Home >Opinion >Columns >Opinion | Will budget 2019 wave a magic wand to revive the economy?

The first budget of the second stint of the National Democratic Alliance (NDA) government of Prime Minister Narendra Modi will be presented on 5 July. While the NDA won a larger victory in 2019 with more Lok Sabha seats for the Bharatiya Janata Party (BJP), the increased electoral strength also comes with higher expectations at a time when the economy is facing multiple challenges.

The first economic results of this government published on 31 May clearly pointed out the gravity of the situation, with growth in the last quarter (January-March 2019) being the lowest in the five years of this government.

The slowdown was a result of many factors, including a slowdown in investment growth, contraction in farm growth and a sharp slump in private consumer spending despite higher government spending. None of this is a figment of anyone’s imagination, and despite the controversy surrounding the national accounts estimates, there are enough indicators to suggest that the slowdown is not only real but also serious, with no signs of recovery.

Take the data on manufacturing output for March 2019, which showed industrial growth contracting by 0.1%, the first in 23 months. The automobile sector, which accounts for a significant share of the manufacturing sector, has shown falling sales since January this year. Several large automobile firms are sitting on unsold inventory in India and have planned shutdowns to manage weak consumer demand.

Amidst all this, the monsoon this year is likely to be deficient. Most of these indicators are robust and have not been questioned so far. Even the chairperson of the Economic Advisory Council to the Prime Minister has admitted that the economy is heading for a slowdown.

While the slowdown is real, the government is also stuck with limited fiscal space. With the situation in Iran escalating and the trade war unleashed by the US, there are also worries on the external front. Given the uncertainty on this front, the fiscal space available may be further constrained. But it also implies that any optimism on exports and the country’s current account balance is unlikely to be realized. That, in short, sums up the challenge for finance minister Nirmala Sitharaman in the short run.

At the same time, the government will also have to be mindful of the three issues that have been troubling economic policymaking. The first and foremost is the inability of economic growth—whatever level it may be—to create sufficient jobs. There is now no doubt about the gravity of the situation after the release of the report of the Periodic Labour Force Survey (PLFS). The fact that unemployment rates are at their all-time high is not the only problem. The problem is also the trend of a large shift of workers away from agriculture, which puts the entire burden of creating new jobs on non-farm sectors. The second is the persistence of the agrarian crisis. Agricultural prices continue to remain low, putting pressure on farm incomes. But it has also come at a time when the usual solution of increasing minimum support prices is unlikely to yield any benefits. The third is the rising inequality in the Indian economy, with a deterioration of incomes of farmers and casual workers, but faster growth in the incomes of those at the upper end of the income pyramid.

The budget is only one of many instruments available to the government. While it may be too much to expect the budget to be a magic wand to revive the economy as well as provide solutions to long-term structural faults, the reality is that this budget offers an opportunity to take some bold steps to signal the commitment of the government to these long- and medium-term challenges.

The present situation is a result of the policies of this government alone and any continuation of earlier policies is unlikely to resolve the problem.

The first step for the government is to acknowledge that the foundations of the economy are in a bad shape. But it will also require the government to move away from the path of short-term populism and think of long-term solutions. This will require the government to revive rural demand even if it means some fiscal slippage.

The huge mandate that has been given to this government allows it the political and economic space to think of revenue generation by increasing taxes on the rich to spend more on the rural economy. It can also think of ways of accelerating the manufacturing sector which is also labour-absorbing.

This will be Sitharaman’s first Union budget. It may not be the last opportunity to deal with the myriad problems of the Indian economy, but it is certainly an important indicator of the political commitment of the government towards its revival. This budget will be watched not just for its economic content but also for the political content. Unlike the first term, expectations from this government are high. But the government will not have the alibi of a weak government with policy paralysis as its predecessor to blame for its failures.

Himanshu is associate professor at Jawaharlal Nehru University and a visiting fellow at the Centre de Sciences Humaines, New Delhi

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