The Delhi elections make the union budget even more crucial. It’ll test whether Modi can keep his promise of a new world of economic opportunities for the neo-middle class. The ball is now in FM Arun Jaitley’s court[/h2]
By Sutanu Guru
Many decades ago, the legendary ad man David Ogi-lvy wrote: “The consumer is not a moron; she is your wife.” In the contemporary discourse on the politics of economics and the economics of politics in India, one can perhaps be forgiven for rephrasing those words as: “The voter is not a moron; he or she is your neo-middle class aspirant.”
When Prime Minister Narendra Modi won a historic electoral victory in May 2014, there was near consensus that aspirational neo-middle class Indians, who formed a large part of the electorate, wanted better economic and job opportunities. Almost nine months later, Modi now faces his real test of purpose, resolve and perceived ability to deliver his own version of a new economic El Dorado. And the man who could reinforce the popularity of Modi or take him down the path of unmet expectations is Union Finance Minister Arun Jaitley, who will present the budget on February 28.
While budgets are often over-rated as instruments of policy change, they do send powerful signals to investors as well as consumers. And it is here that Modi faces a challenge and a dilemma. If one goes easy on jargon like fiscal deficit, stimulus package, new tax regime, GDP growth rate and inflation rate, it all boils down to something simple. The challenge is to ensure that the budget encourages investors to start investing and consumers to start spending. Without either of the two happening and happening quickly, there is simply no way that the Indian economy can go back to the near double-digit growth rates achieved for many years under the previous regime. Without high GDP growth rates, the promise of better job opportunities to neo-middle class Indians will remain a mirage. You don’t need to be a political pundit, then, to figure out what could happen to Modi and the BJP in the 2019 Lok Sabha elections.
According to a business confidence survey, 54.2 percent felt nothing had changed in the last six months. But industry leaders felt there was hope.
And it is here that Modi faces a dilemma. Many commentators are not entirely convinced that Jaitley can deliver what Modi badly needs. Last year, amidst a lot of hype and hope, Jaitley presented the first budget of the new NDA regime. Even die-hard BJP supporters could only manage excruciatingly polite applause, while independent analysts slammed the budget as a damp squib.
The budget needs to deliver on better economic and job opportunities
CHIDAMBARAM’S BUDGET
Here is what economist and columnist Swaminathan Aiyar wrote about that budget: “It’s not a radical Modi budget but a Chidambaram budget with saffron lipstick added. Many of Arun Jaitley’s budget figures and policies resemble those in Chidam-baram’s interim budget. Many thought Jaitley’s maiden budget would produce a major vision for five years, major reforms and some bitter medicine. Sorry, there was no great fiscal vision, only minor reform, and sugar-coated pills rather than bitter ones.
Instead of being long on vision, the budget speech was long in duration (almost two-and-a-half hours). My personal budget rating: 4.5 out of 10, not because Jaitley proposed anything terrible but because he could have done so much more.”
Since then, economists have known that despite a lot of noise and new policies, including dismantling of the Planning Commission and a much-hyped “Make in India” campaign, the performance of the economy continues to be sluggish.
The industry body, Assocham, conducted a Business Confidence Survey of Indian CEOs recently and concluded: “As many as 54.2 per cent of the respondents in the confidence measuring survey said not much has really changed at the operating level in the last six months, but more number of industry leaders expressed optimism about the shape of things to improve going forward.”
According to official data release at the end of January, core sector growth, which measures the output of eight infrastructure industries, dropped sharply to 2.4 percent in December from 6.7 percent in the same period last year. As many other statistical indicators show, the Modi March towards double digit GDP growth remains a distant dream.
WHERE IS THE CHANGE?
As every reader will recall, the two words that resonated throughout the election campaign last year were parivartan (change) and vikas (development). Even those not favorably inclined towards Modi, accepted that he was successful in communicating his promise of “real change”. Indian voters were dismayed by scams, red tape, arrogance and indifference of the ruling Delhi establishment. Modi was never part of this establishment and sounded credible to voters.
