State of the Union: Honey, I shrunk the economy!

Ever wondered why the Budget is such an important event in India? Why on the last day of February everyone goes into a tizzy? Why after the usual platitudes from corporate India, even if the finance minister has messed up the economy, the Budget is forgotten till the next year? Why is the public discourse not prepared to go beyond that “one-day shenanigan” and spend the next two months between the presentation of the Budget and its passage in a piercing and detailed scrutiny of every aspect of the budgetary proposals if it is the panacea for all our ills? Finally, why is the Budget a non-event in all other democracies?

The reason is not difficult to discern. Unlike the rest of the world where there is stability in fiscal and monetary policies over the medium term and no gerrymandering with the taxation structure, budgets are but an accounting exercise to serve the ends of financial housekeeping.

Earlier the Planning Commission used to be a fair arbiter between the Centre and the states. With the abolition of the Planning Commission and its replacement by the Niti Aayog that at the last count was a one-and-a-half-man band, not only has enormous power, propensity to arbitrariness and unfettered latitude been concentrated in the finance ministry, but, more importantly, even the institutional mechanism of taking a long-term view of India’s economic trajectory has been dismantled.

Be that as it may, let us turn our attention to the Union Budget for 2016-17. Finance minister Arun Jaitley opened his Budget speech with a pat on the back. He rather triumphantly declared, “The International Monetary Fund has hailed India as a ‘bright spot’ amidst a slowing global economy. The World Economic Forum has said that India’s growth is ‘extraordinarily high’.” How does this square up against the government’s own numbers? The ministry of finance, department of economic affairs, economics division, puts out monthly economic reports. In its report for the month of January 2016, the last available, it outlines the macro-economic indicators as follows.

The index of industrial production (IIP) is in the red now for many months. It was (-)1.3 per cent in December 2015 as compared to 3.6 per cent in December 2014. It was (-)3.2 per cent in November 2015 as compared to 5.2 per cent in November 2014. Do not forget that in its first six months the National Democratic Alliance government was riding the positive economic momentum created by the previous United Progressive Alliance government even in the closing years of its decade-long tenure.

In December 2015, eight core infrastructure sectors — coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity — grew by a measly 0.9 per cent as compared to 3.2 per cent in December 2014. In November 2014, growth in these sectors had contracted by 1.3 per cent, it was in the negative as compared to positive growth of 8.5 per cent in November 2014. The manufacturing sector also recorded negative growth of 4.4 per cent in November 2015 and again negative growth of 2.4 per cent in December 2015.
During April 2015-January 2016, merchandise exports and imports declined by 17.6 per cent and 15.5 per cent, respectively. The rupee that stood at 59.26 against the dollar on an average in the May of 2014 had depreciated to 68.29 by February 2016 and continues to slide.

The bad news does not end here. The moot point is the data put out by the finance ministry does not square up with the delusional world that Mr Jaitley wants to live in. Mr Jaitley, before patting himself on the back, opened his innings by referring to the global economy being in serious crisis. However, is the crisis as serious as the global economic meltdown of 2008 and the eurozone catastrophe of 2010-11? Despite such grave challenges, the UPA delivered 7.8 per cent growth on an average year on year for 10 years.

What prescriptions to surmount this precarious situation did Mr Jaitley provide in concrete terms in the Budget? The answer, disappointingly, is none. May be for the first time ever “a” finance minister refrained from putting a headline number for gross domestic product growth in 2016-17. The apologists for the government stated on TV show after TV show that they had adopted the number given in the Economic Survey, conveniently forgetting that it is an academic sweep of the economic landscape while the budgetary exercise, for whatever it may be worth, is a governance remit.

The Economic Survey assumes a rate of about 7 per cent for 2016-17. The Budget papers have given the GDP figures for 2015-16 and 16-17. It calculates the nominal growth at 11 per cent. If these are government’s numbers and the Reserve Bank of India’s target for inflation in the current fiscal is 4-6 per cent, then it can be safely inferred that GDP growth in the next financial year would be a meagre 6 per cent. Remember this number is also premised upon 2011-12 as the base year. It is a number that even the RBI and many economists are deeply sceptical about.

At the previous base year of 2004-05, the 6 per cent growth rate would translate into 4 per cent, which is what the economy really feels like. Even the revenues of the government have not been augmented by increased collections of corporate income-tax or widening the tax base. They have been bolstered by multiple increases on excise duty on petrol and diesel myriad times since the Budget was presented last year. This brought Rs 54,334 crore to the government’s kitty, an amount that should have been legitimately passed on to the consumers because of the sharpest drop ever in global crude oil prices in recent times.

On the three major challenges of agrarian distress, private investments and exports the government has done precious little. While the Budget talks about doubling farm incomes in five years by 2021, it does not offer a clue as to how it is possible with the agriculture sector growing at 3.4 per cent. The government has not even given a meagre increase in the minimum support price (MSP) over the past two years. In fact, MSP increases have been virtually nil and the government has reneged on its electoral promise of giving cost plus 50 per cent more to farmers as remuneration for their produce.

Similarly, the government has shortchanged all the oligarchs who had bankrolled the 2014 elections of the BJP. They are bitter about being used, abused, and then finally dumped. The Budget has some paragraphs devoted to public investment which, in any case, cannot kick-start the economy if the path of fiscal consolidation has to be followed. There is nothing to spur private investment that they can create the much-needed employment and trigger domestic demand to get the wheels of the economy turning.

On exports, the government seems to have just thrown in the towel. After 14 successive months of negative growth, there is no roadmap or incentive structure to revive exports which have played a critical role in India’s growth trajectory over the past three or more decades. The government has spent less than budgeted on education, medical and public health, housing, social security and development in the current fiscal. Even the outlays of gender-based ministries went south in the revised Budget estimates.

Finally, there is nothing for the middle class or the small and medium entrepreneur. Neither is their any substantive relief to the taxpayer. The government has delivered a double whammy by deciding to tax withdrawals from the Employees’ Provident Fund (EPF), the object of the tax being to encourage people to stop investing in the EPF scheme and to invest in market-based annuities that can then be leveraged by the pirates and carpetbaggers of the financial sector. This has the potential of virtually wiping out the life savings of millions of ordinary people, as it happened with pension funds of many countries during the arbitrage-, derivatives- and leverages-driven economic meltdown of 2008. Mr Jaitley’s Budget would have the singular distinction of shrinking if not sinking the Indian economy.