Budget 2018: A believer of the Bhagwad Gita, Modi likely to shun populism

Have you noticed something in the past few years? Unlike in the past, when everyone used to wonder about what the new Budget will come up with, very few people do so any longer. 

The reason is that since 1997, the government has held income tax rates stable at 10, 20 and 30 per cent. There has been some minor tinkering – after all, the tax bureaucracy must justify its existence – but overall, everyone has accepted these as fair rates and the government, aware that the tax base is tiny, has refrained from taxing income of the middle class more. A minor change that may happen this year is the taxing of hitherto tax-free dividends.

Now, in 2018, with the goods and services tax (GST) in place, the same thing is about to happen with indirect taxes. Gone are the days when businessmen would fret over the likely changes in excise and customs duties. There is now huge stability in the indirect tax rates. The Budget, as an annual event of middle-class torment, is over.

The past 70 years

So what do the details of the past 70-plus Budgets show? They have varied, naturally, but one feature is common to all of them: Gross mismanagement of the economy caused by political factors that every few years have led to completely avoidable crises. It all started in 1957 and went on relentlessly till 2017.

The broad point about the Indian economy seen through its Budgets is that thanks to the politicians, it revels in subsidies. There is no sector that is not subsidised: agriculture, industry, banking and finance, and services.

Farmers get input subsidies and minimum prices. Industry gets subsidised land and finance. And banking gets capital from time to time by tapping the taxpayers' pockets, that is, for free.

In return, nothing is demanded because agriculture is usually in distress, industry finances politics and the banks are mostly owned by the government. As to services, no data is available outside the formal sector.

The income transfer economy

The extent of the subsidy may vary from one period to the other but this usually amounts to no more than subsidy-switching. Another way of putting it is that the politicians, in order to gain votes, force a small minority of around 200 million people to pay for the rest of the 1,100 million people. These are gigantic income transfers via the Budgets.

But these transfers yield no economic benefits, such as dramatic and sustained increases in efficiency and output. But it must be said that at least where agriculture is concerned, they help maintain social stability.

Tinkering in 2018

That said, what can we expect from the 2018 Budget, the details of which the Prime Minister is said to be supervising personally? Will he go the populist route because the general election is next year or will he stick to his preference for strict fiscal discipline?

The chances are that he will do the latter. He believes the Bhagwad Gita's advice that we must do our duty and not worry about the fruits. He sees his task as having to revive the level of economic activity, not as having to hand out goodies to the voters.

In any case, there isn't much scope for this because, quite simply, the government has very little money to spend and PM Modi doesn't want to go for deficit financing above and beyond what is necessary to meet the fixed payments like subsidies, interest, salaries, and pensions.

Universal Basic Income?

There is one thing which he may announce, however: A universal basic income scheme for which the banking infrastructure is ready via the DBT (direct benefit transfer) accounts. The insistence of linking Aadhaar to bank accounts is because of this.

The scheme will probably start on a pilot basis with a token allocation this year and balloon along the way before the Assembly and general elections of 2018 and 2019. By then, the GST would have stabilised and government revenues will have received a major boost.

If this is done, it will basically be an expansion of MNREGA (Mahatma Gandhi National Rural Employment Gurantee Act), which has flopped because of corruption. But whether the resources that the government can raise will be enough to sustain it is another question altogether. So far, only Finland has started it on a pilot basis.

For the rest, as has been pointed out by almost every expert, there isn't much the Budget can do because now the issue is of allowing the structural reforms made in the past four years to work. They require the disk operating system of the economy to be completely changed from a subsidy-driven economy to an efficient income-earning one.

That will take time.  

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel