Why did the Union Budget ignore the upcoming assembly elections in five states?
The Union Budget is essentially a statement of the government’s spending and receipts over the next financial year. But it also gives an insight into the larger political economy philosophy of the government of the day. It is a reflection of the outlook of the regime.
The fact that this year’s Budget has not done anything aimed at the ongoing election campaign in five states, which includes India’s largest state of Uttar Pradesh, suggests that the regime does not see serious political problems on the economic front. Such a belief can be a result of three factors. The political incapability of the Opposition to make the economy an issue; a belief that there is nothing wrong on the economic front; or a deep-rooted conviction that the Centre is on the right path as far as the economy is concerned.
There is enough anecdotal and statistical evidence to rule out the absence of large-scale distress in the economy. The proof of this is that private final consumption expenditure (PFCE) is not expected to return to pre-pandemic levels in 2021-22. This leaves the first or third factors as the driving philosophy behind the Budget. It is useful to look at them in reverse order.
For the past few years, the overarching theme of the Budget had been making India a $5-trillion economy by 2024-25. While this year’s Economic Survey mentioned this objective, the Budget itself has adopted a longer-term framework. It now envisions India’s economic fortunes 25 years from now, when we complete 100 years of Independence.
It is this long-term horizon that the Budget is targeting with a detailed supply side vision of a revamp of the economy where international investors will pour in money via green bonds to power an India with eco-friendly cutting-edge infrastructure, which, in turn, will create unprecedented opportunities for income and employment.
On the face of it, there is nothing wrong with this line of argument. All high-income economies have better infrastructure facilities than India and infrastructure development cannot take place without a hands-on approach by the government.
So should one accept the Budget’s approach uncritically? John Maynard Keynes, the greatest economist of the 20th century makes a case for why this need not be the case. “But this long run is a misleading guide to current affairs. In the long run, we are all dead. Economists set themselves, too easy, too useless a task if in the tempestuous seasons they can only tell that when the storm is long past the ocean is flat again,” Keynes wrote in A Tract on Monetary Reform in 1924.
Anybody who believes that we are back to a business-as-usual scenario in the Indian economy with the GDP reaching pre-pandemic levels is, at best, being economical with the facts. There is enough evidence to believe that the government’s forced formalisation of the economy, the prepandemic slowdown it created and the pandemic’s economic scars have tilted the scales in favour of capital in the labourcapital binary and the formal sector in the formal-informal sector one.
In simple terms, it means that for the same amount of income generation in the economy, the share of the rich has increased. Because the rich have a lower marginal propensity to consume, it also means a lower consumption demand in the economy. While it is reasonable to assume that highways and airports boost investment in the long-run, it is an indisputable fact that short-term investment decisions are taken on the basis of consumption demand in the economy.
If the poor are having to cut on their consumption because of an income squeeze, then current investment is bound to experience headwinds. This, via the expectations loop, will have an adverse effect on future investments as well.
The Budget is right in making a virtue of the government’s capital expenditure push, but it may have erred by not doing anything to either reverse the pro-rich tilt in the economy, or offering some support to the precarious consumption demand of the poor. Theoretically, one can always cite Keynes to criticise such an approach. However, it must be remembered that political economy questions are rarely, if at all, settled in the realm of academic debates.
It is here that the relevance of the first factor — the incapability of the political Opposition in shaping the government’s economic strategy — comes into play. The three farm laws repealed last year were also a part of the government’s larger strategy of linking the informal sector with the formal sector. They had to be taken back because of a sharp political backlash.
The government did not face any pushback in the rest of the economy. It should not surprise us then that it has not made any changes to its supply-side driven political economy framework in the Budget. We will know if the government is right on March 10, when the results of the five state elections are announced.