The budget that Union Finance Minister Arun Jaitley presented on 1 February has confirmed, if any confirmation was needed, that the ruling party remains wedded to welfarism and its parent, socialism. And since socialism is about a zero-sum game, the government’s last budget is enmeshed in phony dichotomies: either agriculture or industry, either Bharat or India, either the poor or the rich, and the like. Having subscribed to a failed ideology, it has come up with a Finance Bill that is neither fiscally prudent nor politically remunerative. And, of course, it does little to boost growth and job creation.
The dichotomies are phony because agriculture and industry grow symbiotically and not at each other’s expense, because Bharat and India are the name of the same country, because the poor and the rich both prosper when government doesn’t bother them in their economic pursuits. Liberalisation, and not socialism, is beneficent for everybody; the Finance Minister hasn’t done much to liberalise the economy.
Instead, he has assumed that the interests of farmers are different from those of other sectors. So, with the 2019 election in mind, he tried to entice the farm sector, without a hint of reforms: an attractive minimum support price for kharif crops (one-and-a-half times of their production cost), increase in institutional farm credit, upgrade of 22,000 rural haats into Gramin Agricultural Markets, Operation Greens to address price fluctuations in potato, tomato, and onion, new funds of Rs 10,000 crore for fisheries and animal husbandry, a re-structured National Bamboo Mission, etc. The target of the Ujjwala scheme, providing free LPG connections, has been increased; now it will give connections to eight crore poor women.
The biggest populist step was in healthcare. “My government has now decided to take health protection to more aspirational level,” Jaitley said in his budget speech. “We will launch a flagship National Health Protection Scheme to cover over 10 crore poor and vulnerable families (approximately 50 crore beneficiaries) providing coverage up to Rs 5 lakh per family per year for secondary and tertiary care hospitalisation. This will be the world’s largest government funded health care programme. Adequate funds will be provided for smooth implementation of this programme.” Not many details have been provided about this ambitious scheme, though.
Jaitley admitted to the slippage in the fiscal deficit target of 3.2% this fiscal; it may be 3.5%. For 2018-19, the target has been fixed at 3.3%. This had an adverse effect on bond prices, which went down. Expectedly, bond yields, already quite high, went up by 18 basis points on Budget Day. On the front of public finance, the government is clearly on a weak wicket, and things are unlikely to get much better, what with new spending burdens and hardening crude prices. Rating agencies will not view these developments very charitably. This is also unlikely to nudge the Reserve Bank of India to adopt a dovish stance regarding interest rates.
The Finance Minister has reduced the corporate tax rate to 25% for the companies which reported turnover up to Rs 250 crore in the financial year 2016-17. This, he said, “will benefit the entire class of micro, small and medium enterprises” or MSMEs which are facing headwinds.
He has brought back long-term capital gain tax at the rate of 10% for investments over Rs 1 lakh, and 10% tax on distributed income by equity-mutual funds. This was not surprising. After releasing the “Economic Survey” a few days earlier, Chief Economic Adviser Arvind Subramanian had expressed concern over the boom in the stock market and said that caution was needed. Long-term capital gain tax should be seen as a step to check any bubble. This was both prudent and unsurprising.
What was indeed surprising was the government’s complete unconcern for the salaried class, which also happens to be a big supporter of the Bharatiya Janata Party. There was no change in income-tax rates in any slab, just a standard deduction, not amounting to much. Worse, the social sector cess rate has gone up. There were, however, some concessions for senior citizens.
There was also a strong protectionist streak in the budget proposals, Prime Minister Narendra Modi’s free trade speech in Davos notwithstanding.
There are three big conclusions that can be drawn from the budget. First, the Narendra Modi government is convinced that welfarism, though plagued with inefficiencies and corruption especially under previous regimes, could work if implemented competently and honestly—something it is capable of doing. The government may pretend to be post- and anti-Nehruvian, but it is unwilling to let go of state control of the economy. For instance, there was little in the budget speech that would suggest a major restructuring of the public sector, which is a burden on the exchequer and the economy.
“The government has also initiated the process of strategic disinvestment in 24 public sector undertakings (PSUs),” Jaitley said. “This includes strategic privatisation of Air India.” The 24 PSUs are sick, so also is Air India. Even in its fourth year, the regime under Modi, who once said that the government of business is not business, is still trying to sell white elephants.
The second conclusion is the ruling dispensation has great faith in the electoral efficacy of open-ended promises, the promises that are high on rhetoric and low on specifics. The “world’s largest Health Protection Scheme” is a testimony to that faith.
And, finally, the BJP is the only party in the country which doesn’t seem to care about its core constituency—the middle class. Mayawati and Mulayam Singh Yadav, for instance, go to absurd lengths to humour their vote banks. But the BJP is a party with a difference. It disregarded Middle India when Atal Behari Vajpayee was Prime Minister—no changes in income-tax slabs, no concern for the victims of UTI scam: 2004 was the denouement. History may not repeat itself, but the BJP refuses to learn any lessons from it.