This Article is From Feb 29, 2016

Opinion: The Neo-Middle Class Is Not This Budget's Favourite

Unless you are a political partisan trying to play to your gallery, ordinary budgets will be "middle-of-the-road", with some good, some bad and many "time-will-tell" type of things.

Good and bad here refer to fiscal values: like keep costs down, spend efficiently, share burdens equitably and focus on outcomes. Obviously, what is fiscally good is often politically not-so-good, and vice versa, because of our lopsided tax base. If taxpayers form a small fraction of the overall population, then the chances are that the democratic governments will aim to achieve political goodness whenever it clashes with fiscal goodness.

So is it with the Union Budget 2016 that Finance Minister Arun Jaitley presented in parliament today.

Two years into its term, the Narendra Modi government appears to have settled into the realities of the Indian economy, having to make its peace with longstanding constraints, and having to demote some of the more aspirational ideas it talked up during the 2014 election campaign and thereafter. The commitment to maintaining the fiscal deficit at 3.5% of the GDP and initiating budgeting reform by eliminating Plan/Non-Plan distinction indicates an overall sensibility. How the fiscal deficit will be achieved - at a time when the global economy is in the doldrums and the Indian government's revenue earnings look uncertain - is all important.

Will we see greater taxation in the form of unholy cesses this year or higher rates next year? Or will we see an attempt to be make "minimum government" more than the captivating slogan that it has been thus far?

The Modi government has clearly responded to the deepening of problems in rural India by focusing a significant part of the budget on it. This is a good thing and no one can begrudge a government for changing focus in order to attend to a potential crisis. What it could have done, but didn't do, is to use the opportunity to break away from old methods of addressing rural and agricultural distress. The old methods - subsidies, loan waivers and NREGA - are more painkillers than actual cures, and a government with an unprecedented majority should have attempted reform rather than doubling down on the old. Rural roads, crop insurance, unshackling farmers from the oligopolies at APMCs are steps in the right direction, which this budget supports but should have done more of.

A connected problem is one concerning manufacturing jobs, ease of doing business, skills development and delivering decent public services in our cities. Rural distress can be ameliorated if people can move more easily to good livelihoods in cities, and between cities. Unfortunately, in its attempt to directly target rural distress, the budget has come away looking weaker in accelerating the medium-term and longer-term solutions to the problem. There seems to be few measures to support the expectations created by the Make in India initiatives. Setting up 1,500 skill development centres across the country, and lowering taxes for new units is fine, but unless Indian manufacturing firms can employ thousands of workers on an average (instead of the hundred or so now) our problems will worsen.

Not all of this can be done in a budget, but the budget did not do enough to signal, to pave the way for mass manufacturing to take off.

The budget has incentives for startups and infrastructure. On the other hand there concerns over the adequacy of the resources allocated for bank recapitalisation, the cut in capital allocations for defence and inadequacy of tax reform, among others. Pending deeper analysis, it does appear that the Modi government's focus has shifted from the aspirational neo-middle class that the Prime Minister wooed as a candidate, to more traditional constituencies like the rural poor.

Expectations were low for this budget. In a poll I conducted on twitter last week, about half the respondents indicated that they expected few reforms in this budget. Another 35% expected some reforms. Results of a subsequent poll I conducted today, after the budget announcements, were similar: 59% saw few reforms, 30% saw some reforms. The two polls suggest that the budget was slightly below the already low expectations.

Given the state of the world and domestic economies, it is important that the Modi government ensure that it achieves the explicit and implicit fiscal targets in the budget. It will find that unlike the past two years, it will have lesser room to manouevre, tighter political constraints and greater dissatisfaction among the public. As a government, it would do well to re-prioritise economic management instead of setting off on political and ideological wild-goose chases that risk consuming its time and energy. 

(Nitin Pai is director of the Takshashila Institution, a think tank and school of public policy. These are his personal views.)

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