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POLL DANCE

Arun Jaitley’s budget is the opening act of Narendra Modi’s election campaign

By Sriram Iyer

Indian finance minister Arun Jaitley’s budget on Feb. 01 has signalled that the world’s fastest-growing economy is racing towards the next general election.

The Narendra Modi government’s lofty promises for financial year 2019 are largely targeted at a wide base of rural voters, while milking resources from the urban middle class to meet its political ends. However, in an interview with Doordarshan, the national broadcaster, Jaitley defended the proposals saying, “Agriculture was one of the weakest sectors in the economy and it needed support.”

The latest budget marks a U-turn from Modi’s earlier goal of “minimum government, maximum governance.” The government has gotten bigger in a bid to ensure that the rhetoric of the ruling dispensation can cover as many bases as possible before the next elections, even if they were to take place earlier than scheduled. Specifically, pacifying the angry rural voter was the need of the hour—economically and politically.

Indeed, India’s farm sector has been in distress. Agricultural growth for financial year 2018 is expected to be a measly 2.1%, according to the government’s economic survey released on Jan. 29. Prices of farm products have been under pressure. Hence, farmers have not seen incomes rise despite bumper crop production after two years of drought.

To top it, Modi is under pressure to deliver on his 2016 promise to double farmers’ incomes by 2022. Right now, that seems like a long shot.

But to throw money at distressed farmers may, at best, be short-term balm. It is also contrary to the government’s stated objective to move people out of India’s farms into manufacturing jobs. Over 50% of India’s population depends on agriculture, which constitutes less than 18% of the country’s GDP. And there aren’t enough jobs outside the farms.

“Job creation will come only out of new investments and by promoting private investments. There is hardly anything in the budget that will have that effect of simulating private investments,” C Rangarajan, former Reserve Bank of India governor and former chief of the prime minister’s economic advisory council, told the Press Trust of India.

Therefore, the government’s assurance that in financial year 2019 farmers will get 50% over their cost of production via minimum support prices (MSP), and that it will allow export of agricultural commodities, may be exactly what the cultivators want to hear. But both proposals have a domino effect that will hurt businesses and citizens, including poorer farmers.

And if what Jaitley said has holes, there are bigger gaps in what he didn’t say. The government’s proposal on MSP is either vague or nearly impossible, agricultural economist Ashok Gulati told Quartz.

“At present, they have just announced a 50% increase over cost. I doubt they can do it. Inflation will go up, cropping patterns will get distorted, diversification will go for a six. It cannot happen even next year,” Gulati explained. “How can you increase MSP by 50% in a year or two, when you haven’t done that in five years?”

And when the hike in MSP kicks in, it will lead to a spike in inflation. The bill will be borne by all. The middle class will feel the heat of higher prices, while the government food subsidy for the poor is likely to go up by Rs29,000 crore, according to budget estimates.

Notwithstanding the fact that a spike in inflation sans adequate growth hurts everyone, the government itself has downplayed the risk. ”India has seen much higher inflation in the past. Today we are used to 3-4% inflation,” Jaitley said. This goes against the grain of the Bharatiya Janata Party (BJP), which used the issue of high inflation during the previous regime as a poll plank ahead of the 2014 general election.

Then there is the promise of state-sponsored health insurance to 500 million people, dubbed “Modicare.” With a meagre allocation of Rs2,000 crore, and lack of details on the roll-out, the plan is unlikely to see any significant traction before the next election.

Therefore, the sooner the government encashes the hopes these announcements raise and turns them into votes, the better. Prolonging the next election puts Modi at the bigger risk of the implementation and impact of his promises being scrutinised and analysed.

Show me the money

Even if it were keen on delivering these promises, which is unlikely in the next year, the government will have to overcome a cash crunch.

To begin with, it doesn’t seem very confident about the tax buoyancy from the roll-out of goods and service tax (GST) and overall economic growth. The budget estimate for growth in total receipts for financial year 2019 is half of last year’s revised estimate.

An ambitious Jaitley hopes to earn Rs80,000 crore from divestments in financial year 2019. This will include the proposed sale of the national carrier Air India. However, annual divestment targets have been met only 10 times in the last 27 years, including in the current fiscal. Even the latest target was met largely due to a Rs36,000 crore stake purchase by state-owned ONGC in public sector fuel retailer HPCL. The money, basically, went from one government pocket to another.

So the finance minister has done the easy thing by dipping into the urban middle class living on salaries. The cess on income tax has been raised by 1%. Long-term capital gains (LTCG), tax-free till now, will attract a 10% levy on gains of over Rs1 lakh from investments in both shares and mutual funds. Alongside inflation, these taxes will further dent the spending capacity of one of India’s biggest consumer groups.

In a post-budget press meet, Jaitley defended this triple whammy saying, “In every budget I have put in money into the middle class. Today, India is the only country which has an income-tax slab of 5%.”

India’s stock market tumbled on Feb. 01. The tax on LTCG was not entirely unexpected, but the bulls had hoped for some more leeway from what they knew as a “business-friendly” government.

Eventually, this budget may signal the defining shift in the government’s focus. It has limited use for the middle class and the market men who rallied for Modi in the previous election. The massive rural population must be consolidated into a voter base.

The populism will bear a price that is for everyone else to pay.

We welcome your comments at ideas.india@qz.com.