By the time this column is read, most of what needs to be said on the interim budget of the government would have already been said. Not that there is much to say beyond two basic points: The government is politically confident of its political prospects in the forthcoming general elections, and therefore it has decided to boost the confidence of markets by adhering to its fiscal consolidation path without drawing back on the capital spending momentum.
This is exactly why this column will try and discuss what the budget tells us about the economic philosophy of the Narendra Modi government. Here is the gist of the economic paradigm which the Modi government seems to have adopted and executed perfectly.
The government’s biggest responsibility is to augment the physical infrastructure of the Indian economy. This will facilitate big-ticket private investment which has so far been very regionally skewed in India. Infrastructure alone, however, will not attract big investors and the government needs to sweeten the deal with tax rebates or incentives of one kind or the other. Put together, this means that the money required to create such infrastructure needs to be realized by sources other than a higher tax on corporate profits. The government’s biggest economic bet for raising these resources is on the growing income tax kitty of salary earners in the formal sector of the economy.
The dynamics discussed so far are important from the economy’s perspective but pretty much irrelevant when it comes to the realm of politics. Expressways and airports do not get the votes of the poor. Big-ticket manufacturing’s employment creation ability is like the proverbial drop in the ocean for the vast labour force that exists in the Indian economy. This is where the government’s welfare architecture comes into play. From free food grain during the pandemic to rooftop solar now, the Modi government keeps thinking of new gifts to give to the poor and expects their political support in return. The civilisational awakening narrative of the government also convinces them every day that the best is yet to come.
While capital would love to see a part of this welfare money being used to create infra which serves its own interests – in a way it does by creating demand such as cement and steel for houses under the PMAY – it is happy to strike a compromise for two important reasons. One, such asset transfers are not income-generating and therefore do not increase the bargaining power of the poor which can potentially mutate into a wage-price spiral with some exogenous shock or the other. Two, it dreads the days of the previous government which was more disorganised than decentralised and ended up pleasing neither the poor nor the rich.
So far, the politics of this model does not seem to be under threat. What about its economics though?
The fact that India is the fastest-growing economy in the world and is expected to retain its position in the near future suggests that something is working. Of course, the growth has an unequal base and millions are still fighting to ensure subsistence.
But the hard-headed and not normative question to ask is the following. Were the government to change its capex focus towards spending on the revenue side which is focused on supporting the demand of the poor -- say an urban employment guarantee programme or even a cash transfer scheme such as what the Congress promises -- would we have more growth in the short-term than what we are having now?
The answer is more likely to be a no than a yes. Those who would like to evoke the high-growth phase during the UPA to counter this point would do well to remember that global economic tailwinds prior to the global financial crisis and reckless (perhaps by policy design) lending played a far from insignificant role in supporting high-growth phase back then. Both these are now passe, unfortunately for the first, and fortunately as far as the second is concerned.
Does this mean that Narendra Modi’s economic philosophy of government literally building the highway to economic development and making it politically palatable by offering targeted welfare and charged nationalism is the best foot forward India can put at the current juncture? At least two risks can be outlined vis-à-vis such a strategy.
The first is the threat of an institutional capture of sorts of policymaking where what is good for big capital is also sold as being unambiguously good for the entire economy. Concentration of profits might create tailwinds for investment and white-collar earnings in the medium term. Still, it can put a serious squeeze on mass incomes in the long term risking economic stagnation. This is exactly the problem, which is haunting developed economies and in a way what China seems to be trying to act against preemptively.
The second is the threat of India moving from being on the brink of government failure to market failure. The current government is increasingly warming up to the idea of the private sector being the silver bullet for all problems facing the economy. The interim budget’s talk about interest-free long-term loans to private players for R&D is one such example. Being aware of the risks of market failures – they are incapable of factoring in externalities, for instance – is prudent and not the Left-leaning economics that this government abhors.
Whether India’s economic policy steers clear of these risks will depend on the democratic pushback when their signs start manifesting themselves. Mobilising such pushback when required will require political foresight.
Every Friday, HT’s data and political economy editor, Roshan Kishore, combines his commitment to data and passion for qualitative analysis in a column for HT Premium, Terms of Trade. With a focus on one big number and one big issue, he will go behind the headlines to ask a question and address political economy issues and social puzzles facing contemporary India.
The views expressed are personal
Roshan Kishore is the Data and Political Economy Editor at Hindustan Times. His weekly column for HT Premium Terms of Trade appears every Friday. ...view detail
Terms of Trade | Modinomics, beyond the budget
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02.02.2024
By the time this column is read, most of what needs to be said on the interim budget of the government would have already been said. Not that there is much to say beyond two basic points: The government is politically confident of its political prospects in the forthcoming general elections, and therefore it has decided to boost the confidence of markets by adhering to its fiscal consolidation path without drawing back on the capital spending momentum.
This is exactly why this column will try and discuss what the budget tells us about the economic philosophy of the Narendra Modi government. Here is the gist of the economic paradigm which the Modi government seems to have adopted and executed perfectly.
The government’s biggest responsibility is to augment the physical infrastructure of the Indian economy. This will facilitate big-ticket private investment which has so far been very regionally skewed in India. Infrastructure alone, however, will not attract big investors and the government needs to sweeten the deal with tax rebates or incentives of one kind or the other. Put together, this means that the money required to create such infrastructure needs to be realized by sources other than a higher tax on corporate profits. The government’s biggest economic bet for raising these resources is on the growing income tax kitty of salary earners in the formal sector of the economy.
The dynamics discussed so far are important from the economy’s perspective but pretty much irrelevant when it comes to the realm of politics.........
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