It’s not really clear why we keep looking to successive Union budgets for significant economic policy changes. By now, experience should have taught us that we should neither believe the declared budget estimates of revenue and expenditure for the coming fiscal year, nor have much faith in the schemes and the outlays that are promised in the budget speech. Even so, we keep looking — perhaps because we realise that some unstated priorities and approaches are revealed at least through the actual patterns of resource-raising and spending.
In that context, three features of this year’s budget stand out — although none is particularly surprising. First, this budget will do little — if nothing — to address the central problems facing the Indian economy today: sharp increases in inequality leading to depressed mass consumption demand; related to this, a serious employment crisis reflected particularly in largely stagnant real wages, worsening conditions of self-employment and real distress in finding jobs, especially for the youth; all this then resulting in sluggish private investment, not just among corporates but also among micro, small, and medium enterprises that see much reduced possibilities of profitable economic activity.
Dealing with this would have required significant changes in policy orientation: more public spending in health, education, agriculture and rural development; proactive
employment-generation policies not just through genuine employment guarantees in rural and urban areas but also through a systematic package to create financial viability and access to technology for MSMEs; and greater, no-strings generosity to state governments that are also better positioned to make such changes on the ground.
It is obvious that none of these is likely to happen; indeed, the current budget makes moves in exactly the opposite direction. This relates to the second feature: the greater centralisation and politically partisan approach to state governments that is getting more extreme by the day.
The Narendra Modi government’s miserly — bordering on exploitative — attitude as well as its overtly partisan approach towards state governments has come out clearly in its fiscal policy. Tax revenues are constitutionally required to be shared with state governments according to a ratio and pattern determined by successive Finance Commissions. The 14th Finance Commission, chaired by Y.V. Reddy, recommended increasing states' share in the total divisible pool from 32% to 42%, to be implemented over the period, 2015-2020. Yet, the Centre has effectively managed to circumvent this by significantly increasing the share of cesses and surcharges on taxes which do not have to be shared with the states. This has brought down the share of tax revenues going to states to 34% in the last few years, which is also evident in the revised estimates of the current year.
At the same time, the Centre has taken decisions on taxation (like sharply reducing the corporate income tax rate in 2019, resulting in loss of tax revenues of more than 2% of GDP in the following year and probably much more in subsequent years) without consulting state governments. So states’ revenues are being curtailed by such Central policies without any compensation.
And now, this year’s budget reveals that when anticipated tax revenues are not received, the default choice of the Central government would be to cut Central transfers to states. The revised estimates suggest that net tax revenues going to the Centre are going to be lower than the budgetary expectation by as much as Rs 162,748 crore. So the response has been to cut down the 'Grants-in-aid' to state governments by as much as Rs 119,041 crore and reduce spending on Centrally-sponsored schemes by as much as Rs 121,772 crore — thereby even getting a tidy ‘surplus’ of more than Rs 78,000 crore to bolster Central finances. These reductions force state governments to take up the slack even when they face many legal and regulatory fiscal constraints and have given up most taxing rights because of the goods and services tax.
The Modi government’s politically partisan approach towards states, which has been evident for some time, has also been felt by states like West Bengal where MGNREGA funds were simply stopped for years. Other Opposition-ruled states have been denied Central funds even in the face of natural calamities. Meanwhile, the states are openly promised more funds if only their people choose to elect a ‘double-engine sarkar’ in a brazen denial of the basic principles of federalism.
This centralising tendency has become most evident recently in the law that effectively dismantles the rural employment guarantee programme by changing its character from a rights-based, demand-driven scheme available in all rural areas to one in which the Central government would decide when, where, and how much employment it would provide or whether it will allow greater capital investment and contractors. The new law, the Viksit Bharat-Guarantee for Rozgar and Ajeevika Mission (Gramin) Act, also requires state governments to bear 40% of the costs (compared to 10% or less earlier), which would make it financially impossible for most states to continue a part of the present level of employment in the scheme even if the Centre were to decide on it.
The budget has allocated Rs 95,692 crore for the VB-G RAM G. It is quite possible that other planned rural infrastructure works will be transferred to this scheme because capital-intensive, contractor-based works can also be undertaken. In addition, the Centre expects state governments to cough up an additional amount (equivalent to 40% of the total) to bring the total up to Rs 151,282 crore. This is impossible for most states, which are already facing huge financial pressures. It would thus be easy for the Centre to blame the states if the new scheme delivers less than that of the MGNREGA as is bound to happen. The promise of 125 days of work per household will obviously not be met. Yet it will be a win-win situation for the Centre. It can claim the scheme to be yet another gift from the leader rather than a right of the people and then blame state governments if the scheme does not deliver.
This devilish twist in the tail is very much a part of the third feature that emerges from this budget: the government’s fixation with optics rather than substance and its remarkable ability to control the public narrative — however far that narrative may be from the objective reality. All the public documents — most recently the Economic Survey and now the budget — are self-congratulatory in tone on account of positive assessments based on cherry-picked or manipulated data; there is an active denial of any unpleasant truth. This approach is terrible for good governance but effective if the real purpose is just to keep ruling.
Jayati Ghosh taught Economics at Jawaharlal Nehru University and is now Professor at the University of Massachusetts Amherst