by Aniket Baksy
Evaluating a Budget is difficult. It can be looked at in isolation of all realities, only in terms of the impacts on the common man- indeed, this is inevitably how the vast bulk of India not trained in Economics or Public Finance will evaluate it. It may be looked at with a charitable frame of mind, recalling that the present government is only 45 days old and inherits an Economy struggling in the throes of the worst stagflation it has seen in some time- this is probably how most Economists will look at it. It may be viewed as cautiously transformational and a booster dose for an Industrial revival which unfortunately doesn’t cure many of the symptoms of the UPA’s disastrous regime- as most Industry Specialists and Members did. It may be critically and incisively examined for every minor flaw in the FM’s diction (as the Congress and other UPA members will). Another useful way may be to evaluate it in terms of the Economic Survey (Ministry of Finance 2014) released only a day earlier.
The Budget and the Economic Survey 2013-14
For those who missed it, the Economic Survey lays out a detailed set of issues and priorities facing the Government in its second chapter, titled, well, Issues and Priorities. The Economic Survey recommendation is threefold:
A low and stable inflation rate through fiscal consolidation, an inflation-targeting monetary policy framework and a conducive environment for the creation of a competitive market in food.
A sharp fiscal correction, through an improved and more effective FRBM Act, and both Tax and Expenditure rationalisation (loosely translated, cut subsidies, give cash transfers and increase public investment). The Survey also recommends the restructuring of the tax system so as to make it more simple and predictable, with a single-rate GST[i] and a simple Direct Tax Code.
Putting in place the legal foundations of a well-functioning market economy in India, requiring legislative, regulatory and administrative changes.
Well, directly addressing these is futile. The Budget doesn’t directly address a single issue here. Take inflation- there’s no step towards food market reforms. Although the APMC[ii] act repeal was briefly mentioned, there doesn’t seem to have been any supply-side measure directly targeting inflation. Yes, to some extent, better infrastructure and roads will reduce transport costs and losses. To an extent, selling surplus stocks on the open market will work. But when these sales will occur, and the modalities, haven’t even been touched.
“Legislative, Administrative and Regulatory” Changes? It’s possible to argue that the introduction of the expenditure Management Commission is a “regulatory” change. The GST has been fast tracked to an extent- the Government has committed to undertaking the legislative procedures within a year. Other than this, no announcements, although such changes would probably not belong in the Budget anyway. Something that some TV experts did highlight- the Budget is a statement of revenue and expenditure, not a forum to lay out a detailed policy roadmap.
On Fiscal Consolidation, the biggest step Jaitley has taken is the introduction of the Expenditure Management Commission, and maybe the establishment of the Institute of Good Governance. An additional step is that pesky excise hike from 11% to 72% on tobacco and health products- as Pigouvian a tax as ever, one which intends to make full use of the fact that taxing a commodity with inelastic demand will inevitably raise revenues and leave a disproportionate burden on the consumer. How this will work in the environment the rest of the budget sets out is beyond anyone. There’s been nearly no talk on divestment or disinvestment (although some articles peg the disinvestment of stakes to raise INR 63,425 crore (Chakravarty 2014)). There was no mention at all of Subsidy reduction or rationalisation (yes, there were vague snippets, on the lines of “ensuring proper targeting mechanisms” or that “the government will meet all of its social responsibilities.”) There was really no talk on Cash Transfers, except in Jaitley’s initial statement of intent. The MGNREGA was mentioned in passing almost, and despite the furore in the house, the FM did not even mention the budgetary allocation for the programme (although in a later interview to Lok Sabha TV, he did state that there would be no reduction in the allocation. More on the Social Sector later, though).
There was, rather, an (expected) 18.8% rise in Capital Expenditure budgeted. As against, a 16.9% tax revenue rise (this is, however, higher than the 12.7% in FY 2013-14. While the budgeted increase in “other non-tax revenue” (profits of PSU’s, user fees, licenses, and fines among others) is budgeted to rise by 24%, it is unclear how this will be achieved. Unclear. That’s the real issue- no one knows exactly how the targets will be achieved, the projects will be completed and so on.
But then, not that much of India really gives a damn about Government finances; even fewer probably understand how deficits are inflationary and negatively impact investments through crowding out effects, thereby denying them their (clearly much loved) jobs and contributing further to stagflation. Maybe the way to judge the budget is popular opinion, after all.
