Stress on growth

The Budget 2015 is the first full-year budget of the Modi government. This government has been singularly lucky in that the economy is currently in a “sweet spot” (to use the phrase of the Economic Survey) with high growth rate of 7.4 per cent (making it the fastest growing big economy of the world, even exceeding China), inflation down to 5 per cent and the Current Account Deficit (CAD) below 1.3 per cent of GDP, mostly due to the fortuitous development of a steep fall in global oil and commodity prices.  

Further, this government has come to power with a single-party majority promising to create an investor friendly climate which would attract investment from home and abroad, thereby taking India to an 8 per cent plus growth trajectory. This Budget was awaited with high hopes as it was expected to put up a road map for the future course of the economy over the next four years of the present government.  

The basic philosophy of the present government is that growth is the primary mechanism for lifting people above poverty by creating productive jobs. In that sense, pro-growth policies are also pro-poor. However, in a country with a vast number of poor people to start with, growth alone can not be expected to take care of poverty, in the foreseeable future. In addition, even in advanced economies, there will always remain some people (like old, infirm or laid off from jobs) who would need to be protected. Therefore, along with higher growth, we need a social safety net for the vulnerable.

Apart from the economic and social imperatives, the Modi government has felt an additional political compulsion to do something specifically for the poor in the Budget to dispel its ‘pro-corporate’, ‘pro-rich’ image. Analysts consider this to be a reason behind its debacle in Delhi polls in the hands of the populist Aam Aadmi Party promising free water and electricity at half-price. Hence, even if the BJP leadership was highly critical of the subsidy and entitlement-based pro-poor policy of the UPA government, it has not dared to prune, in any significant way, the existing schemes like MGNREGA or extension of food subsidy to a larger percentage of population. 

In addition to continuing with the existing schemes for the poor, this Budget promises to lay down a policy framework for pushing India to a higher growth path along with taking a few small steps to put in place a rudimentary social safety net for the less affluent. The poor state of infrastructure (rail, road, ports, power) is regarded as the most crucial bottleneck holding up the growth of  manufacturing  in India without which the rising young population (the so-called ‘demographic dividend’) can not be absorbed in better paying jobs. 

At the same time, rising wages in China is providing India a golden opportunity to develop as a manufacturing hub (Modi’s ‘Make in India’ slogan). The Budget put a special emphasis on bringing in investment in the infrastructure sector.

The earlier Public-Private-Partnership model has not worked well giving rise to non-fulfilment of targets, litigation and bad debts for banks. The government, therefore, wants to increase public investment in infrastructure by providing additional allocation  (Rs 70,000 crore)  from the budget, on top of creating an Infrastructure Fund  with  an initial equity contribution from the government (of Rs 20,000 crore) which would be used as a lever to raise  more money (debt) from the market. Also, under the so-called ‘plug-and-play model’, the major risks like land acquisition, securing environment and other clearances, arranging coal or gas linkages would be taken care by the government before awarding projects to private developers.

Attracting private players 

This would make the projects more attractive for private players by cutting down cost and time overruns. In other words, public investment and new public initiatives in infrastructure (even if these cause some increase in fiscal deficit above the initial targets) would attract more private funds into infrastructure (called ‘crowding in’ rather than ‘crowding out’ in economics). 

To what extent these moves would be able to fill up the huge infrastructure deficit, only the future would tell. The way the Land Acquisition Amendment Ordinance is being held up in Parliament by the opposition and the slow-moving government machinery (to do the advance groundwork in the Plug and Play model) leaves one a bit sceptical. In addition, the gradual reduction in corporate profit tax from 30 to 25 per cent over the next four years (and making Indian tax rates internationally competitive at ASEAN level) and introduction of an international standard bankruptcy law (to make exit from loss making business easier) are both designed to attract more private investment into India. 

It is also important to note that, following the Finance Commission recommendation, the states would have a much higher share of the total national tax revenue along with a reduction in allocation of Central funds to implement centrally sponsored schemes. That means states will have greater autonomy with regard to revenue as well as expenditure. The overall national performance on infrastructure building will therefore also depend on how the state governments will use these funds – on asset creation or  populist freebies.

On the social security front, three new schemes for the less affluent are an accidental death risk cover and a pension scheme with defined benefits (depending on contribution and period) with 50 per cent of annual premium to be paid by government for five years. Though baby steps, these are welcome beginnings in a country with no social safety net for the poor unorganised workers. (The writer is former Professor of Economics, IIM-Calcutta)