Budget Impresses Markets, But No Relief For the Demonetised Poor

The dichotomy between the interest of finance capital and the needs of the social sector has never been starker.

Prime Minister Narendra Modi has decided that his government need not provide any immediate income relief to the tens of millions of farmers and informal sector workers who have been badly hit by demonetisation. There was talk of a Universal Basic Income but apparently no urgency to implement it. There was talk of providing some debt relief to farmers but the Budget refrained from doing anything about it. The stock market and global finance capital was impressed with the strict adherence to the fiscal road-map which again means additional resources for the social sector, urgently needed in the backdrop of demonetisation, remain in the realm of future promise.

The Budget announcements by finance minister Arun Jaitley clearly reflect Modi’s confidence that the aam aadmi would support the “bigger moral purpose” behind demonetisation ,which now guides various policy measures aimed at “cleansing the economy”.  Jaitley even refrained from levying an additional tax on gains from share market transactions, which Prime Minister Modi had clearly proposed a few weeks ago, suggesting the rich must sacrifice a little more to pay for redistributive justice.

So, this years’ Budget continues the trend followed in the past three budgets: make hyperbolic noise about radical scaling up of welfare programmes but continue to drastically under-fund various schemes. However, this is not an ordinary situation. If the prime minister thinks the large segments of the population hit by  demonetisation will be happy with the “moral cleansing” of the economy alone , then this will be tested in the upcoming elections in Uttar Pradesh.

The dichotomy between the interest of finance capital and the needs of the social sector is now so stark that market commentators sitting on business channels loudly celebrated the fact that there was no Universal Basic Income or farm loan waiver in the Budget.  And the fact that the government was not letting go of the fiscal road map was added elixir for the market. Never mind that  a Republican President in the US is now openly taking about fiscal expansion and welfarism to deal with growing inequalities in that country.

But finance minister Arun Jaitley and his chief economic adviser Arvind Subramanian have taken the position that India need not emulate the west in loosening the fisc as current global economic conditions carry risks for India. These risks, as outlined by the finance minister, predictably have to do with the need for continued global capital flows into India. Jaitley said the interest rate increase by the US Federal Reserve, higher oil prices and growing protectionism in the West pose a risk to India’s economy. Therefore macro stability, driven by a tight fisc, is of utmost importance.

So ideologically, macro stability is being seen largely from the perspective of finance capital flows. It is almost like saying that the hungry and the unemployed can wait till macro economic stability is fully in place. It is this logic that Modi has come to accept, after publicly indulging in the rhetoric that finance capital must be taxed to fund the poor.

The budget also delves at some length in Modi’s new moral project of formalising and digitising the informal economy. The Budget contains a broader framework to squeeze the informal cash economy further and force it into the taxpaying formal sector. There are various new provisions in the budget to force a  coercive transition of the informal economy into the formal system. Any cash payment of above Rs.3 lakh will invite 100% penalty, for instance. Are we to believe no cash payment of Rs. 3 lakh will henceforth be made by politicians or big business entities?

In Modi’s imagined moral framework the informal economy operates  unethically as opposed to the formal one which is ethical since it comes under the full gaze of state institutions and regulators such as the tax department, labour inspector, food inspector, environment regulator etc. But can these state institutions and their interface with the formal economy be described as great examples of ethical behaviour?

Apart from the hyperbole, buttressed with Hindi couplets, of creating a morally and ethically clean economy, the Budget hardly addresses the problem of the private investment famine which has gripped India for two years. The elephant in the room — public sector bank NPAs  and problem loans totalling over Rs. 10 lakh crore — remains unaddressed, though the Economic Survey admitted that the balance sheets of banks and big corporates (who owe massive debt) has worsened. The government doesn’t much talk of ethics and morality in this context. Banks have been provided Rs. 10,000 crore of additional capital when they need over Rs. 3.5 lakh crore.

Jaitley cites 37% growth in income tax in 2016-17 as unprecedented. It is equally unprecedented that financial year has seen two income declaration schemes — running into seven months — in which the tax department is using coercive methods to extract revenues. This can’t be deemed a normal year.

Jaitley says the negative effects of demonetisation will not spill over to the next year. However, the chief economic adviser warns in the survey that the risk to growth from demonetisation and other global factors very much remain in 2018. Arvind Subramanian puts the lower end of the range for GDP growth forecast at 6.75%  for 2017-18. This is lower than 6.9% GDP growth which the UPA had delivered in 2013-14 which was widely seen as its worst performance.

One is not quite sure whether Jaitely’s  budget fully comprehends the challenges that our economy faces from within and outside, complicated by events like demonetisation and the hugely disruptive GST which is on the horizon. And all of this starts looking even more surreal when seen against Modi’s shudhi yagna.

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