Largesse Oblige Needed

Large giveaways, sops to please various constituencies, tax concessions to win the middle class, etc. Nothing surprising in the interim (read election) budget announced a few days ago in India. But when you consider that the ruling party alliance came to power with the largest majority in a long time and on the back of promises to take the economy to a different level and most importantly to create 20 million jobs, you have to say it has failed miserably.

The economic facts are in front of us, if only we would allow the facts to speak for themselves. But no. Here too, the government must engage in deception, sleight of statistics (in which the Vice Chairman of Niti Aayog excels), suppression of data, and in all likelihood, fudging of figures to suit the occasion. This is not how the fastest growing major economy in the world conducts itself; we are beginning to resemble a banana republic. Lessons from Venezuela offer a cautionary tale.

If only we’d shine a light on the facts

The most incredible and laughable of the government’s claims is the latest set of “updated” GDP figures for 2016-17 and 2017-18. If those numbers are to be believed, India grew at an even faster pace, since demonetization. I have no idea what economic activities have been included in the GDP this time, but if they have again included RBI’s banking department as part of corporate enterprise activities (as if it is engaged in production), as Mr Ashok Desai had written just two months ago in The Economic Times, then no one should be surprised that our GDP suddenly shot up after demonetization!

The fact is that the government has not been able to shrug off the adverse effects of demonetization; from recent announcements it is clear that they are now trying to make amends for it. Having sent many of India’s small entrepreneurs, farmers and workers out of business and 3.5 million looking for employment, according to the CMIE (Centre for Monitoring the Indian Economy), including under MNREGA (the government’s flagship employment guarantee scheme), politicians are now trying to compensate through this sudden and expansive – though hardly surprising – act of state largesse, if I may call it that. Worse, they are trying to suppress the real facts, fudge figures and more, in moves that suggest desperation, rather than confidence ahead of elections.

Not only is this government obsessed with GDP and raising India’s international rankings (thanks to some very deft lobbying, no doubt), they are clearly not concerned with the common man’s lot. For it should have been very plain to any government taking over in 2014 – after the lull in the UPA 2 term – that what India needed was to sort out the banking mess first, kick-start business investment in order to solve unemployment and initiate much-needed agrarian reforms.

A farmer income support programme that will do nothing to improve their lives

All we have had instead from the government is sloganeering like Digital India, Start-up India and Swachh Bharat, to name a few. The Economist too has often written that Narendra Modi is not really an economic reformer and is at best, only offering re-packaged reforms that were started under the UPA regime.

The three key announcements that stood out for me in what is supposed to be an interim budget, are the PM Kisan Samman Nidhi scheme that is meant to benefit 120 million small farmers, the PM Shram Yogi Maandhan social security scheme for an estimated 100 million unorganized sector workers (remember, 90% of India’s workforce is in the unorganised sector) and tax concessions to middle class folks earning less than Rs 5 lakh annually. How these add up in budget math is not clear to me. The government is indulging in irresponsible policy-making once again, showing scant regard for fiscal responsibility (mandated under the FRBM Act of 2003), especially when GST is still to gain traction and show a more buoyant tax collection and compliance. It is a clear case of over-reach, knowing that India can ill afford any of this.

If the concept of noblesse oblige means that the wealthy and the powerful exercise greater responsibility with regard to their obligations toward the rest of society, it is time our politicians (of all hues and stripes) learn it. We need a government of largesse oblige, which means we need to make them accountable and responsible for the decisions they take, especially when they take on such grand and ambitious spending plans with their eyes only on the votes, but with little thought on how they will finance any of the plans.

Squandering India’s much touted demographic dividend

What I find disheartening is how our policy makers reach for the easiest solution to hand, after five years of having ignored or wished the problems away. Each of these issues – farmers’ distress, unemployment and business investment – need well-thought out and long-term reforms, not a first-aid type band-aid treatment. And there is a wealth of work already done on each of these issues; one just needs to consult widely and take the views of experts on board. Instead we have leaders who would rather listen to a party ideologue or a swamiji (a godman, often considered a spriritual leader in India). We will never embark on a poverty alleviation programme like the Bolsa Familia conditional cash transfer for the poor in Brazil, for example, because that means that the government has to first make sure the essential “conditions” (education and healthcare) are available and accessible to all. Much easier to throw money at the problem and hope that it goes away, especially around election time.

What is even more sinister is how this government has consistently undermined several of India’s institutions. Whether it is the independence of the Central Bank, the judiciary and the media, or letting investigative agencies, the election commission and even statistical commissions operate autonomously, each one of these is now under severe threat. There is a tendency to push through decisions with little or no consultation, very little debate in Parliament and resorting to ordinances, or even Money Bills. This interim budget treats the country’s finances like the party’s election manifesto.

The government seems to be forgetting a simple fact: you can’t expand government spending on social security and entitlements, when you are cutting tax revenues. Even more so at a time of a weakening rupee, firm and rising crude oil imports and a GST that is still not bringing in huge revenues. And you can’t pump-prime the economy by boosting the single engine of consumption alone. There is only so much consumption that an economy, with relatively low purchasing power like India’s, can absorb.

Consumption the only driving force in the economy

According to the budget, the government has to account for Rs 75,000 crore of farmer support, an estimated Rs 15,400 crore in income tax revenue foregone, Rs 500 crore of unorganized sector worker pensions, Rs 60,000 crore of MNREGA, Rs 6,400 crore to Ayushman Bharat (Modicare), food and fuel subsidies that have risen even though the government claims to have cut subsidies and more.

The net result of all this is an eye-watering Rs 7,13,000 crore gross borrowing programme, of which Rs 4,73,000 crore is net borrowing that the country will embark upon. With Rs. 1,00,000 crore shortfall in GST collections, disinvestment below target by Rs 45,000 crore, overall tax revenue collection just about flat for the year, and interest payments this year already at 39%, this is a very expensive election manifesto indeed. The government plans to use an interim dividend from the RBI of Rs 28,000 crore to plug the fiscal deficit, in addition to Rs 40,000 crore already given to them. And there is an issuance of fresh bonds of Rs 7,10,000 crore expected to fund the fiscal deficit, up by Rs 1,40,000 crore over this year’s amount. This, despite the fact that the NDA regime has seen the most benign period in crude oil prices, yet increased excise taxes on fuel, and would prefer to still keep fuel out of GST so it can continue to tinker with taxes and prices.

Leaving millions to make-believe their aspirations

Since the government has recently declared almost all of India’s middle class to be poor, as I had written in my blog recently, with its 10% quota for forward castes, more election-time largesse was only to be expected. The trouble is, like households, even governments have to live within their means. More importantly, the problems won’t go away. They will continue to fester just like they have for so many decades, simply because we haven’t taken the long and tough road to economic growth and prosperity. And because we can’t count on our politicians to make the right decisions.

Brace yourselves for another five years of “maximum government, minimum governance”.

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