Economic policy: A hard lurch to the right

In an interview on February 1, former Finance Minister P Chidambaram slammed the Narendra Modi government’s Budget for 2021-22 saying, “There is a Budget to be made in the boom years, there is a Budget to be made in crisis years. This is a crisis year. Is this the Budget to be made?” His argument was that in a Budget coming after two years of economic slowdown and one year of recession during which millions of small businesses had shut down and hundreds of millions of the poor were in dire straits, those who were suffering the most should “have the first charge on the budgetary resources, but they have been completely left out.” His own approach would have been to do a direct cash transfer to the bottom 25% of the people for at least six months, devise a rescue plan for the MSME sector so that jobs come back, and cut and unify GST rates so that private consumption rises, alongside spending on infrastructure, he said.

Sanjeev Sanyal, the principal economic adviser to the finance ministry, responded with an equally strong argument for not taking exactly that approach.

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“We have decided to go for growth; and growth using a particular path, which is to spend on infrastructure…We have done this business of consumption-led economy, (that) we must always rely on the dole approach. We have done this for 70 years, we are done with it. We want to have an investment-driven growth model…This may not go with some people’s ideology, but I’m afraid this is the model.”

So, does Budget 2021-22 signal a hard lurch to the right economically? Is this the right time to turn to trickle-down economics rather than to handhold those in dire straits?

Economist Ila Patnaik, a professor at the NIPFP, New Delhi, said the “Budget speech” was “pro-market, pro-growth. Its emphasis was on privatisation, infrastructure-building, not on welfare (spending)…There was a marked difference. There wasn’t a series of new welfare schemes. The messaging was clear.”

This is a sea change in the government’s approach to the economy from what we have witnessed over the last six years. It is perhaps a return to the “Modinomics” that was expected to take hold when Modi first took power in 2014.

Modi projected himself as “pro-business” and his record as Gujarat Chief Minister had borne him out. He won the election on a campaign that ridiculed the UPA’s “rights-based” approach to jobs, food security, education, etc. He would teach the poor how to fish rather than feeding them fish, he would help them stand on their own legs financially rather than stretch their hands out for dole, was the promise.

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All that came crashing down within months. In April 2015, Rahul Gandhi, then Congress vice president, made a single telling comment, calling the Modi government “suit-boot ki sarkar.” He was referring both to the attempt made by Modi to amend by executive order the 2013 land acquisition law to make it business-friendly and to the monogrammed suit that Modi had worn during the visit of former US President Barack Obama. That comment was enough to send Modi on a path opposite to the one he had intended. In August that year, he withdrew the land acquisition ordinance, saying that the “voice of the farmer” mattered most to him.

The Rahul jibe and the experience of having had to withdraw the ordinance sent Modi off on an almost six-year quest to build up and secure his position among the poor with several welfare schemes. Some of them were doles, alright; and some of them were driven by the UN Sustainable Development Goals. But all were cleverly branded and made to look like Modi’s own thinking: Swachh Bharat, Ujjwala, Beti Bachao, Beti Padhao, Jan Dhan (Aadhaar-DBT), and so on.

In a December 2020 article in the Indian Express, former Chief Economic Adviser Arvind Subramanian and others called it “the new welfarism”. They noted: “The New Welfarism…has entailed the subsidised public provision of essential goods and services, normally provided by the private sector, such as bank accounts, cooking gas, toilets, electricity, housing, and more recently water and also plain cash... New Welfarism’s calculation is that there is a rich electoral opportunity in providing tangible goods and services.”

All this helped Modi sweep the 2019 elections and also become, in Vice President Venkaiah Naidu’s 2015 phrase, “the messiah of the poor”.

Yet, even as Modi’s stature rose among the poor and electoral success became almost a given, the economy was sinking. It had been slowing down since demonetisation and had fallen from 7-8% growth rates to just over 4% in a matter of two years. Matters came to a head with the pandemic and Modi’s four-hour-notice lockdown — the economy went into contraction. And the revenues needed to run “New Welfarism” dried up further.

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Something has had to give: the country’s economic direction. And Modi is seeking to use his strong position among the poor as he branches off to his original pro-business path.

“There is a shift to the right…Modi took to the welfare-oriented approach to gain the ‘vishwas of the voter’,” Yamini Aiyar, President, Centre for Policy Research, New Delhi, says. “The pandemic provided an opening and Modi is now seeking to follow his own economic imagination, which is more aligned to big business and formalisation of the economy.”

That the government feels confident to bank on Modi’s confidence that he has the ‘Vishwas of the voter’ shows in how it has handled the farm laws and the ensuing protest. But it was also clear through the pandemic when it moved to change labour laws, grant controversial environmental clearances, etc. The reliance on capital expenditure on infrastructure, privatisation and trickle-down economics is only the final signal of the lurch to the right.

“The government could have taken on more debt for a fiscal response in the pandemic year given the Current Account position and high household savings. But it chose to infuse liquidity and tell the people, ‘Look, we have created the monetary environment, now you are on your own.’ That was Thatcherite. And now, the government is moving even further in that direction.” Aiyar said. “The formal economy is not doing so badly, it is the informal economy that is suffering greatly, but the government seems to be comfortable with that.”

The government could have relied on the NREGS programme, but it has cut down allocation to it by over Rs 34,000 crore. “NREGS was able to expand quickly last year during the crisis. Infrastructure spending does not scale up quickly. There are issues of land acquisition, clearances, a history of delayed payments, project completion, etc., that will impact on job creation,” Aiyar added.

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Will it work?

But even the premise that the government is spending heavily on capital expenditure doesn’t hold, says economist Vivek Kaul, arguing that it is just a narrative that the government wanted to put out. “Capex is going up only by 4.5%. The government doesn’t have money. They relied heavily on disinvestment to raise money, but that collapsed. I suspect that’s also why they cut spending on NREGA, which worked well during a bad year. They may be trying to tilt to the economic right, but it is not working.”

Kaul warns that there is a big danger in relying heavily on privatisation and asset (land) sales to raise revenues. “The danger in government selling land is crony capitalism and corruption taking hold. It is important that they do it right,” he said.