. But like Indira Gandhi’s, it may be temporary. This reset may help BJP score well in the upcoming state elections. But even if it does, history tells us it will not last unless genuine job-creating reforms are undertaken.
India may now have to wait until after the 2019 general election for a genuinely reform-minded budget. In the meantime, we can only hope that the growing NPL problem does not become a full-blown banking crisis. But if it does, perhaps then and only then will we see genuine reforms that India badly needs to get ‘Sabka Saath Sabka Vikas’. In the meantime, no more thunderbolts please.
The writer is distinguished, visiting professor, National Institute for Public Finance and Policy
Please take note, and reform