Budget today: How far will FM turn populist?

The Indian economy appears to have absorbed the twin shocks of demonetisation and the hasty implementation of the Goods and Services Tax (GST) and is on course for healthy growth in the medium term. Essentially, this is what the Economic Survey 2017-18 says while listing quite a few parameters to show how the economy has been healing. The number of indirect taxpayers is up by 50 per cent, with 18 lakh new income-tax filers coming forward this year. Besides, there has been a large increase in voluntary registrations by small enterprises and an 18 per cent rise in direct tax collections. Therefore, despite the large-scale disruption to businesses and the economy in general, GST has led to greater formalisation and a wider tax net. This is surely good news.

Besides, the reversal in decline of exports and revival of manufacturing has meant that gross domestic product (GDP) estimates have improved. The Survey pegs current fiscal GDP growth at 6.75 per cent, ahead of the 6.5 per cent which the Central Statistical Office had estimated earlier. And next fiscal’s GDP growth has been set at 7-7.5 per cent, when India may once again become the fastest growing economy on the planet. Chief economic adviser Arvind Subramanian has not been taken in by incessant questioning about which of these two numbers the growth is likely to be closer to, and wisely so. There are too many imponderables as of now, and there’s not much point in sticking out one’s neck to be any more precise.

But alongside this good news, the Survey also states some harsh truths — that global crude oil prices are rising, there are impending challenges to agriculture due to rapid climate change and falling farm incomes, India is simply not harnessing its women power enough and stock markets are overheated. It also speaks of the twin balance sheet problem — weak banks and over-leveraged corporates — and warns of fiscal slippage due to lower-than-expected revenues. And while there seem to be more jobs in the formal sector than previously thought, job creation obviously still remains a big challenge for the government.

So will the Union Budget bring relief for the aam aadmi, businessman as well as the farmer on Thursday? The Budget, the last full-fledged one for the Narendra Modi government, will have to balance populism, growth and fiscal prudence. Since the finance minister will be pulled in multiple directions, there is no reading his mind on what will finally emerge on Budget day. Obviously, raising revenues will be a major priority.

Job creation ought to be one of the Budget’s top priorities. Though the government has taken some steps, a squeeze in the informal sector due to demonetisation hurt these efforts. The Survey notes jobs will remain a pressing medium-term challenge and job creation needs private investment and export growth. Around 1.2 crore people enter the labour market every year, but there simply aren’t enough jobs for all.

A return of the long-term capital gains tax is also possible this Budget. This may pause the sustained bull run seen recently, but the pause is likely to be temporary and the tax could anyway come with riders such as applicability on only future transactions and a longer timeframe for holding scrips. This levy will not just raise revenues but also help the government somewhat deflect criticism that it bats only for the rich. A recent Oxfam report said the richest one per cent of Indians account for 73 per cent of the total gain in national wealth last year. Taxing some of that wealth will surely be acceptable. Besides, with the Survey warning against the rich parking their funds away from real estate and gold, into the stock markets, this space must be closely watched. The proposal for lowering corporation tax to 25 per cent is also up for consideration.

Then, the Survey puts farm distress in perspective, saying that farmers’ incomes will likely be affected by 20-25 per cent due to climate change in the medium term as Indian farmers rely heavily on the monsoons. So where does this leave Prime Minister Narendra Modi’s vision of doubling farmers’ income by 2022? The Survey notes that agriculture GDP and farm revenues have stagnated in the last four years despite increasing production due to “a problem of plenty”, where farm revenues declined for several crops despite increasing production and market prices fell below the Minimum Support Price (MSP).

Farmers want better MSPs for all crops and more crops under MSP. They also want more measures for getting out of the debt trap — the state-specific loan waivers don’t seem to be working well. All these problems will surely figure in the Budget, which is widely expected to offer multiple sops to farmers.

Also, incentives on gender matters in the Budget appear likely. Not only is focus on the girl child a pet theme of the Centre, this will also make eminent economic sense. The Survey says fewer Indian women are working: 36 per cent or one in three a decade back but just 24 per cent or almost one in four now. Fewer working women means lower economic growth. The Survey says there are 63 million “missing women” and 21 million unwanted girls, underlining a grave development challenge that policies must address. Missing women, non-working women, women who continue giving birth in hopes of a son — how does all this affect the economy? The Survey says: “In developing countries, working women also invest more in the schooling of their children… Recently at Davos, IMF chief Christine Lagarde, quoting IMF research, said that women’s participation in the workforce to the level of men can boost the Indian economy by 27 per cent.” It thus won’t be unreasonable to expect a slew of gender-based incentives in the Budget, like some for employers to hire more women and others for women employees.

There is little doubt that this Budget day, the finance minister will take a pause on fiscal consolidation. What remains to be seen is how much slippage he will allow, and whether the Budget bows to populism over prudence.