Govt keeps fiscal gunpowder dry

There are no big-bang populist announcements to swing the election. The government has reiterated the fiscal glide path to lower its deficit to 4.5% of GDP by 2025-26. It has stuck to its narrative of India becoming a developed country by 2047, and left any major reform announcements to the final budget in July, which the minister said she is confident the BJP government will be presenting. 

What explains this confidence of India’s ruling political party? The best way to answer this question is to go back five years in time.

This year’s interim budget could not have been more different from the 2019-20 interim budget of the previous BJP government, both in terms of the political and economic environment. 

The Narendra Modi-led BJP had lost the election in Madhya Pradesh, Rajasthan and Chhattisgarh in December 2018 to what was looking like an increasingly resurgent Congress party. Memories of economic pain and political anger because of demonetization, and teething troubles on account of GST were still fresh. 

The economy, especially the informal sector, had also lost a lot of growth momentum and the farm sector had suffered a significant worsening in terms of trade due to a collapse in farmgate prices.

Fast forward five years and the Congress looks like a lost and isolated political party. Opposition parties are fighting each other rather than taking on the ruling party. 

Also, the BJP performed very well in the recent state elections, and the economy seems to be in a goldilocks situation of high growth and reasonable inflation.

This budget’s tone is in keeping with a document released by the office of the government’s chief economic advisor V Anantha Nageswaran recently. It seems to suggest that the government is confident of the economy’s growth prospects and believes that fiscal consolidation, without a reversal of capital spending, will crowd in private investment.

In resisting the temptation to splurge on the revenue side ahead of the national election, the government has stayed true to what many experts have underlined and appreciated as its economic philosophy of counter-cyclical deployment of the fiscal gunpowder, and using more of it to augment supply gaps on the infrastructure front rather than rolling out demand-augmenting measures that are difficult to roll back once unleashed.

While this is always the desired approach for fiscal policy, whether or not a government can adhere to it depends more on its political prowess than economic viewpoint. The Opposition’s cluelessness on most economic interventions of this government have added to the political comfort of the government. 

To give an example, let us imagine whether the government could have held nominal PM-KISAN entitlements unchanged had the Opposition made a strong demand for it.

The government’s political comfort aside, what does this budget entail for the economy at large? 

More than anything, it shows a clear perspective of the current government when it comes to dealing with the entrenched dualism in the Indian economy. 

To the modern, more dynamic sectors or the proverbial India, it is offering a business-friendly and as conservative as possible fiscal policy, and commitment to reforms. 

To the non-rich, subsistence-seeking overwhelming mass of voters that is Bharat, the government is selling a narrative of corruption-free, purpose-specific and politically loaded direct benefit transfers, and nudging them to seek a better future for themselves in the modern sector. 

The policy priorities for Bharat and India are not necessarily without conflict, but the friction in this policy see-saw so far has been lubricated by the political persona and capital of the Prime Minister. 

The Opposition’s political predicament, and by extension, the government’s political confidence is a function of the former’s inability to take on this lubricant in India’s political economy.

Roshan Kishore is the Data and Political Economy Editor at Hindustan Times.