THE CHOICES THAT FINANCE MINISTER Nirmala Sithraman faced as she rose to present the Budget for 2020-2021 were less than wholesome. The Government is caught in the bad corner where its finances are extremely strained and yet it has to spend its way out to restart economic growth.
In the event, the Finance Minister relied on an unusual strategy. She reorganised the tax system and offered lower rates of income tax to persons with an annual income of less than Rs 15 lakh. Politically, the message is one of the Narendra Modi Government returning a favour to its middle-class backers. In economic terms, it was making a virtue of dire necessity: how to find the money to boost demand, the weak part of India’s growth story? The answer was simple: just cut the taxes and people will spend the extra money in their hand. What will be a Rs 40,000 crore loss to the exchequer, will be an equivalent gain for the economy.
The other leg of Sitharaman’s strategy is to make India more attractive for foreign inflows of money. Foreign Portfolio Investment (FPI) limits for corporate bonds have been raised; non-resident investors can now invest in some government bonds and Sovereign Wealth Funds (SWFs) have been given tax breaks.
What the Budget has proposed should be viewed calmly, given the grim economic growth situation and the very limited options available to the Government. The proposals are subject to considerable uncertainty and depend on deft execution for their success. Viewed with a dose of realism, they may even look like a gamble. A lot depends on how people respond to the lower taxes: will they spend the money they get or will they simply park it in banks? Similarly, FPIs may not immediately rush to Indian bonds and the Government’s extraordinary target for disinvestment of public sector enterprises will require an aggressive push.
But beyond this uncertainty lie second-order effects of weak growth, ones that can no longer be ignored.
The environment in which growth is weak muddles the political and economic matrix for Modi in several ways. While the exact outcome will take some time to be known, the contours are already visible.
There is an unmistakable ‘socialist creep’ of sorts in India for the first time since economic reforms began in 1991. This is not a conscious ideological return to India’s failed experiment with socialism but an inadvertent drift. The lack of an overall strategy for economic reforms feeds into the process. During the United Progressive Alliance (UPA) era, the policymaking drift was towards socialist ideas. The modernised expression for that was ‘entitlements approach’ but in effect it was a rerun of garibi hatao programmes. At that time, there were voices that cautioned that these programmes would become irreversible in a country with populist economic leanings.
By the time Modi became Prime Minister in 2014, these programmes were well entrenched in the system of political and economic incentives. As a candidate, Modi had railed against the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). But under his watch, allocations to the programme touched a historic high of Rs 71,002 crore (2019-20, revised estimates). This was more than double of the Rs 33,000 crore in 2013-14, when the last Budget of the UPA Government was presented. The Prime Minister has come quite a distance from the heady days of 2015 when he thundered that, “This is a living monument to your failure to tackle poverty in 60 years. With song and dance and drum beat, I will continue with the scheme.”
Schemes of a ‘helping hand’ character for rural India stand at a paltry 0.6 per cent of GDP. But in terms of total expenditure, they eat away a significant 4.5 per cent. With every passing year, these expenditures acquire an irreversible character
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On paper, schemes of a ‘helping hand’ character for rural India stand at a paltry 0.6 per cent of the gross domestic product (GDP). But in terms of total expenditure, they eat away a significant 4.5 per cent. With every passing year, these expenditures acquire an irreversible character. In UPA times, it was MGNREGS; In the Modi age, it is the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) scheme.
Originally, these measures had salience for the BJP as tactical devices to corner the opposition both ideologically and politically. Modi’s extension of these popular welfare schemes eroded the space available to parties like the Congress in countering the BJP on economic grounds. The opposition could not challenge Modi or the BJP by claiming they were anti-poor. Politically, India’s median voter had shifted to a conservative plank. The combination proved unbeatable. But over time, the mix has cemented into something very different. Now, for most economic problems, the Government is a solution. It is not accidental that economic reforms in key sectors like labour and land markets are not considered good political bets.
There are other markers of this change. The high rates of taxation on the ‘super-rich’ are reminiscent of a bygone era when wealth and high income were considered less than desirable. The danger from this outlook in the present time, when India is trying to climb the economic league table, cannot be overstated. In 2018, some 5,000 millionaires left India for better options abroad. It would be facile to claim a link between taxes on high net-worth individuals and this migration but extraordinary taxes significantly raise the probability of such migration in a world where countries vie for such persons. India not only loses rich persons but also an entire class of people who can create wealth.
There is, however, an even more potent source of trouble that flows from India’s poor economic performance.
