Desperate times: The Modi government has much ground to cover in this budget, but little wiggle room

Having dug himself into a hole with demonetisation, Prime Minister Narendra Modi now needs to make a huge effort to climb out and hopes are riding high on the Union Budget for 2017-’18, to be presented on Wednesday. But there are severe limitations on what he can do.

The first budget after he assumed office, for 2014-’15, was a great opportunity for good economics. He could have dealt with burgeoning unmerited subsidies, huge tax-giveaways, unproductive industrial investments, building funds to modernise infrastructure, creating 12 million jobs a year and reforming governing structures. But he missed the chance. So now, it is time for what passes off as good politics – which means winning votes and in India, that is usually through more unaffordable populism.

Tight spot

Unfortunately, the government has its back against the wall. Most economists and educated observers have concluded that the surprise demonetisation of Rs 500 and Rs 1,000 notes from November 9 – which invalidated 86% of the currency in circulation at the time – was entirely ill-advised and ineptly implemented. The International Monetary Fund has reduced the 2016-’17 growth estimates for India by 1%, taking it down to 6.6%, suggesting a loss of Rs.1.5 lakh crores.

Others estimate bigger losses over a longer period. The well-regarded Centre for Monitoring Indian Economy has not only pared down real GDP growth this year to 6%, but has said: “We now expect this growth trajectory to shift down to about 6% per annum for the next five years (up to 2020-’21). The economy is unlikely to achieve a growth of 7% any time during the coming five years.”

This assumes even more significance given that a few months ago, the Centre for Monitoring Indian Economy was very optimistic about India’s economic prospects and had forecast growth to be between 7.5% -8%. In effect, it has cut down its optimism by almost 2% and expects the cold winds to blow for the next half decade or so. That would be a huge blow.

Eye on polls

The blame is being directed at Modi and he is under pressure, not only by a reviving Opposition but also by more conservative forces within the secretive and conspiratorial Rashtriya Swayamsevak Sangh. The results of the upcoming elections, especially in the three North Indian states of Uttar Pradesh and Punjab, will have a huge bearing on the prime minister’s political future.

In Punjab, being saddled with a burdensome ally, the Shiromani Akali Dal, gives Modi and his Bharatiya Janata Party a cushion against the barbs. The make-or-break state is Uttar Pradesh. The BJP won 72 out of 80 Lok Sabha seats here in 2014, which hugely expanded its Parliamentary majority even though it won just 31% of the votes.

But political fortunes change easily in Uttar Pradesh. Adding to Modi’s concerns most definitely will be the aura of development that Chief Minister Akhilesh Yadav of the ruling Samajwadi Party seems to be fast acquiring. What was till not long ago expected to be a cakewalk for the BJP has now become a steep climb. Besides, Modi has a record on not faring well in head-to-head contests in state elections against charismatic regional chieftains, as was seen in Delhi and Bihar in 2015. These states have a cosanguinity of sorts with Uttar Pradesh and they tend to be similarly politically predictable.

Secret weapon

What many people do not realise is that almost 96% of the budget comes preset, because of existing commitments. Allocations for interest, defence, salaries, and transfers to the states cannot be touched. Tax rates can be tinkered with, but cannot be lowered unless a case can be made for higher realisations. As it is, India’s tax to Gross Domestic Product ratio is not very encouraging.

Even so, Prime Minister Modi has a huge advantage in the form of the power of incumbency. The Brahmastra or the most powerful weapon now will almost certainly be the Universal Basic Income scheme, which is being touted by many new-age economists as an idea whose time has come. The Chief Economic Adviser, Arvind Subramaniam, has argued for it. Even Niti Ayog’s Vice Chairman Arvind Panagariya, while opposing the plan, seemed to be doing so because of perceived budgetary constraints rather than ideological reasons.

The Universal Basic Income scheme entails the direct transfer of a certain amount of cash every month, week or even quarter to all citizens. The figure bandied about for India is a United Basic Income of Rs 1,000 a month. To the average Indian family of five, this will amount to a good Rs 5,000 a month, which will comfortably cover the monthly food bill and then some. But this will cost more than Rs 15.6 lakh crores a year. That is more than 10% of GDP.

Squeezing out this amount will be near-impossible, as India already has several subsidies and programmes like the Public Distribution Scheme. The subsidy bill for 2016-’17 on food, petroleum and fertilisers was estimated to be Rs 2,31,781.61 crore, a reduction of 4% from the previous financial year, mostly due to the falling oil prices. The petroleum subsidy was reduced to Rs 26,947 crore for 2016-’17. Of this, Rs 19,802.79 crore was earmarked for LPG subsidy and the rest for kerosene. This subsidy varies with oil prices and not long ago, was more than Rs 1.30 lakh crores. The bad news, however, is global oil prices are rebounding, with Russia and the Oil and Petroleum Corporation joining forces to cut down production to increase prices.

Besides, these subsidies are political holy cows. Farmers, particularly in irrigation-intensive Punjab and Uttar Pradesh, who are major users of fertilisers will take unkindly to a subsidy reduction. Cutting down LPG subsidies will alienate the subsidy-fattened urban middle classes. Food subsidies are, in reality, subsidies to the big farm producers in Punjab and Western Uttar Pradesh because of minimum support prices, which are increasingly above market prices. Distribution of food grains under the PDS is just a fig leaf to cover high prices to big farmers. Thus politically speaking, touching these subsidies will be counter productive and may neutralise any political benefits accruing from Universal Basic Income.

But the prime minister could very well resort to a basic income for everyone below the poverty line. This will entail a subsidy of about Rs 3 lakh crores a year. It’s still a big bill. But desperate measures are a big temptation in desperate times.