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A smart Budget in difficult circumstances

Very much in line with the prime minister’s style, Arun Jaitley has focused on improving sector performances and achieving efficient governance.

analysis Updated: Mar 01, 2016, 23:23 IST
Rajiv Kumar
Rajiv Kumar
Finance minister Arun Jaitley has shown his preference for maintaining macroeconomic stability and establishing the government’s credentials for fiscal prudence
Finance minister Arun Jaitley has shown his preference for maintaining macroeconomic stability and establishing the government’s credentials for fiscal prudence(PTI)

Two questions have stoked my thoughts in writing this article. How is this Budget, the third presented by finance minister Arun Jaitley, different from the earlier ones of the UPA? And, does this Budget not represent the Modi government’s turning away from the corporate sector and, in effect, reverting to a ‘socialist’ approach for India’s economic development? It is possible that such questions may not have arisen had an overall economic philosophy been defined in putting forward a framework for the course of the Indian economy. Without such a framework, the Budget and indeed other policy initiatives could appear ad hoc and somewhat reactive in nature. Hence, it is important to clear this misapprehension.

The Budget for 2016-17 is part of a consistent approach in putting the Indian economy on a path of self-sustained, rapid growth and employment generation while ensuring the widest possible inclusion. It, thereby, allows the Modi-Jaitley duo to deny their left-of-centre political opposition any space from which to criticise the government as being ‘anti-people’ or ‘pro-corporate’. This is both a politically savvy and an effective economic strategy that will lay the foundations for the BJP’s undoubtedly hard task of preventing a Congress comeback, putting regional parties on the defensive and making PM Narendra Modi the first non-Congress two-term prime minister.

Jaitley has eschewed any grandstanding or headline-grabbing announcements. Very much in line with Modi’s style, he has focused on specific measures to improve sector performances, achieve more efficient governance by cleaning up the administrative mess and focus on physical infrastructure, which will help in both growth acceleration and employment generation.

In the light of the two successive years of widespread drought and the consequent rural distress, the Budget has focused on agriculture and rural development. A number of schemes and programmes have been announced and some existing ones like the MGNREGS strengthened with the highest-ever allocation of Rs 38,000 crore. The proposal to give Aadhaar statutory legitimacy is welcome because it will provide the basis for a direct transfer of benefits to targeted beneficiaries. A pilot project for directly transferring fertiliser subsidies will lead to their eventual elimination.

The proposals for reviving agriculture are typical of Modi’s approach of incremental, persistent change for achieving a large cumulative impact. The focus is on providing electricity to all villages and irrigation to each field. Thus, there is a time-bound programme for electrifying all the remaining 18,000 villages; fast-tracking 89 irrigation schemes to cover an additional 28.5 million hectares; allocating an unprecedented Rs 2.8 lakh crore to gram panchayats and municipalities as directed by the 14th Finance Commission; a first-time allocation of Rs 6,000 crore for groundwater management; setting up a long-term irrigation fund of Rs 20,000 crore; rehabilitating 500,000 ponds and dug wells under MGNREGS; raising the allocation for rural roads to Rs 19,000 crore to connect the remaining 65,000 eligible habitations by 2019; promoting organic farming; establishing a unified common agriculture marketing ePlatform for wholesale markets; and a provision of Rs 15,000 crore towards interest rate subventions for farmers. It would of course be even better if these could be combined with a forward-looking analytical framework for policy initiatives.

The finance minister has shown his preference for maintaining macroeconomic stability and establishing the government’s credentials for fiscal prudence. This has been done in the hope that it will attract investors, who will now be assured of targeted inflation control and fiscal discipline. By maintaining the fiscal deficit target of 3.5% of GDP in 2016-17 and announcing measures to boost employment and growth, the finance minister has now firmly put the onus on RBI governor Raghuram Rajan to reduce interest rates in order to spur private investments.

However, in the absence of a private corporate sector response in ramping up investment, the government could be left ruing its decision to not increase public capital expenditure more vigorously. As it is, public capital outlays have been increased by only 4%. Despite the large outlays on roads and railways of Rs 2.2 lakh crore, capital expenditure is a mere 1% of GDP. The government has taken a calculated risk in hoping that private investment, both domestic and foreign, will trigger an upturn in the flagging investment demand. Without such investment, the government’s assumption of 11% nominal growth in GDP for next year may not be realised. This could generate serious disappointment among young job-seekers. The government would do well to closely monitor the situation and take extraordinary steps to ramp up public investment in case private investment is not forthcoming.

To the best of my knowledge, this is the first Budget that makes an explicit provision for absorbing part of the costs of incremental employment by firms. It has set aside Rs 1,000 crore for paying the employers’ contribution of 8.33% towards employees’ pension funds for workers with salaries lower than Rs 15,000 per month. In addition, it has raised the turnover limit to Rs 2 crore for presumptive taxation for MSME units. This will encourage these units to expand and hire more people. The government will also open 100 model career centres by the end of 2016-17 under the National Career Service and circulate a model shop and establishment Bill to all the states to replace the current law with a more simplified version. These measures, combined with the job creation through infrastructure development and under MGNREGS, will help to make economic growth more employment-intensive. Overall, a smart Budget in difficult circumstances.

Rajiv Kumar is senior fellow, Centre for Policy Research

The views expressed are personal

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