Saturdays are often quiet in the North Block housing the finance ministry, which, like the rest of the government of India , has a five-day week. But that was not the case on January 20. Every official—small and big—was in office. Finance Minister Arun Jaitley, junior minister Shiv Pratap Shukla, Chief Economic Adviser Dr Arvind Subramanian and Economic Affairs Secretary Subhash Chandra Garg were also present that day to do the most important part of the work relating to Budget 2018. Called the 'Halwa Ceremony', it involves making halwa and serving it to everyone, before they all lock themselves in to print the budget papers that will be tabled in Parliament on February 1. It symbolises an auspicious start to the exercise that has virtually the entire nation's critical attention. It also has the entire nation wishing for one thing or the other with the critical question: what will the Budget 2018 have in store?
Till last year, the current government had been crowdsourcing ideas from the public on what its priorities should be—the idea was to respond to public views and suggestions. Ahead of the budget presented in 2016, Jaitley had said the feedback from people was that nobody wants to pay tax, but everyone wants the best of everything. That could be the reason why, this time, the government did not crowdsourced ideas.
The finance minister held half a dozen consultations with different groups, including economists, corporates, teachers, NGOs, chambers of commerce and think tanks. Broadly, they appear to have suggested more or less the same things—steps for revival of medium, small and micro enterprises (MSMEs), end farm distress, rural development, address unemployment, and of course, things like reduction in income tax and corporate tax, and more affordable healthcare, housing and education.
However, these are no different from what every finance minister in the past few decades have been hearing during the pre-budget consultations.
What makes this year's budget different is that this time, it is the unstated wishes of people that Jaitley has to address. To start with, the current GDP growth rate, at 7.1 per cent, is less than what they projected. The government never gets tired of saying that India will overtake China. Last year, they took pride in managing its fiscal deficit target, which is now on the verge of exceeding the 3.2 per cent target set for the current financial year. While some economists are not worried about that, a few definitely are. The government does not want to breach the target because international ranking agencies constantly focus on this figure, as do foreign investors.
Jaitley possibly had them in mind when he announced that the government would reduce its borrowing, from previously announced Rs 50,000 crore to Rs 20,000 crore.
Last year’s was the first budget after Prime Minister Narendra Modi wiped out large denomination currencies through demonetisation. It had a devastating impact on the economy with people losing livelihoods by lakhs. This year, Jaitley does not have the luxury of dealing with the fallout of demonetisation the way he did last year—saying “small pains for big gains”.
First Budget post-GST
The upcoming budget will be the first one after the government implemented what the prime minister called the ‘good and simple tax’. However, it turned to become what Congress President Rahul Gandhi rightfully termed as the ‘gabbar singh tax’. While it was promised that GST implementation would bring down the prices, it surged instead. In November, after a low growth rate agonised the nation, the GST Council tweaked the rates. But traders and industry continue to have problems with the way it is being implemented and processes involved.
This budget will also be the first after the government announced and took the first step towards recapitalisation of public sector banks burdened with huge non-performing assets.
The bumpy GST implementation, recapitalisation and unquantified lingering effect of the demonetisation together will impact the government’s revenues, though the revenue collection from direct taxes has gone up.
A few days ago, the IIP figures for November 2017 were unveiled to an unbelieving nation. It was a 17-month high, when nothing on the ground seemed to show that. The general IIP index rose by 8.4 per cent, and the IIP manufacturing index grew by 10.2 per cent compared to the previous year.
However, a closer look shows that the figures are far from truth. On a closer analysis, one finds that November 2016 was the month the country was reeling under the “demo effect”, which implies that the rise was is comparison to a real low.
Economists have often questioned the varying figures put out by different government agencies on growth and production. When India recently climbed a few notches in the World Bank's index of Ease of Doing Business, the government rejoiced. Industry was non-committal. A few weeks later the credibility of the report came to be questioned.
The reality is not about figures, but people and their aspirations, and politics and the BJP’s desire to get re-elected, in the Lok Sabha elections of 2019 that is about 15 months away.
In the halcyon days of campaigning in 2014, prime ministerial candidate Narendra Modi had hammered the Congress primarily on economic issues. Corruption and scams were all about public money gone into the pockets of Congress leaders. Black money was all about those who stashed away their tax-evaded and ill-gotten wealth in foreign havens.
Or so thought Modi.
Prices of petrol and all consumables were high because the Congress had mismanaged the economy. Modi promised “achche din”. He spoke about the aspirations of the people. And people's aspirations went up proportionately. But when it came to seeing a favorable change on the ground they saw nothing.
