It has been just about two months into the tenure of the National Democratic Alliance government. The size of the NDA’s victory must have taken everyone by surprise. Even its principal architect, Narendra Modi, must have been very pleasantly surprised that the Bharatiya Janata Party was able to win an absolute majority of seats in the Lok Sabha. However, Modi himself was largely responsible for the scale of the victory. He has acquired a larger than life image of being a go-getter, one who is an effective leader who can turn around even the most moribund of economies. This reputation was built largely around the performance of the Gujarat economy, which has been amongst the best performing states in India for well over a decade. Although some economists have pointed out flaws in the development of the Gujarat economy, a sizeable majority have come to believe that better days are just around the corner when Modi is at the helm. Certainly, the entire corporate sector had come to believe that a pro-business prime minister would soon implement market-friendly reforms and revive the economy.
What grade can we award the Central government on the basis of its performance in these two months? Have Modi and the NDA government lived up to expectations? The government started with a bang, raising petrol and diesel prices within days of assuming office, and asserted that it was not scared of taking hard decisions. The railway budget was a disappointment, with passenger fares being left unchanged — this when the railways incur substantial losses on running passenger trains. Several new investments were announced. Unfortunately, how these were to be financed was left unclear. The only clear signal emanating from the rail budget was that the government is not averse to foreign direct investment.
Of course, the main policy statement of the government so far has been the general budget. Apart from the die-hard supporters of the BJP, virtually everyone has felt a sense of being let down because the budget has been so tame. Arun Jaitley, the finance minister, has presented a budget whose underlying philosophy does not seem very different from that of the United Progressive Alliance government. Moreover, there is no major reform or even a firm indication of the kind of reforms that the government will push through in the immediate future. The closest substitute for reforms is the announcement that the government intends to set up an Expenditure Management Commission to look into possible expenditure reforms.
In terms of the macro aggregates, the budget is very similar to the interim budget presented by P. Chidambaram earlier in the year. Jaitley has made small concessions to income-tax payers and also reduced excise duties on some intermediate products in order to boost the competitiveness of domestic producers. His projection of total tax revenue is surprisingly high. It would be a miracle if the revised estimates released next year match up to the budget estimates. Similarly, Jaitley’s assertion that he would be able to restrict the fiscal deficit to 4.1 per cent of gross domestic product also seems to depend on rather dubious assumptions.
Perhaps the main message which comes out of the budget (consistent with the rail budget) is that the government will increasingly depend on foreign direct investment to bridge the huge and yawning gap between investment requirements and domestic savings. The BJP is still averse to FDI in the retail sector. However, it has taken a pragmatic approach and raised FDI limits in sectors such as insurance, defence production and realty.
Another key plank of the budget seems to be its reliance on public-private partnerships. The budget actually sets aside a sum of Rs 500 crore to set up an institution that will help facilitate PPP projects. Of course, both FDI and PPP projects are important and useful sources of additional funding for crucial investment projects. However, it is one thing to explicate the importance of PPP projects and quite another thing to implement steps that will induce private partners to invest in these projects. Unfortunately, the budget speech does not mention any concrete measures that are proposed to be implemented in this context.
Perhaps the most intriguing issue is the government’s attitude to the social sector. In particular, will the government continue to pursue the UPA-type policies of redistribution with growth or will it lean towards the trickle-down process in which sustained growth is supposed to alleviate poverty? The government has been more or less silent on this issue. The budget itself makes provision for all the major schemes such as MGNREGA and the food security bill. A recent news item also reports that the government intends to use Aadhar to implement the direct benefits schemes in the pilot areas. Presumably, this means that at least in the short run, there will be no major shift in emphasis between growth and redistribution.
Has the government missed a trick or two by being so cautious, almost timid after the initial boldness that it displayed by raising petroleum prices? One could argue that the government is here to stay for five years, and so it can afford to wait for some time, to take stock of various options before rushing to implement any package of reforms. However, there is at least one reason why reforms which are likely to be unpopular in the short run should be made early in the tenure of the government. Voters typically have short memories and are unlikely to remember what happened four or five years ago — it is the present that counts. From this perspective, it makes sense for the government to bite the bullet now, to slash subsidies to the upper income groups by increasing fuel prices, reducing the quota of LPG cylinders, and so on. These will bring long-term benefits but will raise the current cost of living. The government can reduce the resultant unpopularity by blaming the UPA government for the current state of the economy — an excuse that will soon become unavailable.
Two months pass quickly and the honeymoon period is not over. Most unbiased observers have adopted a wait-and-watch policy. But the public mood may be less sympathetic if the economy takes a turn for the worse. This may happen, for instance, if the effects of the subnormal monsoon are poorer than is predicted at this time. This could result in significantly higher prices and lower levels of economic activity. The government will then have much less room to manoeuvre. Certainly, fire-fighting will then occupy much of the government’s attention, and bold initiatives may well be pushed back to more propitious times. This is one more reason why a more pro-active policy-making is called for, and now.