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For the Narendra Modi govt, looming drought and uncertainty on oil prices due to Iraq crisis add to the existing problems of inflation, reduced manufacturing and UPA’s policy paralysis. Photo: Bloomberg
For the Narendra Modi govt, looming drought and uncertainty on oil prices due to Iraq crisis add to the existing problems of inflation, reduced manufacturing and UPA’s policy paralysis. Photo: Bloomberg

Narendra Modi’s Union Budget a paradigm shift in political economy

Presented by Arun Jaitley, Budget 2014 isn't merely as a statement of accounts, but also a economic vision document of the government

Expectations from the first budget of the Narendra Modi-led Bharatiya Janata Party (BJP) government were different from those of previous years. Different because Budget 2014 was not seen merely as a statement of accounts, but also as the economic vision document of the government. More so when the challenges to the economy are far more serious than they were in the last two years. The twin problems of a looming drought and uncertainty on oil prices due to the situation in Iraq add to the existing problems of high and persistent inflation, slowing of industrial activity and the general climate of policy paralysis this government inherited from the United Progressive Alliance (UPA) government.

Except for the likely drought and the uncertain situation in West Asia, most of the problems have been known and used extensively by the BJP government in the run-up to the general election 2014 to criticize the UPA. This was evident from the Economic Survey presented on Wednesday, which focused on managing inflation, reviving growth, fiscal management and stability in regulatory framework—the cornerstone of government policy. Quite naturally, the promise of achhe din (good times) not only gave political dividends in the form of a full majority to the BJP in the April-May general election, it also raised the expectations from the government on economic management. At the same time, it also raised aspirations of the young and restless middle class, which expected a quick turnaround of the economy.

Budget 2014 has to be seen in this larger context since it is the first and the most important economic statement of this government. It marks a paradigm shift in the political economy, as is obvious from the emphasis the government places on the markets as the dominant engine of growth.

This is obvious not only from its strategy of fighting inflation, which relies on creating a unifying market for food items to weakening and in some cases dismantling the old structures of state control such as the Agricultural Produce Marketing Committees. The same is true of the approach of the budget, which sees the existing structures such as subsidies as necessary evils and advocates a targeted approach. The shift in the balance of power from “inclusive growth" to “market-led" growth is also reflected in the agenda of economic revival, which relies on infrastructure spending through large-scale public-private partnerships and the relaxation in foreign direct investment limits in crucial sectors such as defence and insurance.

Of course, the budget is not the final document and is at the most a statement of intent of the direction that the government is taking for economic revival. And while it is clear in terms of its political content, the government’s ability to use the budget to tackle the economic challenges remains a question mark. This also shows an incomplete understanding of the challenges that the economy faces.

These include the approach to not only inflation management, which continues to give primacy to marketing bottlenecks at the cost of ignoring other issues such as rising cost of production, but also to issues of enhancing agricultural production. But herein also lies the problem. The ability of the markets to influence agricultural productivity is limited and farm subsidies, however undesirable, are an important element of the agricultural sector today.

So is the case of spending on the social sector, which is usually blamed for the fiscal imbalance. But even those who believe in markets and the trickle-down theory agree that markets and growth have failed to improve the social development indicators, despite very high growth. But the sole focus on expenditure reforms also reflects the lack of recognition of the other side of the budget, which is revenue mobilization. While the budget indulges in populism by giving tax concessions to the middle classes, it hardly recognizes that the cost of this is paid by the non-tax paying poor in rural and urban areas.

But a far more fundamental issue is the ability of the budget to incentivize employment creation, where again the market may not be the only solution. It does require government intervention and hand-holding of small and medium enterprises. This not only requires substantial public sector investment in creating infrastructure in small and medium towns, but also credit availability, technical know-how and above all access to domestic and international markets.

Finally, this budget will be as much judged by its ability to manage the fiscal situation as on the political promise of achhe din.

The ability of the budget to translate its political vision into outcomes is what will define the success of the government.

The author is assistant professor, Jawaharlal Nehru University, and visiting fellow at Centre de Sciences Humaines

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