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SUKUMAR MURALIDHARAN | 1 MARCH, 2015

UNION BUDGET: ECONOMY ON A KNIFE EDGE


NEW DELHI: John Maynard Keynes, architect of the economic policies that at least two generations since World War II swore by, spoke of digging holes and filling them up as a potentially productive activity. It was one way of putting into circulation money otherwise held in idle rent-seeking and could boost purchasing power and activity levels in the economy. The “euthanasia of the rentier” he said, was an outcome greatly to be desired, since this was the least productive segment within the economy.

Prime Minister Narendra Modi obviously disagrees. On the eve of the Union Budget, as he responded to the debate on the motion of thanks to the President’s address, he spoke with evident disdain about the basket of welfare programmes inherited from the earlier Congress government. Responding to repeated criticisms about his government’s cutbacks in these schemes, he disavowed any intent to do away with them. He was aware of the inherent political rewards of the rural employment guarantee programme for one thing, he remarked ironically. It was, he said, a monument to the Congress’s failures over sixty-five years. Though he could not envisage a future in which the youth of the country, driven by aspiration, would be sent out to dig holes in the ground in a pretence of employment, he was not about to squander an opportunity to gain political capital.

Finance Minister Jaitley nonetheless had a big surprise in store the following day. In seeming disregard of the Prime Minister’s obvious disdain, he chose rather than continue the assault by stealth on the rural jobs guarantee, to actually increase its financial allocation. As he put it in his speech, there was pressure on the Centre because of its decision to devolve – in accordance with the most recent Finance Commission recommendations – a substantial 42 percent of tax revenues in the divisible pool to the states, against the current 32 percent. Despite this, said Jaitley, “adequate provision (was) being made for the schemes for the poor and the disadvantaged”. Illustratively, he said, “₹ 68,968 crore (had been allocated) for the education sector, including mid-day meals, ₹ 33,152 crore to the health sector and ₹ 79,526 crore for rural development activities”, which would include the job guarantee.

The minister’s numbers do not square with figures given in the detailed breakdown of Central expenses in the year ahead. The total allocation under the national mid-day meal scheme for instance, is ₹ 36.40 crore; and for the rural employment scheme a mere ₹ 986 crore. And this is where the catch is: while claiming a higher devolution of funds to the states, the Union Budget still insists on controlling how these are spent. Or as Jaitley put it: “The significant sums that will be spent by the States on these programmes will ensure a quantum leap in expenditures in these areas. I urge states to utilise their enhanced resources effectively in these areas”.

Against a total of ₹ 382,216 crore promised as the state’s share of tax revenues in last year’s budget, this year’s commits a substantially larger amount, ₹ 523,958 crore. But these promises are seldom kept. Illustratively, under the revised estimates for 2014-15, the actual amount transferred to the states will work out to be substantially less than promised, by about 12 percent.

Jaitley’s effort to take credit for both higher devolution to the states – in line with the government’s newly minted philosophy of cooperative federalism – while still retaining control over how devolved funds are spent, is likely to develop a few snags as it goes along. Difficulties could arise from the state’s own perceptions of the utility of the rural employment programme. Powerful state-level politicians such as Sharad Pawar and Parkash Singh Badal, have in recent times spoken up against the rural employment guarantee as an inconvenience, which compels higher wage payments for essential agricultural labour. This is representative of a certain viewpoint that still remains strong among agrarian elites with substantial influence in state politics. To expect an unchanged level of commitment to the rural jobs programme, despite the power of implementation shifting to the states, may be unrealistic.

As against a welfare orientation, which targets certain measures of employment and human development, this year’s budget shows a strong proclivity for a growth focus. And it is not a scenario without ironies. The Economic Survey released just a day before the Budget was amply sceptical about new growth figures released by the Central Statistical Organisation (CSO) on January 30. By some seeming miracle, the new statistical procedure bumped up the economic growth rate substantially for the year 2013-14.

The Survey cast some doubt over this figure, which it found “puzzling” and inconsistent with other indicators. If growth equals political success, there is no ready explanation for the Congress’s ignominious loss in the 2014 elections and Modi’s equally dramatic victory. Yet, while introducing his budget, Finance Minister Arun Jaitley spoke with some pride of the fact that multilateral agencies had in a scenario of global depression, certified that India still enjoyed robust growth prospects. And banishing the element of scepticism in the Survey over the CSO’s new growth figures, the minister forecast a rise of at least one percentage point in the year ahead over an already somewhat dubious figure. This put a double-digit growth rate well within reach, he said.

After this genuflection before the statistical altar of growth, the measures Jaitley outlined did not, even for favourably disposed observers, amount to more than “positive incrementalism”. This was an outcome foretold in the Survey, which spoke of “big bang reforms” in democracies with a multiplicity of actors as an “exception rather than the rule”. Since “decision-making authority” in such situations is “vibrantly and frustratingly diffuse”, it was often unrealistic to expect radical changes of course.

Among the favourable factors that the Budget seeks to capitalise on, is the historically unprecedented low in the global oil market. This takes considerable pressure off consumer prices and provides windfall profits for the oil companies, which the Centre could skim off. It is partly on these expectations that Jaitley has allocated an additional ₹ 70,000 crore for infrastructure projects which he expects will kickstart the growth process.

It is also vital for this objective, to obtain long-term finance that is relatively stable, unlike the current situation of unending turmoil that prevails in global bonds and currency markets. Towards this end, Jaitley has proposed a Public Debt Management Agency (PDMA) which will take over the task of bringing domestic and overseas borrowings under one roof, with the explicit purpose of securing stable and affordable rates for long-term investments.

How far this new device will succeed in evening out the wild gyrations of international currency and bond markets, remains to be seen. Going into the budget season, Raghuram Rajan, Governor of the Reserve Bank of India (RBI) flagged global economic turbulence as a big worry. Major world currencies have been softening as easy money policies have become the norm in economies seeking release from long months of recessionary gloom. Correspondingly, the rupee has been gaining in a manner that could impair India’s export competitiveness.

Aside from the level, the fluctuations of the currency market have also caused anxiety. Since introducing a $30 billion cap on foreign investor positions in government bonds last year, the RBI has specified a minimum maturity of three years. In his latest policy statement, the RBI Governor spoke of the latitude gained by shifts in the global economy: the decline in the price of oil he said, had created “headroom” for a fiscal stimulus with less risk of inflation.

Just a few days later, while speaking to the New York Times, Rajan wondered if the sudden collapse of the global oil price – its virtual halving in the space of weeks – was evidence of a deeper vein of turmoil yet to be tamed: “I was talking to some market participants, and they were extremely worried about the extent of volatility that can emerge in markets in a very short run... I mean, (oil) is a very deep market. And virtually overnight, maybe in a span of a month or two, it has gone from $100 a barrel to $ 50”.

Clearly, Rajan harbours a sense of scepticism about the current oil price, which he sees as symptom of just the kind of market instability that could sink the best laid plans. This year’s budget bets big on the sustenance of these happy conditions. A hedging of bets is apparent in the deliberate effort to build up the country’s foreign exchange reserves, which today stand at $ 340 billion. But the global economy is on a knife edge. And for an Indian economy that is today more exposed than ever before to global instability, there is a multitude of sources from where trouble could emanate.

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