But if economics is about numbers, politics is often about perceptions. And it is here that Jaitley, and as a consequence, Modi suffered a jolt some months ago. One of the key promises made during Modi’s electoral campaign was about exposing, shaming and punishing the corrupt and bringing back black money to India. It was natural for opponents of Modi to slam his government when it basically stuck to the old UPA stand about not revealing names to the Supreme Court of those Indians with illegal accounts abroad. There was a lot of spin during this controversy and even Modi supporters like Ram Jethmalani launched a frontal assault on Jaitley.
In a widely discussed letter to Jaitley, Jethmalani wrote: “I strongly suspect that your conduct shows that you too like many others do not want the truth to come out. Your public statements… are product of a troubled conscience and mental confusion, a deadly combination….” Now the aspirational neo-middle class Indian voter may not be familiar with the jargon about black money. But then again, he or she is not a moron.
If you talk to BJP insiders, much of this friction and rhetoric has to do with the persona of Jaitley. Social media activists played an almost evangelical role in Modi’s rise to power. And, they are not terribly fond of Jaitley. It is a peculiar situation. Among top BJP leaders, Jaitley is known to have cordial relations with almost everyone in the mainstream media. He is also known to be media savvy. No none in mainstream media was surprised when Jaitley gave an exclusive interview to Barkha Dutt of NDTV, explaining the government position on black money.
But for Modi fans in social media, it was as if Jaitley had committed heresy or apostasy. The fussilade of attacks against Jaitley and even Modi on social media soon after that interview was revealing.
It is against this backdrop that the next budget becomes crucial. For India Inc and other stakeholders in the economy, it might be about numbers. But for Modi, it will be about political signals.
The polarizing re-marks from Sangh Parivar have deeply troubled even some Modi fans. But, they still believe he will keep his promise of a new world of economic opp-ortunities to neo-middle class India.
The ball is in Jaitley’s court to provide some answers on February 28. The landslide AAP victory indicates that Modi might be running out of time.
Rocky road ahead[/h2]
Formidable challenges faced by Team Modi:
Stimulate investment: This is the biggest challenge confronting Jaitley. Business tycoons will admit privately that they prefer to invest abroad rather than in India. They still do, despite the “Make in India” hoopla. Global investors are even more skeptical. Without a massive booster dose of investments, the growth rate will not improve and neo-middle class India can kiss its dreams goodbye.
Stable and transparent tax regime: Old habit of perpetuating discretionary powers has led to a terribly corrupt tax regime. Can our finance minister bite the bullet?
Implementing goods and service tax (GST): India is a series of fragmented markets rather than a national one because of outdated sales and local tax administrations. A pan-Indian GST is the only solution. Efforts to implement this have been on since Atal Bihari Vajpayee’s time. Team Modi has staked a lot on this.
Reviving consumer confidence: The last stretch of the UPA regime dealt a body blow to consumer sentiments, best reflected in real estate and automobiles which have been in the dumps since the end of 2012. Many Indians have postponed their decision to buy cars and houses. This budget promises to be a decisive year.
Maintaining fiscal sanity: Unbridled populism and profligacy combined with a leaky tax regime played havoc with budget numbers, leading to sustained inflation. Can Jaitley restore the sanctity of numbers?
Infrastructure incentives: Modi’s ability to win another election in 2019 will depend on how quickly he improves infrastructure, be it mining, construction or highways.
Ending inspector raj: During the election campaign last year, Modi harped on the tyranny of inspector raj. People hope for limited changes here.
Managing skills: There is a hopeless mismatch between what employers want and the skill set of young Indians. In 2019, close to 500 million young Indians would be looking for better job prospects. Beginning this year, Jaitley must use budget allocations to meaningfully solve this problem.
Containing inflation: Jaitley is lucky here, thanks to a steep fall in global oil prices and some good management of supply chain bottlenecks. He has to ensure the budget doesn’t send inflationary signals.
Managing Rajan: The working relationship between Jaitley and RBI Governor Raghuram Rajan (right), along with other key people like economic advisor Arvind Subramanian and Niti Ayog head Arvind Panagriya will have a crucial role in determining economic revival.