Nightwatchman’s Budget ahead of elections

Why has the government not done anything to alleviate the pain of this K-shaped recovery? There can be only two logical answers to this question. Either the government is convinced that there is no such crisis, or it does not see the need to act immediately on these concerns

The 2023-24 Union Budget will go down as the most unsurprising and matter-of-fact budgets in the history of the Narendra Modi government. The government has retained its focus on capital spending. It has continued with a conservative stance in growth estimates for the economy. And last, but not least, it has displayed a strong commitment to fiscal consolidation with clear assistance from a reduction in welfare spending. The reduction in welfare spending — primarily on account of a ₹90,000 crore reduction in food subsidy — was announced before the Budget. The Economic Survey dropped more than a hint to suggest that capex and fiscal consolidation would continue to be the focus of the Budget. More than anything, this Budget suggests that the government is firmly in control and does not see any reason to deviate from its larger macroeconomic strategy where public capex will crowd in private investment and lead to a sustained improvement in India’s economic fortunes in the run-up to the centenary of India’s Independence in 2047.

Much is written about India being the fastest growing major economy in the world. However, a 6%-7% Gross Domestic Product (GDP) growth for a country like India is nothing to boast of, given the larger challenge of improving living standards. (Santosh Kumar/HT Photo)

What, if one may ask, is the driving political economy motivation behind the Budget? Let us take the economy first. Much is written about India being the fastest growing major economy in the world. However, a 6%-7% Gross Domestic Product (GDP) growth for a country like India is nothing to boast of, given the larger challenge of improving living standards. Where the government can take legitimate credit is in the fact that it has managed to steer the economy through three back-to-back crises, namely the pandemic, the war in Ukraine and the monetary tightening in advanced economies, without even reaching a position where India’s macroeconomic stability, domestic and external, appeared to be fragile.

This task was achieved on two key pillars. First, the use of past economic buffers of forex reserves and food grains. The rollback on the food subsidy and the fiscal front is aimed at replenishing these buffers. The second pillar of preserving macroeconomic stability was using the political capital of the ruling regime, especially the prime minister, to pass on significant pain of these shocks to the electorate rather than the fisc. That India did not announce a large fiscal stimulus to alleviate distress in the wake of the pandemic — the handouts were focused on ensuring basic needs, such as food security — and passed a significant amount of the petroleum price hike to domestic consumers is proof of the latter. Would any other regime have managed to cut its political losses to the extent the Bharatiya Janata Party (BJP) has been able to if petrol and diesel were selling above ₹100 per litre and LPG cylinders above ₹1,000? The fact that the BJP did not suffer electorally shows that the strategy has worked so far (more on this later).

The only other question is whether the government’s economic strategy will work, and more importantly, work for it in time for the 2024 elections. There is more than enough reason to be sceptical on this count. Many independent economists have been pointing out that even though the Indian economy has made a complete recovery from the pandemic’s shocks as far as GDP is concerned, the nature of the recovery has been K-shaped. This means that the have-nots, both firms and households, have fallen even further behind the haves in what was already a very unequal economy. This is problematic in terms of the morality of economic policy and also potentially corrosive to the long-term growth prospects of the economy via a weakening of the consumption demand engine. While conclusive proof or rejection of this argument will have to await the publication of consumption expenditure statistics, various statistics such as qualitative scarring in the urban labour markets, weakness in rural wages, and consumer sentiment continuing to be negative raise enough anecdotal red flags.

Why has the government not done anything to alleviate the pain of this K-shaped recovery? There can be only two logical answers to this question. Either the government is convinced that there is no such crisis, or it does not see the need to act immediately on these concerns. The latter is more likely to be true. The BJP will perhaps wait for the election results in Karnataka, Rajasthan, Madhya Pradesh and Chhattisgarh to evaluate the political fallout of economic well-being (or the lack of it) of the poor who matter the most in elections. If the results do not support its current assumptions and it sees significant vulnerabilities in the 2024 general elections, next year’s interim Budget, like 2019’s, will open the floodgates for relief and populism. This is why this year’s Budget is best described by borrowing an analogy from the game of cricket. It is a nightwatchman.

The views expressed are personal