For all the misses, Modi’s USP is many foundational reforms like GST and IBC, UPI, Jan Dhan Yojana, LPG and electricity for all, subsidised insurance & houses, massive road and rail expansion.
Despite the situation on the ground, the friendly statistics office may have raised its estimates of GDP growth significantly just the day before the budget, but the government wasn’t going to take any chances with upset voters. So, though the government strenuously denied reports of the leaked NSSO survey saying unemployment rates were at a four-decade high – and as high as 17-18% among young men – its last budget before the elections was peppered with instances of how various schemes would lead to increased employment. And, for good measure, it gave away as much as 0.5% of GDP by way of sops for farmers and middle-class taxpayers.
From Rs 2.5 lakh earlier, the effective annual income below which no taxes have to be paid has been doubled – the impact of this on voter sentiment, and on consumption, is likely to be large. The Rs 6,000 annual Universal Basic Income (UBI) for small and marginal farmers, though, looks too small to alleviate farmer stress. Such a low sum is odd, given how, while the NDA took great pride in having raised MSPs for all crops to cover 1.5 times the cost, the scheme has been a complete failure with prices for most crops at 20-30% below the MSPs. The Rs 75,000 crore package has to be juxtaposed with the Rs 2.5 lakh crore that farmers lose each year due to low prices – despite BJP chief ministers in most states till some time ago, prime minister Narendra Modi has not been able to free agriculture markets.
It is not as if the government doesn’t have the money to spend on farmers, the problem is that the spending is mostly geared towards bigger farmers. This includes Rs 1 lakh crore of loan waivers in 2018 – including by the state governments – and the Rs 15,000 crore of annual interest-subsidies on loans. Indeed, while the government spends Rs 170,000 crore a year on food subsidies, were these to be given by way of cash, the government would save Rs 50,000 crore (https://goo.gl/Eh8YyV). And this is without taking into account a faulty design that ensures 60-70% of subsidies like those on PDS and NREGA go to the non-poor as then chief economic advisor Arvind Subramanian pointed out two years ago.
While Modi had a blueprint in the Shanta Kumar report in early 2015, for some reason he didn’t move away from the leaky-subsidy regime by replacing physical transfers of food/fertilizer by cash. In the event, it was foolish to expect him to give farmers a big UBI. If farmers don’t feel the Rs 500 they will get every month is enough to make them vote for Modi, he is paying the price for being too timid on the agriculture front.
As a result, unlike in the past, where high capex-spend was the government’s hallmark, this time around finance minister Piyush Goyal has just budgeted a 6.2% hike as compared to FY19’s 20.3%. While it is tempting to say lower capex or farmer-transfers are due to the NDA’s fiscal prudence, even the lower tax growth assumed – 13.5% in FY20 versus 17.2% in FY19 – now that the DeMo and GST bump is over, is a bit risky given the Rs 18,000 crore of tax giveaways; and after a Rs 1 lakh crore shortfall in FY19, the 19.3% hike assumed in GST revenues in FY20 looks ambitious.
The fiscal maths is also dependent upon a significant step up in dividend from the RBI; in FY19, Rs 20,000 crore extra has been budgeted. The government continues with its policy of passing on expenditure to PSUs – extra-budgetary spending was 45% over the target of Rs 3.9 lakh crore in FY19. This is another weak area since, with PSUs continuing to fare poorly, and the government looking at getting Rs 53,000 crore in dividends from them in FY20 – they will also have to contribute significantly to the Rs 90,000 crore disinvestment target – it is not clear they can raise this money.
Ultimately, of course, the voter is not going to be swayed by just Piyush Goyal’s maiden giveaways, it is the 5-year track record that matters. And there, the numbers Goyal read out are very impressive – lowering inflation from 10.1% in the UPA period to 4.6% now, forcing rich industrialist-defaulters to repay banks Rs 3 lakh crore over last year, connecting 15.8 lakh rural habitations by pucca roads, 1.5 crore subsidized houses under the PMAY scheme, providing electricity to 2.5 crore families and LPG to 6 crore rural homes, covering 19 crore families by subsidized life and accident insurance …
Despite the many misses of the Modi government to catalyze private investment that continues to languish, these are foundational changes that, like GST, will pay off in the years to come; big misses include the lack of a friendly policy to spur investment in telecom and minerals including oil and gas, for instance, as well as the U-turn on ecommerce after billions of FDI dollars were invested.
If the Modi government is voted back to power, however, it will have to work on getting investors back, it will have to free markets like those for agriculture, it will have to stop pampering PSUs – areas where PSUs dominate are those with the highest imports. Sops are useful, but they don’t win elections. Farmers lose Rs 2.5 lakh crore a year but they’ve got just Rs 75,000 crore from the budget; a monthly UBI of Rs 1,500 per family that was being talked of for some weeks, had it happened, equals just a few days of wages were enough jobs to get created; Modi was elected on the promise of reforms, trying to get re-elected on the back of sops is not quite the same thing.