The Budget: Recalibration of Economic Policy to Mask a Political Crisis

Gautam Mody

If anybody doubted the depth of the economic crisis, the Budget Statement – 2016-17 (BS) of the BJP governments sets that to rest. Twenty-one months into government, the BJP government blames the last UPA government, the poor monsoon and the external environment for the weakness of the economy. Shorn of the triumphalism of the last two budget statements, this BS promises to double rural incomes in the next five years. The Prime Minister Narendra Modi had effectively leaked this promise at a farmers rally over the weekend. This reflects the political recalibration of the BJP’s economic policy as it faces not just economic but political ‘headwinds’. To address these headwinds the BS set itself three ‘challenges’ of ‘strengthening our firewalls against these (global slowdown) risks in the economy by ensuring macro-economic stability and prudent fiscal management... rely on domestic demand and Indian markets to ensure that India’s growth does not slow down.and continue with the pace of economic reforms... to change the lives of the people for the better.

Beyond the promise, the BS is bereft of anything that offers even immediate economic stability, much less stability in the medium or long term. Apart from an ideological determination to maintain fiscal deficits within the target (of 3.5 per cent of GDP), the BS offers nothing. The fiscal ‘prudence’ in maintaining a tight fiscal deficit is the BJP government’s silent admission of its lack of capacity to offer a policy framework for economic stability. It therefore must control the fiscal deficit in order to maintain the country’s credit rating and borrow abroad to meet the government’s needs.

Failed effort to make the private sector drive growth

This reduces government manoeuvrability in mobilising resources to drive growth. Stable growth cannot take place in the absence of an increase in investment which in turn cannot be financed internally without a rise in the rate of domestic savings. According to the BJP government’s own Economic Survey 2015-16 (ES), capital investment is at an all time low since 2006-07. Capital investment by the private sector is not just at its lowest during the same period but is declining. For a political party that based its entire economic growth strategy under the leadership of the private sector there is complete silence on how it ended up in a situation where capital has struck against it. Worse still there is a decline in available investable funds with the rate of savings too at its lowest since 2007-08. Historically, in India, the largest chunk of savings has come from working class and middle class households. Household savings have declined year on year in the two years that the BJP has been in government and are at their lowest level since the BJP last came to government in 1998. This is testimony to the lack of confidence the working class and the middle class have in the BJP.

Domestic demand growth – how and from where?

If indeed growth, in the short term, will come by boosting ‘domestic demand’, the BJP government has no idea of how to do it or has the political intention of doing so. The entire budgeted expenditure on social security, social welfare and social protection, including on the NREGA, has been increased by just 0.15 percent. What this means is that for every Rs. 100 between 2015-16 and 2016-17 the government spends, it will only spend an additional 15 paisa more than the last year on the NREGA, the NFSA, the NRHM, the ICDS, the MDM, the SSA and all other programmes including budgetary provision for the Ministry for Minorities, Ministry of Social Justice and the Ministry for Tribal Affairs. Social security and social protection are aimed at providing protection to the most vulnerable by shoring up the social wage through public spending.

In the absence of any increase in spending, disposable incomes of the bottom 80 per cent in the economy will come under further stress pushing them further into the private sector for their needs of healthcare and education as they would be pushed further to unsafe and insecure jobs. The lack of additional finances for social welfare and social protection also means that the 1+ crore, mostly women, ‘honorarium’ workers under these programmes who constitute upwards of 5 per cent of the country’s workforce will continue to work at poverty wages. The BJP however hopes that it will win votes of women living below the poverty line by distributing Rs. 2000 crores worth of LPG cylinders.

Public-Private Partnerships in Infrastructure and Transport only drivers of growth

Virtually the sole growth driver for this government comes from building large infrastructure mostly roads – both highways and rural roads – through public-private-partnerships (PPP). The BJP government however admits that infrastructure projects remain stalled by various ‘bottlenecks’ which it has yet not been able to untangle. The PPP which the BJP until today placed so much reliance on is frozen by the refusal of the private sector to invest. To turn this around the BS now offers the Life Insurance Corporation, perhaps the only remaining public financial institution with stable finances, to provide funds to these projects. While the BJP may indeed blame its predecessor government for the non-performing loan (NPL) crisis of the public sector banks it continues to expose public financial institutions to the risks of the private sector. Providing leadership in government is not just about parking blame on predecessors but about finding solutions. The Rs. 25,000 crore budgeted to rebuild the capital base of public sector banks (PSB) is barely adequate to meet the PSB losses for one quarter caused by the writing of the loans the private sector cannot or will not pay back. This lack of stability in the financial sector will only further contribute to uncertainty in the economy.

