Budget 2021: Balance economics with politics
With the budget just over two weeks away, economist after economist is calling on finance minister (FM) Nirmala Sitharaman to spend, spend and spend. The renowned 20th-century economist, John Maynard Keynes, whose economic theory is being quoted in justification of government spending, once said: “No part of man’s nature or his institutions can be outside an economist’s regard”. There must be a question mark on whether the economists offering advice to the finance minister have taken into account politics, so very much part of the nature of most Indians.
The basic problem that the FM faces is to reinvigorate the economy after the Covid-19 setback. To achieve this, she is being urged to revive demand by spending more. But where is the money for spending to come from? As I see it, every answer to that question has worrying political consequences for the government.
One suggestion being offered by economists is to cash in public assets by privatising them. But there is bound to be opposition to this because it will be seen as selling out to the corporate sector. If there is one thing which the farmer protest has demonstrated, it is a deep-seated distrust of the corporate sector, one might say hostility to it. Hostility to the corporate sector goes far beyond farmers. Of the many jibes Rahul Gandhi has hurled at the Prime Minister (PM) Narendra Modi, the only one which has hit home is his “suit-boot sarkar” one. It led the PM to realise the political consequences of his government being too closely identified with business interests.
Privatisation is a particularly easy policy for an opposition to attack because it can be likened to “selling off the family silver”, as the former British PM Harold Macmillan did in his famous attack on Margaret Thatcher’s privatisation drive. This, he saw as the consequence of “modern economists having decided there is no difference between capital and income”. Macmillan was alleging that privatisation was profligacy, spending capital rather than earning income.
Another method for the FM to find the money to spend, being suggested by economists, is to be less cautious about the fiscal deficit and borrow to spend on productive investments. They do not accept that this would necessarily be unduly inflationary. With private investment and consumption low, they believe the government can spend more without creating excess demand and inflation.
But the FM may still be held back by the traditional fear of politicians of inflation. Indira Gandhi believed voter anger over inflation was a major reason for her coming back to power in the 1980 general election. She made the high price of that essential component of Indian cuisine, the humble onion, the symbol of inflation. This government showed its sensitivity to the price of onions by banning their export last year.
Then, of course, there is the standard remedy for a government short of funds — raising taxes. Raising personal tax would be unpopular with the Bharatiya Janata Party’s middle-class voters. When corporate leaders met the FM, they advised her to reduce income tax so that taxpayers would have more money to spend and, thereby, create demand.
When Sitharaman weighs up the shortterm political consequences of following the advice she is receiving, I’m sure she will be aware of the longer-term political consequence of getting the arithmetic wrong. The indications coming from this very early stage of recovery are ominous. Capital and profits are growing, wages are not, nor is employment. The incomes poorer Indians have lost have not been recovered. The more prosperous have sustained their incomes and grown their savings.
Unless this trend is corrected, India will become an even more unequal country and that could lead to politically disastrous social unrest.
The views expressed are personal