Over a century ago, British economist Alfred Marshall said economics meant political economy. What he said was not as clear then as it seems today. Autocratic communism that saw “politics itself as economics’’ collapsed in half a century. Globalisation, which perceived “economics as a global market”, had a cerebral haemorrhage in under a quarter century. These economic doctrines that dominated the world for a whole century are being reduced to a footnote in contemporary economic history.
The recent collapse of the global supply chains that threatened to integrate the world without borders, have left economists and statesmen bewildered. This is where Alfred Marshall’s concept of political economy, a mix of national economics and national politics, seems to be emerging as the alternative to globalisation. The proportion of economics and politics in Marshall’s idea of political economy varies from country to country. And India is no exception to this trend.
Since 2014, the Modi government’s economic mix has had a greater share of economics than politics. It was the other way round in the second half of the United Progressive Alliance (UPA) dispensation. The budget presented last week by Finance Minister Nirmala Sitharaman seems to extend Modi’s model of economics that predominated politics in his own majority rule, into his alliance rule also.
Balancing the mix
In democratic countries worldwide, there’s a clear trend towards politically-driven economics that provides not just subsidies but even sustenance allowances to people. Studies show that even in the most liberal and open America, due to politically-driven economics, a majority of Americans are beneficiaries of government handouts in some form or the other. Given this background, the question is what is a politically-driven budget and an economically-driven one?
A politically-driven budget prioritises current populist demands over future growth spend. An economically-driven budget, conversely, resists popular demands to spare the resources for future growth. Since the 1950s, our budgets have taken three distinct forms. Until 1990, under the socialist planned economy, our country’s budgets focused on export-import production controls, taxes and central bank financing.
After the advent of liberal economics in the 1990s, the focus shifted to stock markets, foreign investment, and liberalisation of production and free trade. But over the last 15 years, our economy too has begun to fall in line with Alfred Marshall’s political-economic hybrid. The second half of the UPA budgets had less economic drive and more political drift.
The Modi government’s budgets have had more economic drive and less political drift. The UPA’s politically heavy, economically light budgets slowed the growth. In contrast, the Modi government’s more economically heavier budgets triggered higher growth. This impact is tellingly reflected in macro data.
Undeniably, the growth during the decade of Modi’s rule has been manifold as compared to the UPA regime. The phenomenal growth was achieved by a substantial increase in development spending by the Modi government.
In this context, it’s crucial to examine whether the current budget in the coalition government continues Modi’s 10-year economic growth pattern or are there changes.
Continuing development spend
There’s a thumb rule to assess whether a budget is economically driven — read growth oriented — or not. That is, whether the government borrows for development spend or non-development spend like freebies and subsidies.
In the current budget, the total development spend is `15 lakh crore. The Modi government plans to borrow a total of `16 lakh crore this year. It means that 94% of the borrowing is for development. Clearly, the Modi government borrows for development only. This is a significant shift from the UPA rule, which was the other way round.
In the 2013-14 budget, the UPA government borrowed Rs 5.42 lakh crore, out of which only 3 lakh crore (55%) was for development and the balance Rs 2.42 lakh crore was for non-development, including freebies and subsidies. That Modi’s current budget is more economically and less politically driven is self-evident.
There are of course elements of coalition politics in the budget allocations for Andhra Pradesh and Bihar. But they are fundamentally on development spending. In Andhra Pradesh, the Telugu Desam Party government had invested thousands of crores of rupees in the Polavaram project and the new capital, Amaravati.
The Jagan Reddy government, which came to power later, virtually scrapped these projects and made the investment wasteful. The budget has allocated Rs 15,000 crore to give life to the two projects, which are not Andhra projects but the nation’s as well. The Rs 12,500 crore allocation for flood control and irrigation projects in the Kosi-Mechi Link Project in Bihar is also a development-oriented allocation.
Core themes
The finance minister highlights four core themes of the budget: employment, skill development, MSME sector, and middle-class-oriented scheme. For generating employment in the formal sector, which is the first theme, a three-pronged approach has been spelt out: one, the government will cover the first month’s salary for new employees. Two, for businesses creating new jobs, the government will pay two years of provident fund contributions. Three, in the manufacturing sector, the government will cover four years of provident fund contributions for new employees and also employers. These initiatives are projected to create three crore jobs, mitigating the unemployment among the educated.
The second theme, skill development, talks of upgrading 1,000 ITIs, to train 20 lakh people in five years, and educational loans to 1.25 lakh students. The third focuses on MSME development, featuring government guarantees for unimpeded bank credit, directives for banks to lend on inhouse appraisal without rating agency certificate, a special government fund to prevent MSME failures in times of stress, and increase in middle-level loan ceiling amount under the Mudra scheme from Rs 10 lakh to Rs 20 lakh.
The fourth unburdens the middle class with an annual tax relief of Rs 17,500, also proposing loan facilities for overseas education with a near term Rs 10 lakh crore housing scheme for one crore urban middle-class.
The success of the proposals is undoubtedly dependent on how well they are implemented. The Modi government’s track record in implementation of more difficult projects inspires confidence that these doable schemes will be achieved.
Other key aspects
As the finance minister has kept the focus on the four core themes in the light of the perception that the government had not taken the educated youth unemployment issue head on, some crucial aspects of the budget have been less prominently featured.
Beyond the four core themes, the budget contains significant near term and long-term elements. The proposal to create 10 million certified natural farmers with marketing chain structures is a futuristic idea. Allocation of Rs 11.11 lakh crore for infrastructure development, in line with Modi’s decade old infra thrust, is crucial for successful job creation and also for the success of other schemes. Infrastructure has been the foundation of Modi’s growth strategy since 2014. It did set off high economic growth.
Because of the growth focus, the finance minister hasn’t ignored the stressed groups. The rural employment scheme (MGNREGA) allocation has increased by 60% from Rs 60,000 crore to Rs 86,000 crore. The free cooking gas scheme allocation has seen a tenfold increase from Rs 180 crore to Rs 1,800 crore. The free food grain distribution programme initiated during the 2020 COVID-19 pandemic continues, benefiting the underprivileged.
Seedling for future
There are other long term futuristic elements as well in the budget. India has signed the global agreement committing to fulfil climate control guarantees by 2070. This requires reducing thermal power usage and pollution for which clean power through nuclear and solar energy is the dominant supply side alternative.
India is committed to invest in these alternative energy sources with the next generation in mind. This will yield no direct advantage to the party in power in the coming elections.
The budget has initiated a far reaching programme for the research and development of small nuclear power plants. It is something akin to a grandfather planting a mango seedling for his grandchild — a long-term vision that political parties focused on short-term electoral gains will bother less about.
The allocation for the nuclear sector has been upped five-fold from Rs 442 crore last year to Rs 2,228 crore. Solar power allocation has been doubled from Rs 4,970 crore to Rs 10,000 crore. Semiconductor industry, the futuristic technology, has seen its allocation double from Rs 3,000 crore to Rs 6,000 crore. Research and development funding has increased from Rs 840 crore to Rs 1,200 crore. Most of these allocations are investments for the gen next.
To end, this budget has not drawn any unusual criticism even from the hostile opposition. Even P Chidambaram has only claimed that the Modi government has “stolen” the Congress plans. Rahul Gandhi tweeted his usual political criticism, calling it a “budget to stay in power”.
Apart from routine political accusations, no major economic flaws have been pointed out by anyone, including the opposition. Indeed, it is a budget in which economics predominates politics.
S Gurumurthy
Editor, Thuglak Tamil Magazine. Chairman, Vivekananda International Foundation Strategic Think Tank