Jaitley’s Budget is a work in progress

Market fundamentalists are seeking to disguise their disappointment that the first Budget of a BJP-led government in which the saffron party holds a clear majority could not break the shackles of a Congress-led UPA-style economic regime, that it did not make a “structural” shift and give economic direction of a new type.

By that they mean to ask: Why were subsidies not ended? Why was taxation not as good as abandoned in order to create the appropriate environment for investment, a euphemism for a low- or no-tax regime? Why were labour reforms not introduced to allow for work force pruning? Why did the government not retreat from the assets it holds, meaning why did it not announce the sale of the family silver through disinvestment in the Budget itself?

As a measure of self-consolation, many market purists have sought to suggest that finance minister Arun Jaitley’s first Budget is a work in progress, a build-up towards the ideal they aspire to. They may not know this, but they may actually be right. Prime Minister Narendra Modi’s government may well wish to move in that broad direction. But in order to do so it first needs to fix the politics.

The Modi government does not have a majority in the Rajya Sabha. To correct that situation it badly needs to do well in the three Assembly elections for Maharashtra, Haryana and Jharkhand later this year. If that is achieved, the government can show more boldness on the economic front of the kind that the free marketeers desire without fear of adverse political consequences in the short or medium term.

Above everything else, Mr Modi and his finance minister are pragmatists. Through the Budget for 2014-15, they have done well by their core constituency, the burgeoning urban and urbanising (called “rurban” in the NDA’ language) middle class which voted BJP in a massive way in the recent Lok Sabha election. This is a very good platform for the upcoming state polls.

With this electoral contest not far away, the government clearly did not wish to risk the rural vote that favours MNREGA or the “rurban” voter keen on the food security scheme brought by the UPA. In short, the government could hardly have been expected to opt for a confrontational political atmosphere when state polls are near. Hence, some “populist” measures have been sustained in the present Budget. And yet, appropriate signals needed to be sent out to the market-wallahs. This has been done through promise of compressing government spending and slashing the fiscal deficit over the next two years, and advancing the cause of FDI and public-private partnership. For now, near-term political considerations has prevailed.