Not so. In a Twitter age, Public Opinion is uninformed, myopic and in general afflicted by mob mentality, a fact the Congress’ Erudite Twitterati took full advantage of today. Take, for instance, the five seconds that Jaitley spent describing the allocation of INR 200 crores to the construction of the “Statue of Unity.” Completely overlooking the fact that the budget provides a one-time grant to the state, India’s Twitter-wielding “neo-Middle class” was up in arms at the audacious idea of granting an initial corpus of just INR 150 crore to women’s welfare, INR 100 crore on Women’s Education and other much more essential and pressing concerns. The UPA wasn’t far behind. Twitter gets vicious really quickly.
At the end of the day, it then becomes incumbent upon those of us who can still think- and I’d like to believe that’s a good number of us, who study in Colleges and understand a basic modicum of economics and the state of the Indian Economy- to discuss the Budget. And that, then, is what we’ll do.
An Aam-Aadmi Budget may be judged on only one parameter- its impact on the “Mango Man” a certain Muffler-clad gentleman so loves. And let’s be clear- this budget doesn’t really change things. There’s a minor tax revision, and the prices of LCD/LED screens under 19” may fall[iii]. There are sops for savers and investors, and owning a home became easier. But if you were expecting Modi sarkar to slash food prices, that’s unlikely. A meagre set of schemes won’t converge enough to guarantee this- in all probability, dumping food on the open market will only exacerbate hoarding issues no matter how criminal it is. Agricultural Supply Chain correction will take time, and it’s not yet visible on this Budget’s horizon. Priorities of the Government may be questioned- a friend of mine pointed out that while home ownership might now be cheaper, education loans were not given any concessions, and the plan to rapidly expand the IIT-IIM network was undoubtedly ill-conceived. Some of us, however, believe that Budgets have other objectives. Especially this one, which some actual considered as crucial as the ’91 budget.
One of these other objectives is to revive growth, specifically, growth which sustains the Jobs which India so desperately needs.
Does Jaitley Deliver for India?
Industry and Investment
And here it is that Jaitley delivers. Within his budget lies a roadmap for industry which essentially looks at each aspect of the industrial project cycle. The initial phase, conceptualisation, receives boosts through (small) programmes that stimulate rural entrepreneurship and youth leadership. Specialised programmes for entrepreneurship among the SCs and STs are further steps towards this goal, as are Skill training and vocational education programmes, and programmes for the proliferation of rural IT schemes, along lines long argued by APJ Abdul Kalam’s pet project, PURA (Kalam and Singh 2011). Commercial credit receives a fillip as any project that seeks to invest over INR 25 crores receives the advantage of the 15% investment allowance, while SHGs receive increased credit allocations. Programmes for enhanced Venture capitalism, Incubation centres, Textile Clusters, Banking schemes to expand credit allocations and provide troubled asset relief are all a part of a grand vision. These tie in perfectly with a new, more aspirational populace that doesn’t want to be fed; this populace wants to earn its bread (its roti, OK), and earn lots more of it.
Once a new industry is conceptualised, and funding doors opened, it wants to produce, presumably requiring power and water for this. Jaitley delivers on both[iv]. Coal sector liberalisation and easing of import restrictions on a wide range of raw materials including steel-grade dolomite, for instance, will make steel production in India competitive enough to supply to the new industrial complexes Jaitley envisions. Exemptions for high tech industries and cesses on imported telecom products imply a vision for domestic ascendancy of the value chain.
The next stage, selling goods, requires well-developed markets and people with money to spend. Jaitley focusses on the infrastructure, perhaps inordinately. Spending INR 37,000 crore on India’s roads was needed, as anyone who drives from Bangalore to Hyderabad (my mother has been personally forced to, twice) will attest to. The promise to introduce the GST legislation by the years’ end, is welcome- even if it’s not achieved, at least the Government recognises the urgency.
These things are important. Maybe in addition to complaining about everything the Twitterati complain about, as a million others do, and posting the now fashionable “but Modi only cares about the rich…” or pro-feminist statuses or anti-rape statuses[v], a dose of cautious optimism would help. These things are important too. But so are jobs.
At the end of the day, reading through the budget sends out one super-clear message: Invest. Please invest. And here, whether this is warranted or not is, unfortunately, inevitable. The UPA government’s animosity towards investment by the private sector- a strong word, but only animosity captures it- is clear from their stand on retrospective taxation, on compulsory CSR (oh, the irony of forced charity) in the recently passed Companies Bill, from the LARR, whose key addition to the process of land acquisition was an additional bureaucratic layer responsible for “project evaluation,” and consequently, the addition of another layer of bureaucracy to be bribed, and an average one year addition to any project’s timeframe. Investors know economics. They know that factors like risk, inflation and the interest rate make income less valuable, the later it comes.
