Why Budget FY16 makes sense

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Updated: March 12, 2015 5:41:54 AM

Finance minister Arun Jaitley is a smart man. When everyone was hoping that he will be presenting a pro-business Budget, he presented the...

Finance minister Arun Jaitley is a smart man. When everyone was hoping that he will be presenting a pro-business Budget, he presented the one with a flavour of socialist capitalism. He surely had the remembrance of the India Shinning campaign which completely backfired on the earlier NDA government. The perception about economic reforms only benefiting the rich might have been one of the factors responsible for the ouster of the NDA government in 2004.

To understand what motivated him to present a Budget with a socialist approach, it would make sense to look at our income data. When one compares district-level per-capita income data for 2001-02 and 2009-10, one finds that income distribution has not changed for the worse. In fact, district-level real income has increased. Between 2001-02 and 2009-10, there has been an increase in real per-capita income. Growth across districts has been uniform across India. A reason for the fall in regional income inequality is because the private sector, without relying too much on the government, is moving capital to relatively cheaper tier 2 and tier 3 towns. This is good news.

However, at a disaggregated level, things look different. Decomposition of district-level data into agriculture, industry and services shows that, for the agriculture sector, there has been virtually no movement for the income density function; for industry it is little; whereas most part of the district income growth story is explained by the size of services. The India growth story is because of capital-intensive large business houses such as Tatas, Reliance, etc, and service sector behemoths such as Infosys, TCS and Tech Mahindra. In fact, 70% of India’s stock market wealth is explained by 30 big corporates, and in the case of services, 90% of the businesses are generated by only 0.2% of services companies.

This is problematic. In India, still 50% of the people earn their livelihood from agriculture, contributing to 17% of national income. As per the new GDP series, industry (including manufacturing, mining and quarrying, electric, gas and water supply, and construction) contributes around 31%, and services around 52% of national income. The problem of income inequality is very much evident. In India, 90% of the jobs and half of its GDP come from the unorganised sector. Agricultural income is highly volatile and is surely in need for intervention to smoothen out the consumption cycle. So is the intervention for about 6 crore MSMEs, suffering from acute capital shortage.

Given this, what the finance minister did is appreciable. To ensure equal distribution of income, Jaitley made sure he has sufficient funds for agriculture and MSME sectors. So that the farmers do not suffer from volatile agricultural income, R5,300 crore has been set aside to support micro irrigation programmes such as drip water system. Additionally, farmers will also get credit access of R8.5 lakh crore. The Budget proposal also talked about a unified national agriculture market, so that price realisation is better for farmers.

For the MSME sector, Jaitley also allocated R20,000 crore for the Micro Units Development Refinance Agency (MUDRA) Bank. He allocated an additional R1,000 crore to boost capital flow for the start-ups by the MSME sector. Accessibility to finance for these enterprises will give a boost to the MSME sector, and will create much-needed employment generation. India has a growing young population, with two-thirds of its population below 35. The government does realise that finance is a major challenge for entrepreneurs, and this is a great step towards financial inclusion.

So that the poorest in the society have little to complain, in a first-of-its-kind move, Jaitley attempted to universalise the social security system.

In India, around 26.1% of its 1.27 billion population lives below the poverty line and 63 million people have been driven into poverty due to high cost of healthcare. Health insurance penetration in India is only around 5%. The finance minister introduced the Pradhan Mantri Suraksha Bima Yojana, which will offer accident cover of R2 lakh at a premium of just R12 per year, and the Pradhan Mantri Jeevan Jyoti Bima Yojana, which will offer life cover of R2 lakh for the age group between 18 and 50, at a premium of R330 per year. These type of targeted interventions are not new. In fact, 20% of all those living in developing countries now receive benefit from at least one programme that aims at alleviating poverty. The estimate from the World Bank suggests such coverage is increasing by 3.5% annually. In short, Jaitley presented a very pragmatic Budget.

By Nilanjan Banik
The author is with Mahindra Ecole Centrale. He is the author of The Indian Economy: A Macroeconomic Perspective

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