The Modi govt shouldn’t lose its nerve and take any rash actions in this year’s Budget
Article first published in @theprint.in: (click here)
Biz people and industrialists, who have been the most critical about the Modi govt privately, will settle for predictability instead of any tax bonanzas.
The jury may still be out on whether pakodas can create jobs, but the vitriolic reactions the PM’s comment generated would have certainly boosted the sale of Gelusil, figuratively speaking. In all this, the Economic Survey came as a soothing glass of buttermilk.
Ever since it became customary for the government’s chief economic adviser to appear on television after the Economic Survey is placed in Parliament by the finance minister, I do not recall seeing a CEA so excited over the magnum opus he and his team has produced. This exuberance spilled over in one of his tweets, in which he talked about a “Wow moment of epiphanic understanding”. This is remarkable, since Arvind Subramanian was an appointment of the NDA government, and some say he was handpicked by the same gentleman who came down heavily on pakodanomics.
One can polish off endless plates of pakodas debating if 6.5 per cent GDP growth is decent when the global economy seems to be on a comeback trail. However, whether one sees the glass as half full or half empty, the good news from the Economic Survey is that India is in a good place going forward with growth projections pegged at over 7.0-7.5 per cent for the next fiscal year.
Subramanian repeatedly reiterated that the government has been on a path of fiscal consolidation over the last four years, and the problem of twin balance sheets has been all but solved with infusion of funds in public sector banks for NPA haircuts and the bankruptcy code that will bring errant promoters to book by putting their assets on the block.
This underscores two important points. First, the government has been working on a definite budgetary road map for the last four years, which may not have been apparent to all. Having got thus far, the government need not lose nerve and take any rash actions under political provocations triggered by the opposition’s criticism and forthcoming state elections. Instead, it will be better off staying on course. However, being on a reasonably good wicket, it can relax the fiscal deficit target of 3 per cent a little if required.
Though people like P. Chidambaram have always been disparaging about Narendra Modi’s understanding of economics (remember he once said, Modi’s total knowledge of economics can be written on a postage stamp), the government has quietly been working on a two-pronged strategy of enlarging the tax net by increasing the size of the ‘white economy’ and plugging leakages in government schemes and subsidies.
Even before demonetisation and GST, one would recall the Modi government had introduced the nominal 1 per cent tax on jewellery, which had the jewellers up in arms – not because it would increase the price of their goods, but it would make it necessary for them to file returns. It is, therefore, interesting that nearly 15 months after demonetisation, commentators have come around to acknowledging it as a “reform”, if only for bringing more people above ground.
The digital push towards non-cash transactions, with a phenomenal growth of e-wallets and credit/debit card payments, has pushed in he same direction. Boom in e-commerce will only accelerate this trend.
The tale of GST is even more interesting and, therefore, Subramanian could barely hide his joy. Apart from the collateral benefits of transparency which he listed – namely formalisation, inter-firm transactions, tax compliance, GST tax base, state-wise exports, inter-state trade, firm structure of exports – the real icing on the cake has been the number of people who have opted for GST registration without availing the exemptions they were entitled to. This indicates the cost of non-compliance has gone up, and that is encouraging traders and businessmen to come clean.
In an economy as large as India’s, a marginal shift of even 3 per cent to the visible economy can be a game changer. The impact of this will go up exponentially as growth picks up and general income levels rise, which should enable rationalisation of tax rates leading to greater compliance.
On the other front, the Modi government has been working relentlessly on increasing the productivity of government spends on social welfare. The dividends of Direct Benefit Transfer and use of Aadhaar to ensure last-mile delivery does not warrant elaboration.
That brings us to the burning question of job creation. In a country that has so many layers and segments in the economy – it would be naive to expect jobs will come only from the formal sector. In fact, with technology and advent of AI (Artificial Intelligence) etc – so-called “white collar” jobs will shrink and the bulk of employment will have to come through the services and informal sector.
Embedded in the disdain for pakoda sellers is the larger question of dignity of labour. The dream of “sarkari naukri” or “office jobs” militate against the idea of skill development, in which India lags miles behind not only China, but the lesser-developed ASEAN countries. This has been the bane of Bengal, where every parent wants their child to be a doctor, engineer or accountant, and scoffs at any form of business. The result is that today, Mamata Banerjee is actually having to set up “Lyangcha (a form of sweet popular in the Burdawan region) hub”. Soon parents will realise the futility of sending kids to coaching factories in Kota, which is already afflicted with social menace of drugs and sex.
The employment issue will not be solved with a magic wand. Therefore, the first task is income generation and kick-starting investment, while continuing to plan for the long term in a rapidly changing world economic environment.
Finally, as Arun Jaitley gets up to present the Budget Thursday – do we expect fireworks and any big bang? Banking on the mountain of political capital with which it came to power, so far the Modi government has not displayed any signs of diffidence either in its domestic or foreign policies. It has acted with the utmost confidence of coming back for a second innings.
Therefore, it is highly unlikely that the finance minister and the Prime Minister would fritter away the gains of fiscal discipline of the last four years in trying to play to the election gallery. If one may submit, that has not been Narendra Modi’s style even as Chief Minister, and he did not yield to any such temptation for the states that went into elections in the last four years (including Gujarat, which was always a close fight).
The business community and industrialists, who have been the most vocally critical about the Modi government in private party circuits (while making the right noises in public fora) will any day settle for continuity and predictability to any tax bonanzas. They are sharp enough to know that a change of government is likely to throw the country and economy into another five-year tail spin, and by then, many of them would be past their prime and India would well have missed the bus, leaving the next generation stranded.
The middle-class will be happy with minor tax sops, social security and housing. The real challenge is the rural economy, which will look for immediate relief and some cash in hand.
It may be a difficult call to address all issues of agrarian distress in this Budget itself. Neither can it be solved by any sleight of hand. It is for this Arun Jaitley and Narendra Modi may like to keep a rain-check, quite literally so, in case we do not have a good monsoon this year, and the general elections are brought forward to the winter of 2018 – as many expect.
Sandip Ghose is a marketing professional and a popular writer and blogger on politics and current affairs. He tweets @SandipGhose