Economic expansion through doles unsustainable

Nantoo Banerjee

Full marks to Finance Minister Piyush Goyal for presenting an interim budget that could as well be described as the first draft of the ruling party’s election manifesto.  Suffice it say that the political mission of this budget may not be easy to emulate by the opposition. Legally speaking, the budget provisions are valid only until the next government presents a new budget for the fiscal, 2019-20.  The reliefs and concessions are offered mainly to small farmers and unorganised workers. Their actual financial impact on the government expenditure is understandably unclear. No going government is expected to impose fresh taxes for the interim period. The indirect taxes are not in Goyal's hand. It is largely regulated by the GST Council.  By convention, tax proposals are not announced in interim budgets.  Goyal has merely given some small financial sops to tax payers at the bottom. Contrary to the given perception, middle-class gets little from the budget. Other seemingly poll-linked multiple budget concessions to the underprivileged may only mean much higher budget deficit for 2018-19 than estimated in the document.
The finance minister has already indicated a higher fiscal deficit for the current financial year at 3.4 per cent of the GDP. The additional deficit is expected to be met through further borrowing. Thanks to the expansionary budget, a rate cut by the Reserve Bank of India, which was seen as almost a certainty before the budget, now looks very unlikely. By increasing spending and borrowing, the government will be boosting consumption and widening the fiscal deficit. This may, in turn, lead to an inflationary pressure, reducing RBI’s headroom to cut key interest rates.
The post-budget bond market reacted sharply to the finance minister’s announcement of higher-than-expected fiscal deficit this year.  The corresponding borrowing burden on the market saw 10-year bond yields jump 11 basis points to close at 7.38 percent.  As in the case of election manifestoes, the current budget played more on the public sentiment and mood, especially the rural and urban India vote bank, than solutions to long-pending economic problems. The government is fully aware of its financial limitations. The interim budget will at best cover 45 days of the government spending of the 2019-20 fiscal. The government borrowing will increase this year as also the next year, no matter which party or political combination comes to power.
In fact, the prime minister’s  tacit acknowledgement that the current budget exercise is aimed at pleasing as many constituencies as possible — “from middle class to labourers, from farmers’ growth to the development of businessmen, from manufacturing to MSME sector; everyone has been taken care off” — should be a matter of concern. The prime minister called it a “trailer of the (next) budget which, after elections, will take India on the path of development.” Of course, the prime minister assumes that the budget will highly please the people and strongly influence them to buy his party’s economic vision and political mission and send his party back to power. There is no doubt that the provisions in his government’s midterm budget and his post-budget statement throw up a big challenge before opposition parties and the next government — even if it is led by BJP — to implement the measures. It is assumed that the economic and employment growth will be automatically driven by the budget objectives and provisions on human development.
The ruling party tries to give an impression that its economic policy will be the growth driver while politics plays more like a fail-safe auto pilot. In essence, the budget seeks to please all — from the poor and underprivileged to small farmers, agricultural workers, small and medium enterprises, low-tax and non-tax payers, employees and self-employed, underemployed, unemployed, householders and even ragpickers. The proposed pension scheme for nearly 10 crore informal sector workers will provide some small old-age income security to them. It will be one of the world’s largest pension programmes in terms of beneficiaries. Quizzically, the budget is silent on where the fund will come from and how will a cash dole of only Rs.500 per month to small farmers and old-age monthly pension of Rs. 3,000 to the underprivileged boost the economy. The budget does not talk about mega industrial projects and infrastructure expansion and jobs of permanent nature for our millions of young freshers from engineering colleges, management and science institutes, schools, colleges and universities.
Breaking away from the tradition, the government dropped the pre-budget presentation of past-year economic survey. The unusual step may have been taken in the face of some uncomfortable hard numbers that reflected a poor performance of the eight core sector industries accounting for around 40 percent of the country’s industrial production. Foreign trade and employment generation are among other important parts of the economic survey. The country has performed poorly in the field of exports while imports continued to escalate leading to very large trade deficit. The worst performance has been in the area of employment generation. A pre-budget economic survey couldn't have omitted the National Sample Survey Organisation’s latest report that placed the country's unemployment rate at a 45-year-high of 6.1 per cent in 2017-18.  The report has been at the centre of controversy after two National Statistical Commission (NSC) members, including acting chairman, resigned just three days before the interim budget announcement, alleging that the government had withheld its release despite the NSC's approval. The rate of joblessness among youth was at a significantly higher level compared to the previous years and “much higher compared to that in the overall population,” said the report. Instead, the stand-in finance minister repeatedly tried to establish that economic growth automatically steadies employment growth. Unfortunately, this does not happen in a vastly import-led economy such as India. (IPA)

Sunday, 17 February, 2019