Modi-Jaitley must be commended for Budget 2017. Now, create jobs

Rajiv Kumar

Everyone agrees that the Budget is a political exercise, albeit couched in economic and financial terms. It touches the lives of virtually the entire population. Therefore, its impact is far reaching and necessarily takes on political overtones.

It is often used to serve immediate partisan interests as for example in 2008, when the then finance minister allowed public expenditures to explode by 3.5 per cent of GDP. A brazen but successful effort for securing the 2009 Lok Sabha elections for the UPA, which returned with a larger majority!

It was widely believed that the 2017-18 Budget would also see fiscal profligacy for helping the BJP make a good showing in the ensuing elections in five states. Narendra Modi and Arun Jaitley need to be commended for not succumbing to these temptations. The stock market showed its appreciation by recording the highest post-Budget jump ever.

Experiences

With the 2017-18 Budget and the preceding ones, Modi and Jaitley have unequivocally shown that they would not cede even an inch of the “left-of-centre space” to their political opponents. Modi has learnt, as he should have, from the unfortunate experiences of the Vajpayee government that lost the 2004 elections against all odds.

This Budget carefully follows the trend in previous three Budgets of retaining and, where possible, expanding allocations for public welfare schemes. Thus allocations for MNREGA, affordable housing, farmers' crop insurance schemes, subsidies for food and fertilizers, distribution of cooking gas to poor households, and subsidised life insurance schemes have either been increased or retained.

I support these transfer payments and subsidies as being necessary for achieving a modicum of equity and welfare in a poor, predominantly market-based capitalist economy. This is the essence of Keynesian welfarism that kept the Left at bay in Europe and the UK. It is, however, critical that these transfer payments are done efficiently with minimal leakages.

Modi has focused on improving the delivery of these subsidies as is reflected in his oft-cited example of “neem coating” urea fertilisers. Similarly, JAM-based direct benefit transfer to bank accounts of actual beneficiaries is aimed at plugging remaining leakages.

By unabashedly proving its pro-poor credentials, Modi has ensured that he will not be electorally hurt by the emotive charge of leading a “suit-boot ki sarkar”. This has been Rahul Gandhi's one and only successful attack on Modi. It demonstrates that in our hyper-competitive democracy, a minor slip can blow up into a major weakness. The fear of being identified as a rich-person's man has goaded Modi into ostensibly shunning the company of businessmen and avoiding Budget measures that could be even faintly seen as being pro-business.

Having secured his “Left flank”, Modi now must attend to the political necessity of generating large-scale employment. Indian youth's aspirations are exploding and their patience wearing thin. This is evident from the dominant caste mobilisations of the Jats in Haryana, Gujjars in Rajasthan, Patels in Gujarat, and most recently, Marathas in Maharashtra. So the Modi government must urgently generate jobs and in large numbers too.

This cannot happen without rejuvenating private investors' sentiments which are currently so fraught that growth in private gross capital formation is negative. The ominous corollary is that productive capacities in the economy are shrinking and with that job opportunities are becoming scarcer and not plentiful as they ought to be. Aspiring youth do not appreciate NITI Aayog's nuanced differentiation between good employment, full employment and under-employment.

Employment

These measures for generating jobs cannot wait for the next Budget as that would be too late. Investors' sentiments take time to turn around, especially in an external and domestic environment so full of uncertainties. Some measures were indeed announced in this year's Budget. These need to be supplemented to provide the necessary momentum in job creation. These can be announced when the Lok Sabha re-convenes to discuss and pass the finance bill.

First, corporate income tax cut must be extended to the remaining eight per cent that have been hitherto left out. Corporates should be given the option to continue with their exemptions or choose the lower tax rate for next two years. SMEs depend on larger companies for their orders and so without improving sentiment and profitability of the latter, a SME-focused tax cut may not produce desired results.

Revenue

Second, personal income tax cut should be extended to higher income categories by levying the highest rate of 30 per cent plus cesses on incomes above Rs 20 lakh. This will give a much-needed boost to consumption demand, necessary for improving capacity utilisation in domestic industry. Revenue foregone will be recovered with the widening of the tax base and higher compliance.

Third, at least Rs 40,000 crore should be allocated for public sector bank recapitalisation. Unfortunately, as happens all over the world, taxpayers will have to bear the cost of the past sins in order to unfreeze the credit flow from banks whose NPAs have climbed to a scary 11.5 per cent. Surely, bank mortality must also be permitted, while safeguarding depositors interests, in cases where NPAs have gone beyond redeemable levels.

Fourth, private sector operators must be involved in the implementation of affordable housing and infrastructure projects. There is no shying away from tardy implementation of housing projects. This must be rectified by inviting private contractors to execute projects where land acquisition, procedural clearances and financial closure have been secured. These projects can be awarded in the most transparent and competitive basis to deflect any charges of crony capitalism, etc.

Fifth, private sector should also be actively involved in the resuscitation of agriculture extension services and creation of post-harvest logistics that would improve farmers' connectivity with private retailers and e-markets. Private retailers would be ideally suited to be used as extension service providers and suitably incentivised.

All these measures will assure private investors that Modi means business.

(Courtesy of Mail Today.)

Former Secretary General, FICCI, India, Economist, author, interests: Sufi music and meditation.