With the loss of Maharashtra, and a near-loss in Haryana, the political tide is clearly turning against the Bharatiya Janata Party (BJP) in the states. If the party fails to retain Jharkhand and also loses Delhi early next year, one could say that the Modi government’s political honeymoon is well and truly over.

This has implications for the economy, which ought to be on top of everyone’s agenda. If the opposition has smelt blood and is in no mood to help the government push through difficult reforms in the current and future sessions of Parliament, the medium-term outlook for the economy will not improve. The cyclical part of the economy may well revive with fiscal and monetary measures, but the structural part of the slowdown cannot recover without big-ticket reforms. These include not only factor market reforms, but also police, legal, judicial and administrative ones.

Given this reality, the Narendra Modi government needs to shift gears on two fronts: one economic and the other political. The political one is obvious. It has to accept the reality that its footprint over the states will not be what it was before December 2018—when it lost three Hindi-belt states—but a much reduced one. This means it must reach out more to the opposition to evolve a consensus on difficult reforms. It cannot get things done on its own. When your political capital is eroding, you have to stoop to conquer.

However, the one thing the government does have control over is the Union budget. The next one is two monthsaway, and the government could do worse than to treat it like a routine exercise. Though the overall importance of budgets has been reducing in recent years, the next one can still make waves if the Modi government chooses to make the right noises and adopts big changes.

The Modi government budgets have always been underwhelming. The administration’s big moves were either not made in its budget or were aligned with it only in terms of financial impact. From demonetization to the goods and services tax and merger of the general and railway budgets, from the reworking of budget heads from plan/non-plan to merely capital and revenue, to the shift of the budget presentation date to early February, every single move was revolutionary, often disruptive. As a result of new presentation dates, the Modi government was the first in India’s history, leaving aside the six-year Parliament during the Emergency, to deliver six regular budgets in a single term.

However, this time around, the government needs to make this budget count by focusing on what it can deliver in terms of bang for the buck.

Given the cyclical and structural slowdown, the first thing the budget has to deliver is a boost to consumption and demand. This means many things, but primarily one major shift in priority, from fiscal deficit targeting to boosting expenditure. The finance minister should announce a fiscal holiday in 2020-21 and focus on big-bang spending. Among other things, this means reviving infrastructure spending on roads and railways, clearing all government dues in construction and other projects, especially those to small and medium enterprises, and providing another and final round of capitalization for banks and non-banking financial companies (the latter indirectly). It should also mean providing for a slowdown in non-tax capital receipts from such downbeat sectors as telecom. This will expand the fiscal deficit and only a part of this can be covered through asset sales, including privatization.

The next thing to do, which again will optically impact the fiscal deficit, is to bring all off-balance-sheet borrowings by public sector companies such as Food Corporation of India back into the budget by clearing their dues in a single shot. This will push the overall fiscal deficit to nearly 5.5-6% of gross domestic product, but this is not a time to fret about empty numbers. A deficit that already exists off the balance sheet will merely be recognized. It is no different from banks being asked to formally acknowledge their bad loans so that remedial measures can be taken. The fiscal deficit should be given a revised glide path from 2021-22 onwards.

A related measure should be a shift to an accrual-based system of accounting, so that fiscal deficits are not massaged by delaying the reporting of expenditures incurred in one year and bringing forward revenues due from the next. This kind of fiscal legerdemain was common in the United Progressive Alliance era, but it does the Modi government no credit to continue with such dubious practices. A clean balance sheet is the basis on which genuine reforms can be attempted.

It would help if Budget 2020-21 were to focus on a few simple messages such as the ones above and not try to be all things to all people. After several quarters of slowdown and fears that growth and jobs may be trending downwards, the least the government can do is focus on what it can deliver. Finance minister Nirmala Sitharaman should deliver a short and focused speech in February when she presents the budget. Her real work will begin the next day, when the expenditures earmarked by it would have to be put to good use.

*R. Jagannathan is editorial director, ‘Swarajya’ magazine

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