Prices of almost everything have gone up. Though global crude prices fell for almost three years since the current government came to power, Indian consumers have had little impact. While oil companies reduced the price on one hand, the government slapped an excise duty on the other. The benefit was not passed on to the people.
In the last three years, people have foregone LPG subsidies and railway concessions, tax payers have paid more in the form of cess. In fact, the government has been smart in not missing any avenue from where they could collect tax.
Digital transactions were introduced without a cost to people, with benefits explained. And soon, digital transactions also began to cost. Helpless people's stoic absorption of all that was being done was presented as their support for the structural reforms the government was undertaking—be it the GST or before that the demonetisation. The upcoming budget will not be able to do much with GST tweaking, something that lies in the hands of the GST Council.
As a matter of fact, rhetoric so helped the government that the Sensex zoomed every time the government made an announcement that seemed favourable to sections of the government—be it the BJP’s supporters or foreign investors.
When the Sensex breached the 35000-mark on January 17, what had driven it was not a spectaculor policy introduction or a cheering corporate result. It was in response to a government statement that they will reduce additional borrowing, i.e., they will not resort to fiscal deficit.
Policy analyst Devinder Sharma points out that the recent decision to allow single brand retail was aimed at the World Economic Forum at Davos where foreign investors will be looking at Modi's performance. This policy decision was a reversal of what the BJP stood for before coming to power. Interestingly, as the then leader of the opposition in the Rajya Sabha, Jaitley had maintained that FDI would convert India into a nation of sales boys and sales girls.
What middle class Indians fear the most now is a further decline in return on savings. Incentives for saving are going down and the government is finding more ways to squeeze the middle class that had slowly started indulging in conspicuous consumption.
And as people moved savings from low interest yielding bank deposits to the capital markets, there are talks of the finance minister hunting in this ground too for revenue. Will dividends be brought into the tax net? Will the time-period to qualify for long-term capital gains be increased? Will fixed deposits be treated up on par with debt mutual funds, or will debt funds be brought down to the level of FDs?
Corporates want a cut in the corporate tax. Last year, Jaitley had suggested a cut from 30 per cent to 25 per cent to make the domestic industry competitive, and reduced it for companies with a turnover of up to Rs 50 crore. Industry bodies now want it be 18-22 per cent.
Modi had said that he did not have the luxury of a “honeymoon” period, and had to hit the ground running. He has been running, and doing so without any coalition partners, who had festered the hands of his predecessor Dr Manmohan Singh. But what have the Indians gained?
Farmers are committing suicide and agriculture has been hit. The talk of neem-coated urea and soil health cards is not enough to assuage their feelings. Joblessness is growing even as former NITI Aayog vice-chairman Dr Arvind Panagariya explained it as underemployment rather than unemployment.
People want more money in hand, and when they say that, they want lower taxes. This should push up demand and that should get the manufacturing units in the MSME space chugging into action.
The upcoming budget will likely focus on increased public spending. There is bound to be an enhanced allocation for infrastructure—Bharatmala, Sagarmala, Bharatnet, regional connectivity, enhanced railway safety, speed and connectivity, and review of the surge pricing—all aimed at creating jobs, something that till a few months ago, according to NITI Aayog and government-friendly economists were not really the job of the government. Rather, the government was only to create an enabling atmosphere.
But implementation does not seem easy or simple for Jaitley to convert Modi’s promised achche din into reality through this budget—the current government’s last full budget ahead of parliamentary elections.
Will Jaitley strike a balance between populist steps that will give away and camouflage steps that will raise the revenue needed to give infrastructure sector a bigger push to create jobs that will result in cheers on the ground? Or like Modi, will he prefer to talk of structural reforms that will show results four or five years later?
These days, the prime minister talks of simultaneous elections to parliament and state legislatures, knowing fully that many surveys have projected him as the best prime ministerial choice before the country, and such a move could result in the BJP winning all over. As the BJP's ambition of continuous tenures in office gets more and more visible, it becomes clear that the budget will contain steps that will make for good days for their voters, in the medium to long term.
Modi government has constantly responded to its electoral needs—an example being the Triple Talaq Bill close on the heels of their statement that Muslim women had voted for the BJP in Uttar Pradesh. Another is the November tweak of GST. It will now take steps, through the budget and beyond that, to realise its own dream of a new India, and with his own indelible stamp.
