Union Budget 2019: Is Nirmala Sitharaman a scapegoat for earlier economic misadventures?

It would be unfair to expect too much from the first Budget of the second term of the ruling Bharatiya Janata Party government. It was always going to be a non-event in the absence of liquidity, sufficient elbow room and paucity of ideas.

This being Finance Minister Nirmala Sitharaman’s first Budget speech, every Indian would wish her well. Every Indian would want her to succeed because what is good for India is good for all of us. But then there is this lurking suspicion that she is being used as a scapegoat for the PM’s and previous finance ministers’ economic misadventures.

The suspicion is strengthened by the fact that the blue-eyed boy of the BJP, Piyush Goyal, who presented the ‘Interim Budget’ barely five months ago in February, was not considered suitable enough to present the full Budget in July.

But before anyone blames Ms Sitharaman’s Budget as flat and as something that does not have fresh ideas - though one can trust industry leaders, CII, FICCI and others to give her budget 8 or 9 out of 10 - please bear in mind that she has inherited a chocolate-coated mess. The word, ‘chocolate-coated’, is important here because the government has, for many years, maintained that India is the fastest growing economy and every pointer to the contrary was brushed under the carpet. The capital market indices kept going up (and continue to do so) and there was general optimism. The truth is beginning to come out now and every serious indicator tells us that anything that could have gone wrong, has gone wrong. Any indicator that appears right could perhaps be hiding something.

While the front pages of newspapers and television headlines try to tell you that all is well, the inside pages tell you a different story. Growth is at a five-year low, investments in new projects are at a 15-year low, unemployment rate has touched a 45-year high, GST collections have fallen below the Rs 1 lakh crore mark in June. Worse, auto and tractor sales continue to decline by double digits and agricultural growth rate in 2018-19 has come down to 2.7% from 5% in 2017-18.

The BJP was elected by a full majority and a clear mandate to transform India. They had sold the narrative that BJP had transformed Gujarat into an economic powerhouse and given the opportunity, they could do that for India.

All good, but it did not turn out that way. This was mainly because the BJP in Gujarat had benefited from Dr Manmohan Singh’s deep understanding of Indian economics and UPA Chairperson Sonia Gandhi’s commitment for social change. Gujarat probably benefited from the overall economic mood but perhaps had little understanding of what was driving growth.

Demonetisation was a disaster and we are still suffering from the after-effects. Ms Sitharaman, however, informed Parliament that Demonetisation had no impact on the economy! While some took it as a Freudian slip while others were outraged, she curiously admitted that the government had conducted no study on the impact of Demonetisation on small and medium scale enterprises.

The BJP government should have allowed traders more time to adapt to the new GST regime but that is all history now. Truth is that the BJP is going to be in power for the next five years and while we can be critical about what the government got wrong, it is important to understand how we can get out of the mess that we find ourselves in. We need to be as bipartisan as possible because the state of the economy impacts every Indian.

The biggest problem, however, stems from the fact that the government has been trying to relentlessly push the Indian economy into ‘formalisation’. In his 2017 Budget speech, the then Finance Minister Arun Jaitley indicated that one of the ‘missions’ of his government was to convert the informal economy to formal economy.

Grand as it may have sounded, Mr Jaitley highlighted what was wrong with the government’s thought process. It thought that it could convert millions of small businesses into formal companies by the stroke of a pen. Someone should have told him that the journey from informal to formal is a very difficult one for businesses which are focused on survival. They have to fight competition, pay their employees and the business owner is the last one to get paid. The increased pressure and cost of compliance has killed thousands of small businesses over the last two years and with them India has lost lakhs of jobs.

The BJP has perhaps misunderstood the fundamentals of the Indian economy and this could be traced to their complete disdain, if not hatred, for all things Congress. BJP leadership was deeply impressed by the Chinese investment and manufacturing-driven growth model and believed that India could enter the next orbit of growth if it invested heavily in building its infrastructure and stepped up export-driven manufacturing.

We need to understand that Indian economy is driven by domestic consumption, which constitutes 59% of the Indian GDP while investment in fixed capital makes up 28.5%. China, in comparison, is driven by investment in fixed capital which is 42.7% and domestic consumption makes 39% of their GDP. There is nothing wrong in seeking more investments but no prizes for guessing that these additional resources were going to come from greater tax collections.

The BJP government got its opportunity when international crude prices came down. Rather than passing the benefits to the middle class, the government decided to add this to their revenue base. The government made an estimated Rs 10 lakh crore from additional taxes on petroleum products.

Then came the Goods and Services Tax which not only threw millions of small businesses across the country into a tizzy, it raised the cost of compliance for businesses which were anyways struggling to stay afloat after demonetisation. The impact of Demonetisation and GST were not completely understood then but we can now say with certainty that this is where trouble began.

The BJP’s policies have hurt domestic consumption and this is now evident in the declining automobile sales and has spread to other areas. There is hardly a sector in the economy which has not been impacted by the twin-shocks, as they are called now.