Since he assumed the reins of power, Modi’s signal achievement has been the re-assertion of India’s voice at key global fora. India had lost much of its voice during the Manmohan Singh years. From the US to the Middle East and from Southeast Asia to Japan, Indian foreign policy experienced a reinvigoration that has not been seen in a very long time. Much of this was due to deft diplomacy that bore Modi’s personal touch. And it has worked to India’s advantage.
The most recent example of this fruitful approach is India’s ability to withstand China’s repeated attempts to help Pakistan internationalise Kashmir. In recent months, China has been rebuffed twice at the United Nations Security Council (UNSC) when it tried to bring Kashmir to the UNSC. In this, France came to India’s help as did the US. It is not just Pakistan and China that have tried to create trouble for New Delhi. In influential capitals, including Washington DC, powerful individuals have tried to rake up Kashmir in the name of alleged human rights violations—the detention of political leaders from the Valley and the alleged communications ‘lockdown’ there. But the world has virtually given a free pass to India.
This, however, is not due to the ‘strategic altruism’ of countries like the US that have been friendly towards India for a while now. Much of this has to do with India’s economic potential and the building of military muscle that comes with economic growth. Countries like Japan, Australia and the US—the other legs of the ‘Quad’ formation—consider India to be an essential military part of the effort to keep China in check. In contrast to Cold War ‘containment’ of the Soviet Union, the new formations are designed to keep international sea lanes open for free trade on the basis of a rules-based order.
If India were to lack the economic and military muscle essential to this project, the help that India has been receiving will disappear fairly quickly as these countries re-evaluate their ‘India bet’.
The Budget presented on February 1st should have set off alarm bells on this count. The Budget has plenty of hints why Indians should worry. For the first time, the Army’s expenditure on pensions is greater than that on salaries of active personnel. Worse, in 2020-2021, the Army will spend just 11.5 per cent of its budgetary allocation on equipment; 75 per cent will go to personnel costs. The Indian Army may be one of the largest fighting forces in the world but, increasingly, it will be one that is underequipped and technologically underprepared for rivals like China.
The situation is worse in case of the Navy and the Air Force—the two forces that have a far more capital-intensive requirements. Two decades have passed since the Air Force demanded a modern fighter jet. India needs 200 fighter planes; with the Rafale deal, it will get just 36. Even if one ignores the political mines strewn around the procurement process, the bitter truth is that India does not have the economic means to equip its forces to the necessary level. With economic growth in dire straits, the resources necessary for the task will get even scarce. The scariest part of the story involves the Navy, the force that is not just supposed to guard the Indian Ocean but even go as far as the South China Sea to project Indian power. That is the stuff of fantasy now. This could change, provided India went back to its high growth (7-8 per cent) again.
For the first time, the Army’s expenditure on pensions is greater than that on salaries. In 2020-2021, the Army will spend just 11.5 per cent of its budgetary allocation on equipment; 75 per cent will go to personnel costs
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It is reasonable to ask whether so much should be made of a single Budget. Extending a cause and effect chain on a single event—however important it may be—is analytically untenable. But what happened on February 1st was not the first instance of a weakened economic vision for India. It was the second Budget in a row when the country cried for a growth strategy and a clear one did not emerge. With every passing year, the opportunity cost of now putting India back on track goes up. On the one hand, there is an unthinking drift in a socialist direction and, on the other hand, India’s external environment will get difficult.
At the moment, the BJP is a confident party. Its pipeline of political projects, that were for long time a mere dream, is now reaching completion. Article 370 of the Constitution has been abrogated. Prime Minister Modi’s declaration in Parliament on February 5th that a Temple Trust has been created takes the dream of a Ram temple in Ayodhya one more step to reality. The law forbidding the practice of Triple Talaq is now a reality. In due course, a Uniform Civil Code too may see the daylight. The party will need to think hard soon about what it will champion once all these projects are over.
Ideally, the political slack after the completion of these ideas should have been taken up by economic growth and the possibility of prosperity for all Indians. With sclerotic growth, a different set of ideas will have to fill that space. The trouble is that this will place a ruthless burden on the idea of Hindutva. If independent India’s history is anything to go by, economic ideas have longer life than political ones. For a very long time—from the advent of the Second Five-Year Plan in 1952 until 1991—developmentalism was both a running idea and an ideology. The promise of a better future kept political peace in India except a period of great economic turbulence in 1970s. Secularism as a successor idea to developmentalism—something that came into full bloom as the dominant ideology in the 2000s—did not last long. The BJP needs to wake up and understand this reality.