Here, a shout out is due to Jaitley for the emphasis he has placed upon development in the North East Region. After legacies of neglect, a budget whose expenditures on Road and Railways in the Region add up to nearly 4,000 crore was warranted beyond measure. The North-East is a part of India. It’s incumbent upon us all that we care about them, just as much as anywhere else. The NER does indeed get quite a bit of attention- a Sports University, Agricultural Institutes in Assam, and Institutes for Himalayan Research. That’s a good thing, but then, “aspirational” India simply doesn’t accept any positivity on things that don’t affect personal bottom lines.
The Social Sector
Now, the Social Sector, the darling of the Congress, the UPA, and the Left. That clear that the Social Sector has been neglected is, unfortunately for all these parties, far from clear. The flagships of the Congress have been retained, only not expanded[vi] (as a UPA-III budget would undoubtedly have done), and in some cases their focuses may have been reoriented- this is unlikely to happen at the grassroots though. There is, however, hidden in the many INR 100 crore schemes, a message- Jaitley wants India to work hard and get up on its own feet. Rural entrepreneurship and easier agricultural credit, beside a massive boost to the farm sector, means that agribusiness should get easier. Agribusinesses are not, as a certain muffler-wearing gentlemen might have you believe, the province of Ambanis or Adanis. These are SMEs, with corpuses and initial seed investments of less than a crore, funded by SHG[vii]s or by regional Rural Banks. Food processing units at the local and rural levels can actually benefit farmers[viii]. The infusion of funds into credit through NABARD augurs well for these. Yes, Punjab and Haryana may benefit disproportionately, but that doesn’t make the positive impact of an enabling reform- and that’s what categorises most of Jaitley’s proposals, the enabling of action rather than the State automatically undertaking these- any less potent.
The Food Security Bill didn’t appear to find any mention in the Budget. This disappoints many, I’m sure- a vocal proponent of the Drèze-Sen-Khera School[ix] of Public Economics expresses his disappointment by noting that the budget’s tax cuts are “populism” financed by the non-tax paying poor (Himanshu 2014). While not many were surprised, many were disappointed- while the FM opened with a statement of intent that subsidies would be targeted, there was no talk on subsidies at all. LPG and petroleum subsidies, fertilisers and food have all been left untouched. The Ratings Agencies have taken notice, and they aren’t exactly euphoric. India’s deficits have been headline news items on foreign investment scrips for a while, and the reliance on FDI implies that expenditure rationalisation on the revenue account could’ve been better. Markets didn’t realise this at first- once they did, they wiped off over 430 points gained over the course of the budget speech and ended up in the Red[x].
But then, what after all is the Social Sector? Is it the Human Development Sector? Jaitley’s budget does an OK job here, given other constraints. A recognition of the importance of Teacher training (INR 500 crore) and of a larger higher education sector shows some importance to the sector. Those moaning about the Primary Education sector having been neglected are, in some ways, justified. Maybe more could’ve been done towards infrastructure augmentation- but then, that’s not a core priority. The ASER[xi] 2013 report provides some perspective here- 97% of India’s School-going populace goes to school, but less than a third can perform an arithmetic operation appropriate for their grade level. The quality of education is important, and it’s good to know that Modi Sarkar agrees.
As far as health goes, Drèze and Sen should laud the initiative to introduce Universal Access and free drugs and healthcare, however small the initial move may have been. Drèze, in particular, should rejoice a bit more- massive allocations for urban renewal, national level sanitation schemes all feed-back into a malnutrition-poor health-outcome alleviation scheme, thus providing a more-or-less broad-based framework to tackle the multifaceted nature of the health crisis in India. That being said, work in the health sector is disappointing. There’s been really little clarity on new regulations to improve access to health and so on. Vikas requires healthy workers.
However, redemption for these failings comes, albeit only in part, with the recognition that boosting entrepreneurship, boosting rural credit, improving access to machinery, investing in agricultural infrastructure and productivity, are in fact Social Sector Measures. For instance, a good reason for poverty in India is lack of easy credit, and the consequent dependence on Moneylenders, a problem that’s been compounded to no end by the virtual destruction of the Micro-Finance Sector. Credit expansion helps here, and doesn’t suffer from Moral Hazards created by Loan Waivers. These measures alleviate poverty, not through the conventional idea of just giving, but allowing people to seize their own destinies. Getting people to work to overcome their poverty is never easy[xii]. But Modi’s budget does a good job of trying[xiii]. And it’s not like he entirely neglects the social aspect of it- there are targeted allocations for Women, for SC’s and ST’s, missions for Low-Cost Housing- these are social sector projects.
