Blog Post


Rajiv Kumar 16 February 2017

Everyone agrees that the budget is a political exercise, albeit couched in economic and financial terms. It touches the lives of virtually the entire population. Therefore, its impact is far reaching and necessarily takes on political overtones. It is often used to serve immediate partisan interests as for example in 2008, when the then finance minister, allowed public expenditures to explode by 3.5% of GDP. A brazen and successful effort for securing the 2009 elections for the UPA, which returned with a larger majority. It was widely believed that the 2017-18 budget (FY 18 budget) would also see fiscal profligacy for helping BJP make a good showing in the ensuing elections in five states. Modi and Jaitley need to be commended for not succumbing to these temptations. The stock market showed its appreciation by recording the highest post budget jump ever.

With FY 18 budget and the preceding ones, Modi and Jaitley have unequivocally shown that they would not cede even an inch of the ‘left of center space’ to their political opponents. Modi has learnt, as he should have, from the unfortunate experiences of Vajpayee led government who lost the 2004 elections against all odds. FY 18 budget carefully follows the trend in previous three budgets of retaining and where possible expanding allocations for public welfare schemes. Thus allocations for MNREGA, affordable housing; farmers’ crop insurance schemes, subsidies for food and fertilizers; distribution of cooking gas to poor households; subsidized life insurance schemes have either been increased or retained.

I support these transfer payments and subsidies as being necessary for achieving a modicum of equity and welfare in a poor, predominantly market based capitalist economy. This is the essence of Keynesian welfarism that kept the left at bay in Europe and the UK. It is, however, critical that these transfer payments are done efficiently with minimal leakages. Modi has focused on improving the delivery of these subsidies as is reflected in his oft cited example of ‘neem coating’ urea fertilizers. Similarly, JAM based direct benefits transfer to bank accounts of actual beneficiaries is also aimed at plugging remaining leakages. This is the essence of putting in place a Development State.

By unabashedly proving its pro-poor credentials, Modi has ensured that he will not be electorally hurt by the emotive charge of being a ‘suit boot kisarkar.’ This has been RG’s one and only successful attack on Modi. It demonstrates that in our hyper competitive democracy, a minor slip can blow up into a major weakness. The fear of being identified as a rich-persons man, has goaded Modi into ostensibly shunning the company of Indian businessmen and avoiding budget measures that could be even faintly seen as being pro-business of pro-investor. Could he have gone too far in this direction?

Having secured his ‘left flank’, Modi now must attend to the political necessity of generating large scale employment. Indian youth’s aspirations are exploding and their patience wearing thin. This is evident from the dominant caste mobilizations of the Jats in Haryana, Gujjars in Rajasthan, Patels in Rajasthan and most recently Maratthas in Maharashtra. These communities, which benefitted disproportionately from 1990s liberalization, now see opportunities lagging significantly behind aspirations. Hence the mobilization. Surely, Shiv Sena’s newly found belligerence arises from smelling an electoral opportunity among the disaffected Marathi Youth

So the Modi government must urgently generate jobs and in large numbers too. This cannot happen without rejuvenating private investors’ sentiments which are currently so fraught that growth in private gross capital formation is negative. The ominous corollary is that productive capacities in the economy are shrinking and with that job opportunities are becoming scarcer and not plentiful as they ought to be. Aspiring youth do not appreciate NITI Ayog’s nuanced differentiation between good employment, full employment and under-employment.

These measures for generating jobs cannot wait for the next budget in February 2019 as that would be too late. Investors sentiments take time to turn around, specially in an external and domestic environment so full of uncertainties. Some measures were indeed announced in the FY 18 budget. These need to be supplemented to provide the necessary momentum in job creation. These can be announced when the Lok Sabha re-convenes to discuss and pass the finance bill.

First, corporate income tax cut must be extended to the remaining 8% that have been hitherto left out. Corporates should be given the option to continue with their exemptions or choose the lower tax rate for for next two years. SMEs depend on larger companies for their orders and so without improving sentiment and profitability of the latter, a SME focused tax cut may not produce desired results.

Second, personal income tax cut should be extended to higher income categories by levying the highest rate of 30% plus cesses on incomes above Rs 20 lakh. This will give a much needed boost to consumption demand, necessary for improving capacity utilization in domestic industry. Revenue foregone will be recovered with the widening of the tax base and higher compliance.

Third, at least Rs. 40,000 crore should be allocated for public sector banks recapitalization. Unfortunately, as happens all over the world, taxpayers will have to bear the cost of the past sins in order to unfreeze the credit flow from banks whose NPAs have climbed to a scary 11.5%. Surely, bank mortality must be also be permitted, while safeguarding depositors interests, in cases where NPAs have gone beyond redeemable levels.

Fourth, private sector operators must be actively involved in the implementation of affordable housing and infrastructure projects. There is no shying away from extremely tardy implementation of housing projects. This must be rectified by inviting private contractors to execute projects where land acquisition, procedural clearances and financial closure have been secured. These projects can be awarded in the most transparent and competitive basis to deflect any charges of crony capitalism etc.

Fifth, private sector should also be actively involved in the resuscitation of agriculture extension services and creation of post harvest logistics that would improve farmers’ connectivity with private retailers and E-markets. Private retailers would be ideally suited to be used as extension service providers and suitably incentivized.

All these measures will assure private investors that Modi means business. And we know from his Gujarat track record that he does mean business. In Delhi he has been hemmed in by the need to propagate the correct political message of being pro-poor. This is fine. However, it is not necessary that taking steps to boost private investment and employment generation will queer the pro-poor pitch.

The calculus of Modi’s political messaging team could well be that his own persona and popularity, which remains exceptionally high for a person in the middle of his term, would suffice to win the 2019 elections. However, he would do well to take out an insurance policy against downside electoral risks, by ensuring that private investors are now enthused and actively working with him for generating jobs. And are not in either in a sulk or simply licking their self-inflicted wounds. Smart political messaging can remove perceptional bias against pro-investor measures that are necessary for generating jobs, critically needed for electoral success and economic dynamism.

Rajiv Kumar, Founder Director, Pahle India Foundation.