The other growth driver will come through the expansion of the private sector in public transport which will be allowed participation through the amendment of the Motor Vehicles Act. So now the private highways that will be built on the back of public debt will have fleets of private buses, financed by PSBs, rushing up and down them as the state road transport corporation will be set up for being taken apart. This will also push up the cost of transport for the working class. Creation of regular jobs will also come under attack.

In addition, for the BJP, economic growth will come from the governments promised teaming new one-day start-ups, 100 per cent foreign direct investment in retail of food products and dismantling shop and establishment regulation. This would also place employees in shops and establishments further at risk.

Bounty to Agriculture to benefit Middle and Large Farmers

And indeed economic growth will be fuelled by the bounty to agriculture and rural areas. Even the absolute numbers show up the lack of depth in the proposals to bring about any substantive transformation of agriculture. The total increased spending on agriculture amounts to only 1 per cent more of budgetary expenditure which is far from sufficient to address the rural crisis. Of this increased spending, 70 per cent, or Rs. 15,000 crores will go towards relief on interest payments on existing bank loans. Hence the benefits of this will go to a limited extent to the middle peasantry and largely to big farmers. As for small and landless peasants they can only hope for one of the underpaid and unsafe jobs on a road building project.

Not forgetting some of the rhetoric that brought the BJP to government, the budget has committed a wage-subsidy of Rs. 1000 crores for creating jobs at less than Rs. 15,000 a month, wherein government will contribute the equivalent of the employers’ contribution to EPF, at the lowest legally permissible rate of 8.33 per cent. Implicit in this is the recognition that the private sector will not create jobs without a subsidy, just the way it will not invest unless finances from public financial institutions and highly subsidised land and other natural resources are placed at its disposal.

In the absence of a policy mechanism to boost demand in the short term that translates into higher investment and more jobs, the government’s spending will translate into stronger inflationary pressure. The implementation of the recommendations of the 7th Pay Commission, already skewed against the worst off amongst government employees, will only further contribute to inflationary pressures without any real growth of the economy.

Taxes to increase Inequality

While the BJP governments ES calls unambiguously for addressing the imbalance between direct and indirect taxes, the budget does absolutely nothing other than increasing the burden on the working class by bringing 60 percent of employee provident fund (EPF) withdrawals under the income tax net. In addition to this the services of the Employee Provident Fund Organisation will now come under the service tax net. This is a clear reflection on the BJP’s determined attack on the organised working class while remaining silent on the taxes on the incomes, wealth and assets of the rich.

The tax proposals for taxing dividend payments above Rs. 10 lakhs at 10 percent and the 3 percent surcharge on incomes above Rs. 1 crore will realistically bring in very small sums of tax. Government is more likely to spend more than it will collect if it is to administer these taxes effectively. These taxes are mere showpieces to take away some of the criticism against the BJP government which has come to be identified to be for the ‘super-rich’. The revised estimates of tax collection in the current financial year made available through the BS show that the government fell short in collecting both income tax and tax on companies but over exceeded its target on excise duties. The BS is carefully silent on the fact that in aggregate terms its relative comfortable fiscal position came about as a result of the high tax it imposed on petroleum products.

At a time when the price of petrol is at a historical low, the government displayed its political capacity and will to impose a heavy tax burden on the working class and the rural proletariat by imposing high taxes on petroleum products. Even within different fuel products: aviation fuel is taxed at less than half the tax rate on diesel. Hence even for indirect taxes, the policy is skewed against the working class. Both the mechanism of direct and indirect taxes, as the ES points out, strongly contribute to income inequality. The BJP government has taken one more step in the direction of a more unequal society.

Budget 2016-17 reflects the BJP government’s crisis

Despite its promise and sops in the first two rounds the BJP government failed to win over private capital even as it completely miscalculated the implications of trying to change the law that governs land acquisition. In the course of this, the government lost ground in rural areas. The BJP government has faced the fury even from the most privileged in rural areas, who can, when in revolt, mobilise sections of the state machinery in its support.

This demobilisation has, all of a sudden, muted the signature tunes of “Make in India”, “Ease of Business” and “Minimum Government” as the BJP government steps in through this BS to cool the wrath of the rural elite. In this electoral democracy, the BJP believes the worker, the small and landless peasant, and most socially and economically disadvantaged can be won over by the rhetoric of its leader and should he fail, he will take to silence while the BJP and its fraternity will ably put down every voice of dissent as anti-national.

New Delhi, 1 March 2016:

Gautam Mody is General Secretary, New Trade Unity Initiative.

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