When Nirmala Sitharaman got up to present her second budget, the overall political-economy context would have cast a heavy shadow on her mind.
Growth has slipped, jeopardising both macro economic stability. Inflation has spiked, potentially leading to citizen discontent. Industry sentiment is low, with the private sector either unwilling or unable to invest. Unemployment is high, and demand has slipped, generating a potentially vicious cycle.
All of this has not yet had a direct national electoral impact. But the Bhartiya Janata Party’s less than expected performance in various state elections, and the growing social unrest, which possibly has economic roots, was a warning that the government needed to get its economic story right. The economic dip has also had foreign policy implications, for diplomats acknowledge that they would have been able to better present the government’s case if the world was still convinced of the Indian economic story.
This is a heavy cross to bear for any finance minister. Has she done enough to not just address the economic roots of the slowdown, but politically reassure the BJP’s voters that things are on track and diplomatically reassure the world that India remains a bright spot?
The answer is mixed.
Sitharaman began with reiterating that the government had taken a range of measures — which amounted to structural reforms. This is partially true. But perhaps, there was a need for an acknowledgment that the economy has been in crisis — and this has stemmed not just from global but local factors. This acknowledgement would not have been seen as weakness — the government has enough political room and legislative heft — but as strength.
She then structured her speech into three big themes — of an aspirational India, economic growth for all, and a caring society. In itself, these goals are laudable, but what does it mean for specific groups?
Take the politics first. The BJP’s core constituency is the middle class — though it must be acknowledged that the party has now moved substantially beyond this segment. The proposed changes in a new tax regime will bring cheer to this constituency. It is however not fully clear whether, without exemptions, taxpayers do benefit substantially under this regime — or whether they will choose to opt for the older regime. But it does give a degree of relief, and enhances the disposable income in the hands of a large segment of taxpayers. Politically, this may help, including in the upcoming polls in Delhi, which is home to a substantial middle class. Economically, the government hopes that this will revive demand — whether that happens is still to be seen.
The second constituency that the BJP was keen to send a message to was the farmers, whose incomes have dipped. Sitharaman presented an elaborate 16-point roadmap to revive agriculture and allied activities — from a reform in agricultural markets to improved backward linkages, from seeing farmers as also energy producers, especially in solar, to a boost to the blue economy. These are all significant points. But they are medium- to long-term reforms. And whether it will help boost rural incomes — which is an immediate priority, for the slump in rural demand has caused much of the economic slowdown — is unclear, especially in the absence of a rural stimulus.
The third leg in the FM’s approach was a focus on industry and infrastructure. The government is clearly hoping that some relief to companies, assurances on tax harassment, commitment to wealth creators, a renewed push to manufacturing, and a heavy deployment of infra funding would lead to a virtuous economic cycle — where investment kick starts, jobs are created, people have more money, and demand picks up.
Once again, on paper, this is a sound plan. But past experience has shown that operationalising this is often more difficult than thought. Despite five years of politically high-profile campaign, Make in India hasn’t delivered the mass scale manufacturing jobs the government had hoped. Infrastructure projects still operate more slowly than envisaged. The fact that the markets — which have shown remarkable resilience despite dim economic indicators — crashed on Saturday reveals that industry and investors are not quite convinced of the government’s road map.
Put it all together, and here is what you have. The BJP, somewhat free from electoral pressures this year, adopted a cautious approach. It has sought to reassure the world that Indian economic story is on track, and reforms will pay dividends sooner than later.
It has sought to reassure its older supporters — the middle class — as well as its newer supporters — in rural India — that their interests are important to the government. It has also relied on a traditional economic prescription of investment leading to growth to stall the slowdown.
But, given the scale of the economic crisis, it may not be enough. If Sitharaman’s gamble does not pay off, the BJP may have reason to worry, for there is a possibility that the economic outcome and the political outcome will slowly begin aligning
Prasanta Patnaik