Budget: what will it be about this time?

In any budget, the planner must balance various aspects, such as revenue versus expenditure, and also make some trade-offs in both spending and collections that reflect value judgements and policy priorities. That is one reason the Union Budget is such an anticipated event in the Indian news cycle, as it is the one thing that gives us perhaps the clearest idea as to what the government of the day is thinking.

Obviously, there are the basic ideas that permeate society that influence the Budget – for example, that the rich need to be taxed more than the poor even on a percentage basis. That idea takes the form of tax slabs that may be tinkered with, but nobody expects it to be turned on its head where the poor pay 30% and the rich pay 10%; not only would that be antithetical to our values, but it would reduce government revenue, too. However, there are nuances. Should Long-Term Capital Gains be tax-free? Why? Is it not the rich who invest in stocks, and shouldn't we soak them sufficiently there, too?

Further, there is the expenditure side. This is the perennial "guns versus butter" equation that readers of Paul Samuelson's iconic 'Introductory Economics' textbook would be so familiar with. Except, in the case of the government budget, the question is not so much the most efficient allocation, or the most equitable allocation, but rather it links back to the question of what ideology the government subscribes to.

Should we be a welfare state, where we have certain expectations from the government in providing goods and services to the underserved? Or, should the government simply enforce property rights and let the market determine winners and losers? That may theoretically be the most efficient way to allocate resources, but is that the fairest way? This question, too, has been settled in India, with even the Narendra Modi government continuing the extravagances, albeit grudgingly, of the UPA schemes of NREGA, Right to Food, etc.  

However, it does seem that this government, while sharing the overall ethos of Indian political-economic thinking broadly with the UPA, is stingier than the UPA in doling out money to social causes.

One recent example is of Finance Minister Arun Jaitley rejecting a request from the health ministry for a 33% increase in its budget, initially only agreeing to 5% and then, upon representations, allowing for an 11% increase.

This small increase is alarming because India spends less than 2% of its GDP on health and, as correctly noted in the letter from the health minister to the finance minister, health expenditures are correctly viewed as investments in human capital that yield "ten-fold returns". Should the finance minister then not worry less about rating agencies and more about investments in the people of India?

Furthermore, this government seems more interested in pleasing rating agencies and businesses than in launching schemes like the plethora of schemes launched by UPA-2. It has improved the ranking in ease of doing business, pushed through reforms like the Insolvency and Bankruptcy Code, opened up sectors for FDI, and implemented GST. These are all worthy reforms.

Persistent concerns

However, while greater reforms should lead to a higher growth trajectory in the long run, there are persistent concerns of jobless growth in the era of 'Make in India' and persistent crises in employability and skilling of youth in the era of 'Skill India'.

Then there are, of course, political considerations on top of the purely economic that are illustrated above. Given the fact that this is the last full-year Budget before the 2019 general election, and given that the ruling party was almost humbled by the opposition in Gujarat, it seems likely that agriculture will get a greater push to alleviate agrarian and rural distress. The proposal to double farmers' incomes by 2020 may get a boost in the forthcoming Budget.

There are many other issues the finance minister must grapple with. How to tackle rampant tax-avoidance and increase the tax base? In the last Budget, the finance minister announced a 5% income tax slab that would hopefully bring a lot more people into the fold. However, this step is too little to tackle the gargantuan problem that only 2% of people pay taxes in India.

Also, how much should corporations pay, given that we live in a globalised world where corporations readily register in tax-havens - legally - to avoid paying tax. How do we plug that loophole? Is the government even interested in plugging that loophole?

In sum, if there is any deviation from the policies of the government from the last few years, it is likely that it will be with an eye on the 2019 general election. Perhaps a boost in government spending to spur the economy at the cost of the rating agencies' ire is coming our way; or perhaps not. Who can tell. With a reformist government in power, the question to ask is, whether ideology will trump good politics and, some would say, good economics, or will it be vice versa.

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