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  Opinion   Columnists  02 Feb 2017  Union Budget 2017: Little populism, but reforms ignored too

Union Budget 2017: Little populism, but reforms ignored too

The writer, a policy analyst studying economic and security issues, held senior positions in government and industry. He also specialises in the Chinese economy
Published : Feb 2, 2017, 2:43 am IST
Updated : Feb 2, 2017, 6:41 am IST

Budgets are also weighed down by a major constant in that prior commitments take away the most.

Finance Minister Arun Jaitley tabling the Union Budget for 2017-18 in the Parliament in New Delhi. (Photo: PTI)
 Finance Minister Arun Jaitley tabling the Union Budget for 2017-18 in the Parliament in New Delhi. (Photo: PTI)

The presentation of the Budget is a much-awaited annual ritual. It was very important in the days of licence raj when the government exercised its discretion or didn’t show it to favour some and punish others. For instance, it was in one such Budget that the rates for purified terephthalic acid (PTA), was reduced and dimethyl terephthalate (DMT) increased to determine the outcome of the most fiercely fought corporate war in India’s history between two top manufacturers of polyester filament yarn. The rest is history. One became a colossus and the other is now a dwarf.

The era of economic liberalisation ushered in by P.V. Narasimha Rao has put paid to that often-lucrative discretion. There is a predictability of rates and their continuity. This is a predictability of ideological direction. With discretion reduced and direction assured there can be a few real surprises in a Budget.

This Budget has no surprises. What little scope there might have been was removed by the utterly reckless and foolish act of demonetisation. To heal the wound would require bitter medicine. Bitter medicine needs an externally forced crisis or a change of regime to precede it.

Budgets are also weighed down by a major constant in that prior commitments take away the most. These are interest payments, salaries and pensions. These take away more than 60 per cent of the allocations. Subsidies range from 8-15 per cent of the Budget and now depend a great deal on international oil prices. When this was touching $100 a few years ago the oil subsidy was almost Rs 130,000 crores. Last year it was Rs 27,500 crores. Similarly defence expenditure, despite growing salary and pension burdens, are flexible because capital acquisitions wax and wane. But they are invariably between 12-15 per cent of the Budget. In this way fixed commitments take up over 85 per cent of the Budget.

The annual Budget ritual can only be described as fixing how the rest of the 15 per cent is going to be used. Even here, there is not much flexibility, as most schemes started have to be continued and supported. So all that the finance minister can do is tinker around the margins and outline a set of dreams to be realised at a later date.

What made people anxious or more interested in this Budget is that it came under the overhang of the demonetisation, which seriously hit the economy. Even the government now admits that there will be a substantial shortfall in growth. Last year at Budget time, a GDP growth of 7.6-7.8 per cent was being spoken about. The chief economic adviser in his report on January 31 estimated this to be between 6.5-6.75 per cent. The government and even the IMF are admitting a one per cent drop in growth, or about Rs 1.5 lakh crores. The highly regarded Centre for Monitoring Indian Economy (CMIE), however, estimates a fall of two per cent and the aftereffects to last as long as five years.

The political consequences of this fall could be severe, given that five states including the biggest, Uttar Pradesh, that gave the BJP 72 seats in the Lok Sabha, will go to the polls. So the possibility of a major act of populism to mitigate the aftereffects of demonetisation was very big and real. Mercifully it didn’t happen. We must thank the Narendra Modi government for this.

This Budget had two firsts. First, of course, was the date. The other is the incorporation of the Railway Budget into it. This has allowed the government to obfuscate certain allocations. For instance, Mr Jaitley spoke of capital expenditure of Rs 128,500 crores on transport, a good Rs 21,000 crores over last years. But does this year’s allocation also include the Railways, which was suggested in his speech? In that case, the allocation is actually about Rs 30,000 less than last year. The Budget document also indicates a capital expenditure ratio of 14.43 per cent. If this includes the Railways’ capital expenditure of Rs 131,000 crores, then it is clearly a reduction. The government needs to come clean on this. Likewise, the finance minister mentioned a “huge” increase in MNREGA allocation, but an examination reveals that this “huge” increase is just Rs 501 crores over the expenditure of Rs 47,499 crores last year. This tendency to exaggerate is persistent and worrying.

Since Budgets are mostly preordained, the administrative actions proposed are where the real action is. This Budget has a few, and some of these can have lasting benefits. First and foremost is the tightening up of the law on bouncing of cheques. This has been the biggest reason why large cash transactions are preferred. If the process to realise funds and punish perpetrators is shortened and tightened it will have a hugely beneficial effect on how we deal with each other and pay the government what is due to it. Another positive measure is to dissolve the Foreign Investment Promotion Board (FIPB), which had actually become a huge hindrance to foreign investment and a rent collection stop.

The government has also linked MNREGA to physical targets such as increasing water storage capacities by building as many as 20 million water ponds.

The government also plans to monitor the building of these using satellites, to preclude false claims. This was long overdue. Much will no doubt be made about the limit of Rs 2,000 on anonymous political donations. This is a non-serious measure and I will expand on it some time later.

All in all, this is a Budget as expected. It avoids political populism, but it also avoids major economic reforms. It is not going to change the direction in which the nation is moving. As the man on the street would say, it’s a kaam chalao Budget. It could have been better or it could have been worse.

Tags: union budget 2017, demonetisation, gdp, narendra modi