Boxed into a corner, finance minister Arun Jaitley has hitched the economy’s wagon to the rural sector to gain escape velocity. He is also banking on investment in infrastructure to provide the necessary horsepower. The problem is in the after-effects, but then somebody else will have to wipe that off the floor.
Jaitley has exhibited supreme dexterity while presenting his third budget. He had to make a choice between stepping up public investment or keeping the economy’s fiscal discipline intact; a public debate even ensued in the run-up to the budget. He has managed to assuage both camps: he has pushed for a massive increase in public investment, but also mollified fiscal hardliners by promising to keep fiscal deficit to 3.5% of GDP.
The finance minister understandably wants to dodge the icy grip of a global slowdown. Waning global demand has already spread its chill: exports have contracted for 14 straight months. This threatens to derail any chances of an economic resurgence, including prime minister Narendra Modi’s ambitious Make In India programme. If people are not buying, why manufacture? And, if demand doesn’t exist, why invest in manufacturing capacity? This jeopardises employment, income, growth and has the potential to descend into a vicious cycle.
The trick is to create demand and induce people to buy more. The rural economy is considered an economic locomotive: it is estimated to consume roughly 50% of all manufactured goods and between 25% and 30% of services. Two consecutive poor monsoons has left that engine powerless. Rural and agricultural distress has also claimed numerous farmer lives. Jaitley is now promising to channelise additional resources to the farm economy and rural areas under various heads; the hope is this will impel rural consumers and farmers to consume more, and keep the economy ticking.
A sum of Rs87,765 crore has been kept aside for rural development, of which Rs38,500 crore has been committed for India’s marquee job guarantee programme, the Mahatma Gandhi National Rural Employment Guarantee Scheme. Part of the money will be used to dig up half a million farm ponds and wells, and a million compost pits to produce organic manure, a la Keynes redux.
Another intriguing allocation is Rs2.87 lakh crore to the third tier of India’s federal governance structure: gram panchayats and local municipal bodies. It seems this money will be transferred over five years, though the division between flows to villages and urban local bodies is not known.
Infrastructure financing is the other tonic Jaitley’s administering to the economy: Rs2.18 lakh crore is the budgeted capital expenditure for roads and railways. Add to this mix, investment in power generation, ports and waterways. Even in infrastructure investment, the emphasis is on the rural sector: investing in expanding the coverage of irrigation (to reduce Indian farmers’ vulnerability to fickle monsoons) and investing in roads and electrification.
There are also promises to double farmers’ income by 2020 through a combination of moves: improved access to markets, reduction of intermediaries, improved availability of inputs (seeds or fertilisers). However, doubling income in five years would require an annual income growth of at least 12-14%. With agriculture GDP growth seriously challenged, this will be a big ask. We will await details of how the finance minister plans to achieve this target.
Jaitley hopes the poor and indigent will think well of him. In a year with critical state assembly elections (Assam, West Bengal and Tamil Nadu), Jaitley has promised to levy higher taxes on higher incomes, but the salaried chap will also feel the noose tighten when his retirement corpus becomes fair game for the taxman.
The finance minister’s ability to pull off this tightrope walk between economic stimulants and fiscal rectitude is contingent on revenue accretions: he expects Rs19,610 crore of additional tax revenues in the coming fiscal. In addition, he is banking on two other big sources: spectrum auctions and selling government’s shareholding in public sector companies. These are highly unreliable, at least going by the disinvestment record so far.
A pick-me-up budget, which also includes a welter of cesses and surcharges to achieve revenue targets, is likely to increase prices of final goods and services. But then, that’s somebody else’s responsibility, right?
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