Finance ministers have to do a bit of tight rope walking during every budget presentation. The task becomes even more difficult as elections approach. At a time when the ruling party is about to face a series of state assembly elections this year and early next year and has to face the general elections by mid-2019, Finance Minister Arun Jaitley has tried to perform a balancing act in his budget for 2018-19, addressing the ruling establishment’s political needs while not letting public finance slip out of control. He has not only made substantial commitments to give a fillip to the rural economy but has also flagged off an ambitious National Health Protection Scheme to provide health insurance coverage of Rs 5 lakh each to 10 crore poor families. In a change of priorities, the budget has allocated more resources to the social sector, including health, agriculture, and education, with the avowed objective of helping the economically weaker sections and women.
The intent is laudable. But the trick lies in how the Modi government plans to meet these spending commitments. All budgetary arithmetic is based on assumptions. The government seems to have assumed that economic growth in the next financial year could be at its highest since 2014, with a concomitant rise in revenues. Income tax collections are budgeted to increase at nearly twice the growth rate of the underlying economy, and indirect taxes could do well as the economy recovers and the new Goods and Services Tax (GST) system settles down. If these assumptions go awry, given the level of spending committed, the economy could go into a tailspin. A failure to pass the fiscal consolidation test could lead to the central bank raising interest rates. Already, sovereign bond yields have spiked to their highest since June 2016, boding ill for the government’s borrowing plans and interest payments. A hardening monetary policy could choke the nascent economic recovery.
Some of the measures announced in the budget in the quest to double farmers’ incomes and create jobs have proved inefficient in the past. For instance, the government has announced that it will ensure that farmers get at least 1.5 times their cost of production through the minimum support price (MSP). This has been tried repeatedly in the past without success due to inefficiency and corruption in the state procurement system. Again, there is no innovative proposal to spur job creation, the government’s single biggest failure so far, despite the numbers it claims. It is doubtful if the government decision to contribute 12% of the wages of new employees in the form of provident fund contributions for all sectors will alone do the trick to encourage massive hiring. Despite its promises, the budget lacks the conviction and capacity to fulfil them on the ground.