A TYPICAL ELECTION BUDGET : COMPETITIVE POPULISM IS HERE TO STAY

Dole, welfare measures or buying votes : take your pick, but surely not reformist enough

Given the serious fiscal constraints, Piyush Goyal did a commendable job of remaining within reasonable fiscal slippage parameters. It is politically astute too as no one in the political firmament would be able to either contest, or unwind, the schemes in perpetuity which have been announced. So as an able and loyal foot soldier, who is also eminently qualified, he has delivered for his political masters.

So whilst the wide ranging welfare measures ( read sops) for all vulnerable sections of the society would be welcomed, it is the mathematics which leave many unanswered questions on the ability of the Government to achieve the targeted fiscal deficit of 3.4%. For example, given that the GST rates are set to decline next year and the collections have been consistently below the Rs. 1 Lakh crore per month mark,  or that the growth in direct tax collections are only 12% till date against 19% projected for the current year, the revenue projections seem to be highly optimistic and the fisc would perhaps be closer to 4%. If it is a play on galloping GDP growth, apart from tightening compliance, we must remember that in an environment of challenging economic growth – both in India and globally – that too is a risky gambit. Unless, of course, India changes the methodology of computing GDP yet once again and thus mathematically achieves the fisc next year too ! The quality of the fisc is, of course, a totally different matter.

There have been serious differences on whether the government was ethical to present a full blown budget in an election year as against a vote on account. If the narrative that this was to address the serious challenges faced in the country is to be believed, then it is sad to note that only the agrarian distress has been considered. The second glaring distress is the lack of job growth – the budget has no measures whatsoever to address this core issue haunting us for the last many years. The budget almost solely relies on consumption growth and capital formation expectations ( we would end the year at 5% growth vs the 10% envisaged in the budget) are hardly enough to get the private capital investment cycle moving. And that is what would have created jobs. And if it is indeed going to be a consumption led growth, then without supply side measures inflationary expectations would rise over the course of the year.

The farm sector the outlay is in perpetuity and will cost the nation Rs. 750,000 crores over the next ten years. Would this not have been more judiciously  spent if, instead of planning for a permanent dole, fundamental and comprehensive reforms in the agricultural sector were outlined ? This would include reforms in agri trade, logistics chain including aggregation of produce and storage, dismantling the outdated mandi system, etc. Immediate income support for a defined period has now become necessary as these sort of core reforms have been ignored on the altar of populism over the last many years.

The competing demands of the economy are many : infrastructure, skill development, education, health and now safety nets for various sections of the society. The roadmap to fiscal priorities is, therefore, a must which needs intelligent trade offs as not all will be achievable or sustainable. This blue print with substantive reforms to fundamentally seek solutions to  the core growing  fiscal problems has been missing from past budgets and this one was no exception. Apart from buying some time, applying band aids have limited utility in cases of sustained hemorrhage !

And finally a word on the FM’s assertion on his  mandate to prepare an honest budget. But is it based on honest data ? The path to creative accounting was shown by Chidambaram but this government continues alarmingly to progress on this slippery slope. Disinvestment has been given a new meaning with institutions like LIC and ONGC buying up shares of weak listed PSU entities, off balance sheet borrowings by PSUs like by the FCI at Rs. 100,000 cr. and NHAI at Rs. 60,000 cr and not to mention the erosion in the credibility of our statistical institutions leading to recent high profile resignations post the controversial GDP series realignment and the unemployment data. We have not matched upto China’s economic success in any regard : please let us not try to play catch up and match up to them on the credibility of the national statistical data !

As a fellow chartered accountant, albeit one who is immensely more gifted and accomplished, I am sure Piyush Goyal understands the implications of even a hint of suspicion of the underlying data in the financial statements. And combined with a large “real” borrowing program of the centre ( not including the states ) of Rs. 9 lakh crore ( including Rs. 2 lakh crores off balance sheet by PSUs) the cost of capital is bound to increase in India apart from the country’s risk premium. This does not portray well for the financial markets and foreign portfolio flows will almost certainly be hit as we progress during the year.

The association of data with truth is getting tenuous. I am concerned that in the popular media this seems to be justified away as the new normal since it is seen as a global phenomena ! Our macros are still much better than many, as is the hard earned credibility of our data. Let us not sacrifice this for the sake of an electoral outcome.

In any case I seriously doubt if budget outlays can win elections. And going purely by intent of the economic programs, it would seem that the political space between the different parties is becoming increasing blurred. Right, left or center : the only commonality seems to be the  growing concern for cows whether it be the Rs. 750 cr allocated for the Kamdhenu Yojana or Kamal Nath’s gaushala program.

One outcome, though, seems certain : competitive populism is here to stay.

The original version appeared in The BW Business World digital edition dated Feb 02, 2019 as a Guest Column >Article and in the subsequent print edition (https://www.dhirubhai.net/feed/update/urn:li:activity:6505670743618093057)

(PRABAL BASU ROY)

A Sloan Fellow from the London Business School, PE Investor and Corporate Advisor, the author has formerly been a Director and Group CFO in various companies.

He is one of LinkedIn's Top Voices ; his views are frequently published in the national media on the intersection of current affairs, leadership and strategy with matters of finance, public policy, financial markets and corporate affairs.

Join me on Twitter.com @PrabalBasuRoy and feedback by email is welcome.