Someone once said that self-preservation and self-denial are the basis of all political economy. These two will be quite in demand at 11 Ashoka Road, the Bharatiya Janata Party’s headquarters in New Delhi. There will be one significant difference though: Self-denial will be exercised in public through hubris and media management, while self-preservation will be implemented in private through policy design, especially economic policy, over the next 12 months.
This will be necessary because the wheels seem to be coming off the BJP’s electoral juggernaut. Even though the party has won the Gujarat state assembly election, there is no denying that it had to settle for a sub-optimal outcome. It has won only 99 seats out of 182 seats, a drop of almost 14% from its 115 seats in 2012.
A simplistic break-up of the votes shows that while the BJP might have done well in urban areas, it may have reasons to worry about rural votes. Drilling just one level deeper, there are fault lines in many urban areas as well: the BJP’s margin of victory has reduced in various urban constituencies, reflecting the angst of urban youth and the disaffected.
This might affect the tenor of debate in both the Lok Sabha and Rajya Sabha. In light of the Gujarat results, it will be interesting to see how the government handles the fires that are already raging and need managing—such as the non-performing assets mess in the banking sector, or the Financial Resolution and Deposit Insurance Bill that has already generated a lot of heat.
The next big opportunity for corrective action will possibly be the 2018-19 union budget. This will also be finance minister Arun Jaitley’s last full budget and a curtain raiser to not only the impending 2019 general elections but also the intervening 2018 state assembly elections in Karnataka, Madhya Pradesh, Rajasthan, Chhattisgarh, Tripura, Meghalaya, Mizoram, and Nagaland.
With so much at stake, what will future policy direction look like? There’s some certainty about at least two elements.
One no-brainer will be rural emphasis in future policy. The story of rural distress is no longer deniable and the ripple effects of that were already manifest in rural Gujarat’s voting trends. More worrisome is the situation in Madhya Pradesh where farmers’ agitation and the ensuing violence claimed lives, further aggravating the adverse sentiments. This from a state that was till recently considered an agricultural turn-around story. It’s no different in Rajasthan where a combination of monsoon deficit, drought conditions, high input prices, and reduced earnings have ignited protests and agitations.
The GDP data for the first half of 2017-18 (April-October 2017) also shows a slowdown in agricultural growth. Coming as it does on top of the lingering effects of demonetisation, it has translated into lower income generation and increased indebtedness for farmers.
Gujarat’s groundnut crop during 2017 provides an instructive example. Following record sowing and kharif crop this year, the open market price for groundnuts crashed below the procurement price of Rs4,500 per quintal announced by the BJP government in Gujarat, which also included an element of bonus. And yet, ironically, farmers were forced to sell at the open market auctions at sub-MSP prices because of the government’s slow procurement machinery, which entailed lengthy documentation, including the dreaded Aadhaar linking.
On top of all this, there have been reports that many farmers who had filed claims for losses under the Pradhan Mantri Fasal Bima Yojana, a crop insurance scheme launched in 2016 with great fanfare, are still waiting for their compensation.
It’s all about jobs
The second element will be employment generation. This will be done through multiple initiatives, including perhaps higher budgetary allocations for employment guarantee schemes, such as MNREGA. In addition, there is likely to be greater emphasis on public expenditure for increasing capacity, especially in infrastructure, hoping it will lead to higher employment and economic growth.
Prime minister Narendra Modi recently launched a new umbrella road-building programme, which envisages road construction of 83,677km over the next five years. Capital expenditure has also been earmarked for railways, power, highways, rural roads, and digital infrastructure. The prime minister’s economic advisory council (PMEAC) has identified 10 priority areas: economic growth, employment and job creation, informal sector and integration, fiscal framework, monetary policy, public expenditure, institutions of economic governance, agriculture and animal husbandry, patterns of consumption and production, and, social sector. Policy action might be seen in some of these areas.
One continuing area of concern is a lack of fresh investment in manufacturing, especially in the private space, which is either reeling from the after-effects of past over-borrowing, or, sitting on cash waiting for more certain times. Messrs Modi and Jaitley will have to find ways to coax them into investing. An alternative is to get public sector corporations to invest in capacity expansion, some of which is already happening.
All largesse, whether pre-election or not, usually results in cash outflows and impacts fiscal deficit; the global rating agencies usually keep a hawk-eye on this one metric. The five wise men of the Fiscal Responsibility and Budget Management Act review committee may also have to avert their gaze as Jaitley pulls all the necessary pre-election levers which may send fiscal deficit beyond the budgeted 3.2% of GDP. Niti Aayog vice-chairman Rajiv Kumar has publicly supported relaxing fiscal deficit targets to allow for more capital expenditure.
Interestingly, PMEAC members also had pointedly stated during their first ever meeting in October 2017 that fiscal deficit targets should not be relaxed. But then, of course, they are not the ones worried about political self-preservation.
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