“Volume growth at leading FMCG companies that derive more than a third of their sales from rural areas has dropped to a six-seven-quarter low. Indian airlines carried 11.6 million passengers in March, a mere 0.1 percentage point higher than a year earlier, representing the slowest increase since June 2013,” the Economic Times reported.

While there was nothing wrong with the concept of Make in India or investing heavily in infrastructure building, the change in policy direction did not yield much.

Exports took a hit as they went down from $318.6 billion in 2013-14 to $280 billion in 2016-17 and ended marginally higher at $331 billion in 2018-19, a 4% rise over a five-year period. Make In India for the world simply did not have any impact. The government was hoping that infrastructure growth would lift up growth but going by the numbers, it only had a limited impact. This happened mainly because private investments in the infra sector had taken a hit as it declined from almost 37-38% to below 25% in fiscal 2018 but has gone down even further, leaving the entire responsibility on the government now.

While India needs the infrastructure to grow, the question is does it help restore demand and create enough jobs? The government needs to examine if there is a case for focusing on finishing existing projects before taking up any new ones.

Generating employment for our young women and men has to be put on the top of our national agenda as we want every Indian to achieve their true potential in life. Sadly, unemployment rate is at a 45-year high and it would take some bright ideas and a lot of work to see that things are back on-track, but the government has to first acknowledge that we are in serious trouble on the job front.

The government’s job creation efforts have been focused on disbursing loans through the Mudra scheme. Launched in April 2105, the government has so far given away Rs 7,23,000 crore to 15.56 crore people. Since the scheme covered roughly 1/6th of the voting population in the country and half of all voting households, it may have helped the BJP get extra votes, but has it helped growth and more importantly, has it helped create jobs?

India recorded three years of 9% growth between 2005 and 2008 and MGNREGA, launched in February 2006, is reported to have played a big part in raising rural demand and overall growth in the country. MUDRA may only be a loan scheme to boost self-employment, but it has not caused any noticeable uptick in the growth rate.

A deeper social audit is needed to study the impact of the scheme but if unemployment reaches a 45-year high despite

MUDRA, it means either of two things, the scheme is either not working or the economy is in such poor state that even such a massive loan disbursement is not having a visible impact. The BJP government needs to carry out a reality check on what has gone wrong and how to fix it.

Agriculture is the single biggest employer in the country and this is a sector where serious thought is needed. The government can keep talking about doubling farm income by 2022 but we all know this is not going to happen. The average growth rate in the agricultural sector during the first five years of the BJP government was little over 2% as the post-2014 monsoon deficit pushed agricultural growth into the red zone.

The government has to understand that domestic consumption will not revive unless the farm sector shows signs of revival. The government can keep talking about doubling farmer income by 2022 but we all know that it is not going to happen. NITI Aayog estimated the income growth for the farm sector to be 3.4% between 1993-94 and 2015-16. For farm incomes to double, incomes would have to grow at 10.4% annually between 2015-16 and 2022-23, that is more than 3x the base rates. At present, incomes are growing at less than half of the old rates. With another bad monsoon looming large, we should consider ourselves fortunate if farm sector growth does not go in the negative zone.

Truth be told, the government does not have any ideas on how to fix Indian agriculture and revive rural demand. It has appointed noted agricultural economist Ashok Gulati as a member of the Task Force on Agriculture at the NITI Aayog and the Chairman of the Expert Group on Agriculture Market Reforms. A high-powered committee of Chief Ministers has now been constituted for ‘Transformation of Indian Agriculture’. The committee, headed by Maharashtra Chief Minister Devendra Fadnavis, has been asked to submit its report within the next two months.

The fact that Mr Fadnavis has been entrusted with the responsibility of heading the committee indicates the kind of mess the government is in. Mr Fadnavis neither has the time nor the competence to suggest answers to one of the most complex problems facing the country today. He is headed for an election later this year and even if he is able to take out the time, the bigger question is if he is indeed the right person for the job?

Maharashtra government had recently admitted that 12,000 farmers have committed suicide in the state in the last three years. The Maharashtra government had brought a loan waiver scheme for its farmers but have spent only Rs 16,980 crore compared to Rs 34,022 crore promised initially. Maratha reservation may give him some political respite, but it would be unfair to expect Mr Fadnavis to come up with a magic potion to fix Indian agriculture when all his schemes have failed to deliver in his home state.

Fixing the real estate sector needed urgent attention but here too, the government did not have too many options, considering the kind of damage it had done to the sector over the last five years. The value of their real estate holdings defines the net worth of most middle-class families.

Anyone who lives in the real world will tell you that property prices have crashed all over the country and this has impacted them, more than anything else. Money locked in real estate is as good as dead because there are no buyers in the market even at rock-bottom prices.

The biggest problem for the BJP as a party and as a government is that politics always comes first. National interests come a distant second. National interest would have demanded that the BJP recognised the acute stress the country is under and having run the government for five years, it has no one else to blame.

The country perhaps expects too much from Ms Seetharaman. We expect her to get real, face facts and come up with a budget that seeks to fix the economy. What we are likely to get is just more of the same. Perhaps she would do a better job next time.