It has become commonplace for business leaders in India to sing the praises of any economic policies of the Narendra Modi government—even when they are clearly wrong and misguided
It has become commonplace for business leaders in India to sing the praises of any economic policies of the Narendra Modi government—even when they are clearly wrong and misguided (like the demonetisation of November 2016). This is especially true of the Union Budget speeches.
This time round, there was some change, with less enthusiasm—largely because of new/higher taxes on capital gains and on trading derivatives. The stock market plunged immediately, recovered somewhat and thereafter has been volatile, and the rupee also depreciated against major currencies. Business leaders have also been more muted in their responses, and we are hearing fewer of the breathless cries of “gamechanger” or “masterstroke” that were earlier standard.
If the less enthusiastic corporate response is only because of the relatively minor new taxes, then it is a foolish reaction that does not recognise the massive and growing inequality in the country and the need to do much more to address it. But maybe there is more to it. It could be that the business leaders are also finally beginning to realise that the current economic strategy of the Modi government is not fit for purpose, worsening many of the deep imbalances and problems within the economy, and therefore is ultimately not even in their own self-interest.
Mind the Gap
By now it is fairly clear to most people that the Indian economy is much more fragile than the Modi government would like everyone to believe. The K-shaped recovery meant that the aggregate gross domestic product (GDP) increased mainly because of exploding incomes at the top of the distribution, creating extraordinary increases for the rich as well as for those sections of the upper middle classes that benefitted from the limited trickle-down. Meanwhile, the material lives of the mass of people actually deteriorated in important ways.
The central challenges are those of growing unemployment; insecure and low-paying livelihoods in both agricultural and non-agricultural activities; the rising prices of essentials, especially food; the new adversities in the form of climate change that especially affect cultivation and informal workers; and the increasing desperation of the youth as they experience an expensive and frustrating higher education system with almost no guarantee of any proper jobs to be had thereafter.
Insofar as aggregate growth has been kept buoyant, it is largely because of public capital expenditure, which did indeed expand in the past decade. But this has underperformed in recent years. Consider what the numbers show: The Centre’s capital expenditure was budgeted to be more than Rs 10 lakh crore in 2023–24, but there was a shortfall of more than Rs 52,455 crore in the actual spending. This makes the promise of a further increase in such spending to more than Rs 11 lakh crore a bit suspect.
Similarly, the assistance to state governments for capex, in the form of “grants-in-aid for creation of capital assets” fell short by more than Rs 66,201 crore from the budgeted outlay. And since this number now includes the central transfers to states for the rural employment programme under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), the numbers need to be interpreted with even more caution.
In any case, public capex in infrastructure generates one type of growth, but it is unlikely to generate more employment or improve overall living conditions until much later. To address the urgent problems already mentioned, which would also deal with the problem of inadequate demand, it is necessary to undertake different and more immediate measures.
Foremost among them is a proper package for micro-, small- and medium-enterprises (MSMEs), to begin to undo the ravages of successive blows from demonetisation, and badly planned and worse implemented goods and services tax (GST) rollout, and the cruel and extreme Covid-19 lockdowns that were undertaken with almost no compensation. Since MSMEs already employ around 85% of the workforce, and are going to account for even more in future, this is essential.
Then, obviously farming needs to be made financially viable, which it is currently not—and therefore the farmers’ demands, including the guarantee of the minimum support price, need to be taken seriously and budgeted for. Public employment is not only necessary in itself, to provide better public services to all citizens, but it also has major catalytic effects. Health and education are large potential employers and increasing spending on these can generate large multiplier effects on employment.
Missing the Message
Unfortunately, this Budget shows that the government intends to do precisely the opposite of these required measures. Spending on health, nutrition and food security, education and the employment programme is largely slated to remain unchanged in nominal terms compared to the past year’s actuals, implying a decline in real terms. This will only worsen the problems of unemployment and rising cost of living, and cultivators will continue to suffer.
The continued centralisation of finances is a surprise, given the message of the recently concluded general elections. The share of transfers to state governments in total central government spending (through centrally sponsored schemes, Finance Commission grants and other grants and loans) came down from an already low 22.1% in 2022–23 to only 20.8% in 2023–24. The special assistance to Andhra Pradesh and Bihar is limited, but even this is likely to be taken out of the requirements of other states, while Opposition-led states are likely to continue to be deprived of even basic transfers, such as West Bengal being denied funds for MGNREGA.
All in all, this is not a Budget that anyone in India should be very happy about, and certainly even Big Business that has been the recipient of favoured fiscal treatment for so many years now, would do well to recognise the warning signs.
The writer is professor of economics, University of Massachusetts, Amherst