Yes, allocations are small. These are seed funds, ones that lead to larger allocations as the project progresses. Nonetheless, there were many who derided the “INR 100 crore” figure.
Well, it’s not really that surprising. Given inflation, INR 100 crore isn’t all that much- surely, it’s nothing compared to the Food Security Bill (INR 3 lakh crore by some estimates, INR 1.2 lakh crore by others) or the Farm Loan Waiver of 2008-9 (INR 60,000 crore). What all this critique misses is the fact that the INR 100 crore figure is only an initial allocation. There’s a difference between an initial allocation and an actual one. INR 100 crore is intended only to get the project going. Given this characterisation, the Jaitley Budget must now be viewed purely in terms of what is going to be done now.
What About the Future?
And a Lot, a lot is planned. Apart from the infrastructure boost (which drove L&T stocks nearly 3% higher initially, finally ending at 0.16% up, after the late afternoon correction), the Government envisions a Skill Revolution that reveals a lot about the employment-centrism inherent in the Budget. Skill India is an interesting idea- it looks at directed professional training for electricians, plumbers and the like. An education boost in higher education is evident- 5 IIT’s, 5 IIM’s, 4 AIIMS, national importance to Film and TV institutes and a new National Centre for Humanities are encouraging ideas. Programmes on Cleanliness have long been overdue- no matter how much Yamini Aiyar moans that the problems with Toilet usage and open defecation can be delinked from toilet infrastructure, it’s probably impossible to argue that India has enough toilets either. Yes, Social Change matters, but I guarantee you that it’s probably tougher to convince women to use a toilet when their houses don’t have one. Bangladesh’s success on the Toilet front was led by “women empowerment”- but an innocuous paragraph in An Uncertain Glory highlights how the State has been “quietly building toilets for years,” and how the final improvement and changes in social norms is clearly the result of thousands of community volunteers descending upon the rural populace, and teaching them (Drèze and Sen 2013, 64). We’ll do that later. Let’s build the toilets now.
There are cute ideas, too. Cute, due to their impracticality (unfortunate, but true). Even as an incubation fund, INR 7,060 crore to start the 100-Smart City Project is puny. Especially given how critical urban renewal is, in a Nation where we’ll soon cross the 50%-Urban population mark. While it’s commendable that urban and housing renewal will be FDI-led, the wide number of FDI-dependent proposals in the Budget does raise uncomfortable questions about exactly where all these dollars will come from. We’re being optimistic- not entirely uncalled for, there has, after all been a rapid FII inflow in recent weeks- but then, let’s be realistic too. The DMIC[xiv] is proposed to cost USD 90 billion- that’s INR 5.4 trillion. We should shudder at how expensive the several other Industrial Corridors will be- it’s roughly the same distance from Delhi to Kolkata, and the Chennai-Bangalore and Bangalore-Mumbai Corridors will probably have to negotiate rough terrain.
What, then, do we conclude? The Budget isn’t perfect. It presents no concrete roadmap on the process of fiscal consolidation, other than an assurance that the FM may or may not keep. It neglects Financial Sector Reforms by and large- something Naina Lal Kidwai argued was essential given banking sector indebtedness and poor asset quality. It neglects certain key sectors of manufacturing which were dying for an exemption or a tax holiday, something- auto and pharma (Mazumdar-Shaw 2014) come to mind[xv]. On the face of it, it doesn’t put up a convincing social security framework, or appear much to address human development. Plans to expand Urban Areas and develop infrastructure corridors, SEZs and the like appear to lack clarity of vision and thought. Puny allocations raise questions of what can be done.
Looking a bit deeper, the truth couldn’t be more the opposite. The budget provides a renewal framework, and thereby fulfils its mandate- to state the Intent of the where and how the Government will spend or earn. Its vision for human development isn’t spelt out in detail because it doesn’t have to be- this isn’t a manifesto. It’s a Budget. It’s a statement of revenues and expenditures. It does a good enough job here. The one failing is its failure to convince us of how Deficits will be controlled, and this is minor enough that one can be excused for appreciating the vision behind the budget.
