Opinion | A lost opportunity to show the Centre is up to the task

In the run up it, this budget had been billed as a “do or die” or “make or break” budget for the Narendra Modi government. This is the usual journalistic hype. If there was any compulsion for the budget, it probably was to be a “live and let live” budget. This would translate into an old-style budget, unmindful of the technicalities of fiscal conservatism in promoting consumption. An expansionary budget that would pump-prime an economy that is showing classic symptoms of what Marxists would call “under-consumption”. As it turned out, the finance minister has neither provided for the government to do its job of reviving the economy well—the fetish of containing the fiscal deficit continues even in these desperate times—nor has public expenditure increased by anything more than 12% to finance a tangible stimulus for the private sector.

The source of the current economic crisis lies neither in the anarchy of the market nor in the fundamentals of the economy and its processes of production, but in the relation between the two—the circulation process. This was disrupted, and in turn impaired the medium-term growth process. As such, this was a good time and place to move from demonetization of currency to monetization of assets. There is a ₹2 trillion disinvestment target, but that banks almost entirely on an initial public offer of shares in Life Insurance Corporation. It is not an asset monetization strategy. The focus of the budget, at least in its dressed-up numbers, continues to be its long-term fiscal policy. This is where it has erred. The focus should have been the government’s public expenditure policy. This could have meant greater public investment without any fear of crowding out private investment at this point of time. However, last year, the finance minister’s strategy of investment-led growth had no impact even after a cut in corporate tax rates and the central bank’s interest rate reduction of 135 basis points within a year. In such a context, focusing on a consumption-driven growth policy would’ve been a better strategy to trigger a pro-cyclical movement in aggregate demand and rejuvenate the economy. This has been attempted not only half-heartedly, but also unimaginatively by recalibrating personal income tax rates to create the optics of a tax cut. 

In fact, the new personal income tax regime reflects nothing but confusion in the government’s thinking. Touted as being a simplification, it now has seven slabs instead of three. Fewer tax exemptions are welcome, but making them discretionary shows indecisiveness. In doing this tax rejig, the finance minister has managed to squeeze fiscal space rather than create it. 

A better way would have been to creatively focus on an ubiquitous category of expenditure classified as transfer payments, which includes subsidies, tax exemptions, social security payments, etc. A quick turnaround will need simple but substantial income support for poor households with a high propensity to consume in the form of a modified universal basic income scheme funded by addressing the almost 2% of gross domestic product wasted in the form of thoughtless transfer payments in the budget. It would have quickly put more money in the hands of poorer consumers with a high marginal propensity to spend, and revived growth in the short run. Most people will assess this budget based on having done precious little for an economic recovery. Few will notice that whatever little might have been done will be negated by the horizontal distribution formula adopted for statutory transfers to states. The Fifteenth Finance Commission, it appears, has recommended two major changes: first, a reduction in the weightage of state income, and second, lowering the weight assigned to population. Both these will go against big states, especially the Hindi heartland.

Also, by taking 2011 as the population base, southern states will lose even after the balancing introduction of a demographic change variable. Inter-state distribution aside, prima facie, it appears that the states will face a fiscal squeeze, especially with 4.1% having been carved out for panchayats and local bodies from the 41% devolution kitty. The states are bound to rise up in arms. This is such a far cry from the Bharatiya Janata Party’s federally-sound budget of 2016.

Since it is in the states where growth actually takes place, this could serve as a big growth dampener. No matter how and how well it is measured, GDP, at the end of the day, is nothing more than an aggregation of state and Union territory domestic products. Given the constraints of a budget in the post-reform era and under the goods and services tax regime, it couldn’t have been a budget of largesse; it had only to be a budget of largeness. More than presenting a strong budget to Parliament, what was needed was a sense of confidence in the country’s economic policy instilled among the people—apprehensive investors, scared corporates, anxious employees, harried customers and worried entrepreneurs. This Budget missed a good opportunity to convey to the country that the government had not lost sight of its economic responsibilities and would now aim to cover much-needed ground in reviving business confidence, pushing forward with a clear set of structural reforms and a programme to broad-base social empowerment. But the aggression witnessed in the government’s social agenda, right or wrong, is largely invisible in its economic one.

*Haseeb Drabu is former finance minister of Jammu and Kashmir