The last budget of Modi government
The budget to be presented on 1 February will be the last full budget of this government. The budget in 2019 will only be a vote-on-account. But whether this will be the last full budget of the Narendra Modi government will depend on the outcome of the elections to be held in 2019. It is in this context that this budget holds importance not just for the economy but also for the political fortunes of this government, both of which will depend on the contours of the budget.
The contours of the budget are more or less known given the stress in the economy and the political exigencies of this being a pre-election budget. It will certainly be a budget keeping the electorate in mind; but whether it will also be a budget that can revive the economy is a question that can be answered only after the budget’s presentation. And it is the second which will matter more in the long run, irrespective of the electoral outcomes.
Things are certainly not good as far as the economy is concerned. The stress in the rural economy has only worsened with growth in rural wages slowing after a brief spurt last year. Between May 2014 and October 2017 real wages of agricultural labourers grew annually by 0.67% per year. Real wages of non-agricultural labourers declined by 0.24% per year during the same period. The monsoon was good last year, but the unevenness of rainfall has meant that agricultural production has been hit with crop production in the kharif season likely to be lower by 2.8%. The latest crop watch by the ministry of agriculture shows a severe shortfall in winter rains with reservoir levels much lower than last year. Rabi sowing is down by 0.9% with wheat sowing down by 4.7% and oilseeds sowing down by 3.7%. The only crop group which shows growth in acreage is pulses, led by grams, with all other pulse crops showing stagnant or lower acreage. Clearly, the situation in agriculture is likely to worsen or at the least will not improve in the rabi season. That means the distress in agriculture is likely to continue for some more time.
But the government is also left with little room to manoeuvre. The fiscal situation is fragile with the government already having spent more than its fiscal deficit target. Given that inflation is on the rise and is likely to be in the near- to medium-term, the worry on the fiscal situation will weigh heavily on the mind of the finance minister. Further, the rise in petroleum prices and the worsening of the current account deficit will also put pressure on the exchange rate. With exports already sluggish and imports rising, the external situation is unlikely to boost the economy. The domestic economy may be showing signs of recovery but concerns on private investment and excess supply suggest that the recovery, if any, is likely to be slow and painful. All in all, the situation is no better than when this government took over.
But it is the government itself which is to be blamed for the mess. It had the good fortune of falling crude oil prices and low inflation regime in the last three years which it squandered. Even in the rural economy, the government is solely responsible for creating a mess with neglect and indifference. It is now stuck with the Hobson’s choice where immediate steps to revive the rural economy are inevitable. Much more for the fact that these are also politically sensitive. But the real problem is whether the government has any plans to revive the rural economy. A short-term boost through increased spending might suppress the symptoms in the short run, but where the government has failed is to provide the right prescription to an economy which is becoming more complex day by day. It is not just domestic price volatility and the increased transmission of global prices which are creating vulnerabilities for the farmers, but also the rising cost of production and the increase in weather fluctuations. All of these not only require short-term palliatives but also long-term investments in agriculture. However, the record of the government on this count has been negative with agricultural investment in the crop sector declining by 4.7% in real terms during the tenure of this government.
The present crisis is as much a result of contemporary factors as it is a result of long-term neglect of the agrarian economy. That’s why it needs a directional shift in dealing with the agrarian economy and not just short-term measures to win votes. The lure of farm loan waivers win votes as they did in Uttar Pradesh and elsewhere but do not preclude the possibility of another debt trap.
The ultimate choice has to be made by the government, thinking not just for the next election but also for the next decade or so. The unrest over lack of jobs and stress in the agrarian economy may not be visible on the streets but there are strong undercurrents that are threatening to derail political stability which is necessary for bolder reforms in the economy.
Despite concerns on the fiscal math, the time is now for the government to increase public spending in relieving rural distress and reinforcing social protection measures; rural infrastructure, irrigation and marketing networks also need increased investment. It is also time to overhaul the price support mechanism even if it means increased spending. Otherwise, it will not only be the last budget of this government, it may also turn out to be the last opportunity for it to revive the economy.
Himanshu is an associate professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.