The Budget’s Dilemma (GS Paper 3, Economy)
Introduction
- The political context of the upcoming Union budget is markedly different from the previous decade.
- The ruling party's interpretation of the fractured election verdict and its perceived chances in upcoming state elections will likely influence the budget's focus.
Doubling Down on Welfarist Measures
- State Approaches: States like Maharashtra and Haryana are implementing measures such as monthly cash transfers to women, free bus rides, and filling government vacancies.
- Revenue Relief: The government's revenue constraints have eased with the RBI transferring a larger-than-expected surplus.
- Utilization of Surplus: How the surplus is utilized—whether for welfare, capital spending, or reducing the fiscal deficit—will reveal the government’s stance on the political landscape and economic condition.
The Growth Numbers Hide Big Questions
- Growth Concerns: The 8% growth rate raises questions about robustness and distribution.
- Government Spending: The Centre’s fiscal deficit at 5.6% of GDP highlights that government spending is a key economic driver.
- Employment Issues: An increase in self-employment, often involving one-man shops or unpaid household work, signals a weak labor market.
- Youth Challenges: Stories of youth engaging in day trading and night gaming reflect underemployment and the impact of high food inflation.
Limits of Welfarism in Attracting Votes
- Election Results: The recent election results question the effectiveness of welfarism in swaying voters.
- Structural Issues: Governments face the challenge of structural transformation, inadequate job creation, and deepening labor market duality.
Stagnant Manufacturing Sector Despite PLI Scheme
- Approach: The government’s strategy to boost manufacturing through tariffs and the PLI scheme has had limited success beyond the mobile phone sector.
- Manufacturing Share: The sector’s share of GDP has stagnated at around 17% for two decades.
- Trade Policy: A contradictory approach of raising tariffs while seeking to join global supply chains and trade deals requires reevaluation.
Subdued Private Investment
- Corporate Investment: Despite fiscal incentives, corporate investments remain subdued.
- National Champions: Emphasis on national champions may not significantly impact investments or job creation.
- Broader Investment Base: A broader base of companies is needed to drive the capital expenditure cycle.
- Current Sentiment: Despite healthy bank and corporate balance sheets, caution prevails over optimism in the private sector.
Current Account Surplus and Investment Implications
- Surplus Misinterpretation: The current account surplus in the last financial quarter is not ideal for a capital-deficit country like India, indicating that domestic savings exceeded investment.
Diverse Growth Stories in the Economy
- Consumption Demand: Weak labor markets and subdued investments imply overall consumption demand remains weak.
- Affluent Spending: Higher spending by affluent segments contrasts with muted FMCG growth, low two-wheeler sales, and a collapse in entry-level car markets.
- Market Segmentation: High-end car sales and premium real estate are thriving, reflecting a splintered domestic market.
Conclusion
- The upcoming Union budget presents a challenge for the Modi government.
- Coalition partners will demand their share, and the coalition government may avoid radical reforms.
- Election results will drive introspection on economic policies—whether to focus on more welfarism to attract votes or to prioritize job creation.
- Only time will reveal the government's lessons from the election outcomes.