And what a vision it is, one sweeping in its comprehensive roadmap for renewal. An agricultural sector characterised by renewed productivity, better technology incubated in agricultural universities, selling to an industrial textile cluster, perhaps located along a high-speed rail corridor for quick connectivity to a new port with infrastructure upgraded to world-class standards. Farmers who sell to private dealers and retailers who compete efficiently, middlemen forced to themselves compete for the privilege of intermediating sales, all accessing a new education system whose elite institutions can now cater to nearly twice their current intake and seed that many more innovative projects. Cities whose urban renewal makes them hygienic, clean, and safer than ever before, and thereby makes them attractive places to invest in and purchase homes in, given their modern planning and rapid public transport systems. Broad-based social equity in opportunity, education and healthcare through targeted entrepreneurship development, and the attendant rise in a culture of innovation where lateral thinking and risk taking are rewarded. A nation where the power sector meets over 50% of its generational needs through solar panels and photovoltaics manufactured locally. It’s worthwhile watching the video promo for the Dholera Special Investment Region, to see what Modi envisions as India’s future.
Sounds tempting? You bet. Sounds impossible? It probably is. But guess what, if Modi Sarkar can fulfil even a quarter of the schemes outlined, the dream suddenly becomes temptingly close to realisation. Here’s to Jaitley for a Job Well done. Now, we should all be back to work, putting it into practice.
Chakravarty, Manas. 2014. “Budget 2014: If this is a bitter pill, Give us more of them.” Livemint.com. July 10. Accessed July 10, 2014. http://www.livemint.com/Opinion/3ongbnBLKhStdeCbfu4gVK/Budget-2014–If-this-is-a-bitter-pill-give-us-more-of-them.html
Drèze, Jean, and Amartya K. Sen. 2013. An Uncertain Glory: India and its Contradictions. New Delhi: Penguin Allen Lane.
Himanshu. 2014. “Narendra Modi’s Union Budget a paradigm shift in political economy.” livemint.com. July 10. Accessed July 10, 2014. http://www.livemint.com/Opinion/fsF9kXTA72lTU5dSG8anYL/Narendra-Modis-Union-Budget-a-paradigm-shift-in-political-e.html.
Kalam, A P J Abdul, and Srijan Pal Singh. 2011. Target 3 Billion: PURA: Innovative Solutions towards Sustainable Development. New Delhi: Penguin Books.
Mazumdar-Shaw, Kiran. 2014. “No “wow” Factor in Budget 2014.” The Economic Times. July 10. Accessed July 10, 2014. http://blogs.economictimes.indiatimes.com/Plainspeak/entry/no-wow-factor-in-budget-2014.
Ministry of Finance. 2014. Economic Survey 2013-14. New Delhi: Government of India, Chapter 2.
[i] Goods and Services Tax
[ii] Agricultural Produce Marketing Commission
[iii] For reference, the average laptop screen is 15”.
[iv] While the power sector will be boosted enormously by cutting of import duties on raw materials and new thrusts on Solar and renewable power, surcharges on renewable energy have been increased, invoking some confusion. On the other hand, the Water sector will benefit from the initiation of river linking, for instance. It may be worthwhile to acknowledge the politics behind raising investments in water and power supply in New Delhi, as a certain Muffler-clad gentleman will no doubt be in some important ways perturbed by such moves.
[v] There’s been a profusion of these after an ill-thought comment invoking the word “rape” in describing the 7-1 defeat of Brazil to Germany made the rounds on Social Media.
[vi] For those astounded that the MGNREGA allocation found no mention in the Budget Speech, the allocation has been retained with no change.
[vii] Self-Help Groups
[viii] Not that it’s any use explaining this- those who insist on wearing Red each morning will still decry the Budget as one that has nothing for the poor. As they did, indeed.
[ix] Readers will note that this is my own moniker for a school of economics which claims that legitimacy for economic policy derives solely from the expansion of individual capabilities in accordance with Sen’s approach, and therefore advocates massive subsidisation and public investment of essential inputs in human development, particularly health, nutritional improvement and education.
[x] No Pun Intended.
[xi] Annual Survey of Education
[xii] I refuse to believe that Rahul Gandhi is really that stupid (just kidding, but I need to make a point). I assume that his “Poverty is a State of Mind” comment had a notion like this behind it.
[xiii] I’m aware that this sounds rather Libertarian. But it’s time a few of the ideas of liberty and the notion of work over doles, caught on. While some will see Red (Pun Intended) at (what they assume is) the idea that people should be made to work for money, please let me state that I’ve said it before- unhealthy people who cannot work have indeed been shortchanged. But clearly APL families who hold BPL cards and qualify for NREGA benefits probably should be incentivised to, well, “get off welfare”.
[xiv] Delhi-Mumbai Industrial Corridor
[xv] It may be worthwhile to point out that while Akshay Kumar may feel that the Film Industry deserves more sops, Humshakals doesn’t exactly provide the most compelling of cases for the same.