A Budget in challenging times

This year’s Budget was made in one of the toughest environments. There are both domestic and foreign constraints.

The only question before the Finance Minister, apart from procedural and allocative changes, was how to increase consumption. She had to do it without giving up too much tax revenue and give growth a chance by changing the mood in the country.

In the event, she has produced a Budget that will not achieve this objective in the measure required. Only three Budgets in the last 40 years have managed to do that, in 1985, 1992 and 1997.

The Modi government had a golden opportunity this year to do the same thing but the suit-boot ki sarkar Congress jibe of 2014 still rankles. So it has once again avoided a sensible but politically hard decision. It has refused to take any political risk.

The Finance Minister said “For someone earning ₹8 lakh, this means an additional ₹1 lakh to spend; for those earning ₹12 lakh, nearly ₹2 lakh more; and for those with an income of ₹24 lakh, about ₹2.4 lakh extra.”

She has, if I may, put fuel in two wheeler tanks when it’s the four wheelers that need refuelling.

She has doubtless reduced the tax burden for a lot of people. But these aren’t the spending classes. They save more precisely because they are middle class. That plus the fact that it’s not as if they will spend only on things. Chances are they will spend more on school and doctors fees.

The Finance Ministry is unable to build sociological factors into its budgets. There is a much greater dependency ratio now comprising the young and the old and the unemployed. There are also a lot more fixed costs like transport, communication and entertainment that keep increasing.

Also, spending and consumption are as much about money as about aspirations. And that’s where the idea of marginal propensity to save comes in. It tells us how much of an extra rupee of income will be saved.

For the Indian lower middle class it’s very high, certainly more than 0.50. A high MPS isn’t a bad thing provided the savings are originating in the upper end.

Bad policy

The other extremely worrying bit is the about turn on PSUs. The BJP was all for dismantling it and had even come out with a policy a few years ago. But now thanks, I am certain, to RSS pressure, the Modi government has chosen to throw good money after bad.

The Budget says nearly ₹15 lakh crore will be thrown away. Not all of it will be wasted of course. But a third will be, you can rest assured. This is welfare by other means.

For a government that’s desperately in need of money the correct policy is to sell off the land of deadwood units while continuing to pay the few remaining employees till the end of their lives. The employees have a right to livelihoods, not assets of the companies they work for.

Apparently there are technical difficulties in that many of these units stand on land for which there are no extant papers. Most were leased — read donated — from state governments. But surely this is not an insurmountable problem especially if an arrangement for sharing the proceeds of the land sales is arrived at.

But as always the Modi government which is never afraid of tough political decisions — 370, triple talaq, wakf, CAA — gets cold feet when economic decisions are concerned. Clearly, when decisions that affect Muslims are concerned the RSS approves but not when economic ones have to be taken.

The good bits

That said, there are a lot of good changes, too, that aim to please different segments of the voting public and spend money where it should be spent. But the most important bit is that, for the first time since 1997 the Budget explicitly tries to please the middle class.

About time, too, since this is the class that pays income tax. But let’s also not forget that maybe only 10 per cent of it does. Indeed, if 100 per cent of agricultural income is not taxed, 90 per cent of income that would qualify as middle class income isn’t, either, at least not by the government. But many of these people do pay an informal tax to the tax inspectors.

Last but not least, while everyone is complaining about the Budget largesse to Bihar, let’s not forget the election in Delhi on February 5. A very large number of the beneficiaries of the tax announcements live in Kejriwal’s constituency. That’s what I like most about this Budget.

He is facing anti-incumbency anyway. The tax reliefs may well be an insurmountable challenge. Worse, he can’t complain to the Election to Commission because the tax relief is not specific to his New Delhi constituency.