Good times, but not just yet

Finally, we have been presented the first Budget of the Narendra Modi Government. Since he had largely campaigned on economic issues — vikas or development — there has been much speculation on what the Budget would contain. Without doubt, the Budget places before us a pleasing vision for the country. However, in its intent to address the immediate situation, namely, revive growth and lower inflation, it leaves one less impressed.

The Finance Minister’s vision for India is inclusive. He has covered agriculture and manufacturing, the small enterprises and the multinationals, and the young, women, scheduled castes and religious minorities. This is worth emphasising, given that there was an apprehension of the BJP’s commitment to such a vision.

There is to be urban infrastructure in a hundred ‘smart cities’, including modern sewerage, public transport and drinking water. And this is to be in place by 2019. There is to be ‘total sanitation’ too by then, and low-cost housing for the poor, though no timeline has been stated.

This appears an audacious plan given the public sector’s record in India, but no one would quibble that it is of utmost relevance to the country. Then there is to be an agricultural-infrastructure fund, and school infrastructure and teacher training are to receive more money.

Interestingly, no major trimming of subsidies has been announced. On the other hand, some redesign of existing schemes has been proposed. Accordingly, the public distribution system is to be overhauled and the MGNREGS reworked to focus on the “creation of assets” targeted on “agriculture and allied activities”. We have not been given a preview of the Government’s approach to consumption subsidies such as on oil and gas though we have been told that there will be better targeting of the PDS. Clearly, a trimming of subsidies, either for ideological reasons or for making fiscal space for investment, is not this Government’s intention.

But the Finance Minister has not presented any clear-cut strategy. Jaitley said early on in his speech that “poverty is a reality”. The Prime Minister stated early on in his tenure that his will be a government that works for the poor. The question is: How good is a plan for the future if we don’t know how to get there?

Here, the Budget’s public finances are obscure. Fiscal consolidation and the inherited targets are to be adhered to. But if revenues don’t increase while the subsidies remain untouched, the financial wherewithal for the vision can be questioned.

In a sense, the Finance Minister has given us the terms on which his Budget should be judged by declaring what he considers the main goals for the economy. These are the revival of growth, the dampening of inflation, and the attainment of a “manageable” current account deficit.

As the last has been more or less achieved by his predecessor, it leaves only growth and inflation. Here we find ourselves to be less enthused. There is little in the Budget to suggest that growth will revive and inflation dampen because of its provisions.

There is sufficient reason to believe that growth slowed along with the substantial reduction in public investment since around 2008. The slowdown has also been aided by the contractionary monetary policy. The Reserve Bank of India itself justifies its policy by referring to the persistently high inflation of the past three years or so. And overall inflation has been high because of the acceleration in food-price inflation. For this to be addressed, policies more direct than provided for in the Budget are required.

Essentially, there is a need for a substantial public investment hike. Why does a scaling up of infrastructure require more public investment? That is because much of infrastructure is in the nature of a public good. Public goods are accessible to all free of cost, and hence the private sector has no incentive to produce them. Publicly-provided infrastructure has the potential of stimulating growth and dampening inflation to an extent.

To understand this, think of capital formation in agriculture. It can raise productivity levels and thus growth of output, which simultaneously has the effect of dampening prices by increasing supply. Public capital formation in agriculture has been declining in real terms for close to two decades now, and private investment has not replaced it. Closely monitored irrigation is going to be increasingly important even for the future as climate change accelerates. So we see how increased public investment can help in the present with accelerating growth and decelerating inflation.

Greater public spending on infrastructure would have been in line with the BJP’s announced concern for the poor. The building of infrastructure contributes more to generating jobs than any other public policy.

We are yet to have a clear idea of how much more the Finance Minister intends to spend on infrastructure this year and how he plans to allocate it. But we know of two things for sure.

Some forms of infrastructure impact the poor more closely. For instance, in an economy of the self-employed, direct producer services such as water, electricity and waste disposal matter most, certainly more than airports, convention centres and bullet trains. Second, apart from the public good aspect, we have evidence that the public-private partnership mode is unlikely to be very effective here. This is the evidence from 10 years of the UPA government.

If there is a strategy in this Budget it appears to be to kick-start investment by extending allowances to the private sector. In the current situation, that is unlikely to have great success. The Finance Minister has expressed some scepticism about the role of the PPP mode but his own chosen strategy for infrastructure provision is flawed.

He speaks of getting the banks to lend for infrastructure construction. Banks are not suited to this task as their liabilities are short-term. Public investment can make the difference by crowding in the private through raising aggregate demand and facilitating production. This would be an instance of win-win.

The writer is professor, Centre for Development Studies, Thiruvananthapuram

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