It was expected to deliver on its promises of pro-growth, pro-business reform, issues that are of considerable importance to its urban, middle-class core constituency. The financial media in India, which draws its viewership from the same constituency, had warned that this would be a ‘make-or-break budget’ for the government.
Yet the government did not present a budget of headline-grabbing, big-ticket reforms or corporate welfare schemes. Instead, it stuck to maintaining fiscal prudence, restoring sectoral balance and acting as a facilitator rather than driver of the growth process. The budget demonstrated good policy and good politics, which is not always the case. Even the critics of the current government termed it, in what might be construed as a reluctant complement, a ‘UPA III Budget’ — UPA I and II being the terms used for the two Manmohan Singh-led governments that preceded it.
To appraise the current budget, it is important to understand its context. There are two main challenges facing the Indian economy in the short run. India is witnessing high GDP growth of over 7 per cent in a gloomy global economic landscape, but the business sector has been sceptical of these numbers. As a result, they have been reluctant to make new investments. This problem is compounded by fear that the banking sector may be carrying too many non-performing assets on its books, making it reluctant to advance credit.
The Indian agricultural sector, on which nearly half of the population depends for its livelihood, has had a string of bad years due to low rainfall. This has raised questions over the sustainability of consumer demand, which is important for economic growth especially in light of the weak global outlook.
Given this background, it was argued by some experts that the government should follow the Keynesian prescription and expand government expenditure, even if this means running a high fiscal deficit. But the finance minister chose to keep his commitment of limiting the fiscal deficit to 3.5 per cent of GDP. This has put the ball back into the Reserve Bank of India’s court to stimulate the economy using interest rate cuts.
Direct incentives to the private business sector were relatively small — a tax cut here, an exemption there. Similarly, the government did not raise its allocation earmarked for bank recapitalisation, much to the disappointment of financial markets. Instead, the government chose to rationalise the tax regime and focus on improving ease of compliance.
Rural and agricultural sectors were the focus of government expenditure. The government has announced ambitious programs to extend electricity use in rural areas, improve irrigation and construct new roads. Even the national rural employment guarantee scheme, the main plank of the previous government’s pro-rural redistributive policy, was effectively co-opted by the current government, which has increased that program’s allocation by a whopping 11 per cent.
The budget has taken a set of small steps towards broadening the constituency for pro-market reforms. One concern has been that the fruits of economic reform are confined to the educated, urban, upper-caste niches. This poses the risk of an anti-reform backlash. The budget tries to address this by expanding access to markets for a broader section of the population and by creating a safety net to compensate those left behind.
The budget has created a crop insurance scheme for farmers and extended health insurance coverage to poor families. It has sought to integrate regionally dispersed wholesale grain markets by creating an electronic trading platform. These measures will help pave the way for a more dynamic and market-oriented agricultural sector.
In the manufacturing sector, the budget has allocated resources to develop vocational training and certification to bolster skill formation. There are schemes to foster entrepreneurship, especially among the lower castes that are as yet to receive their fair share of the benefits of economic reforms.
The current budget, like those in the recent past, has taken incremental steps towards economic reform while trying to broaden support for it. This approach may disappoint the pro-reform lobby and make the government look weak in comparison to its campaign promises. But, out of political necessity, it has placed the country on a path of prudence — and India will be all the better for it.
Mandar P. Oak is Associate Professor at the School of Economics, University of Adelaide.