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Last Updated : Feb 04, 2019 02:01 PM IST | Source: Moneycontrol.com

Opinion | Interim Budget: Great for elections, but worrisome for the economy

The real worry is the absence of incentives for job creation

RN Bhaskar

The mood in the Bharatiya Janata Party ranks is upbeat. Budget 2019 had the right notes for wooing farmers, the middle class and, possibly, even the real estate sector.  In terms of political strategy, the budget announcements were nothing short of brilliant. But four issues are quite worrisome.

The first is agriculture. The government has announced a grant of Rs 6,000 per farmer household for those owning less than two hectares. The amount is meagre, but the outlays can be large. On the one hand, it will increase the centre’s bill by at least Rs75,000 crore.  On the other hand, there are good reasons to believe that the money will be inadequate.

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Avg monthly household inome

To understand this situation, it is necessary to study the findings of the latest Nabard survey on All India Rural Financial Inclusion Survey 2016-17). The table shows that even though the average (all-India) farmer income was around Rs 8,933 per month per household, agricultural income was just Rs 3,140.  The farmer had to make up for household income through other means. And do bear in mind that these figures are averages.  As Nabard itself admits, at the lower end, farmer income could be barely one-third these figures.

The low income was not because of poor agri-production. It was often because the farmer is usually not paid enough for his produce. As can be seen from anecdotal evidence, the farmer gets barely 10 percent of the market price for his produce. Middlemen, often backed by politicians, invariably account for a good part of the difference between what the farmer gets and what the consumer pays.

Clearly, the focus should not be on subsidies or income grants, but on working out a mechanism which allows farmers to be paid at least 50 percent of the market price (which is what Verghese Kurien of Amul insisted and succeeded in ensuring). The government has a time-tested model, which it can implement with a few tweaks. But it hasn’t. This is unfortunate.

There is another problem with agricultural dole. See the Nabard chart.  The farmer already earns more than the non-agriculturist. Benefits should have been extended to this rural segment as well. But politically, the farmer is a more important vote bank.  That explains why the ethical option was swept aside and the politically expedient one was taken up instead.

The second worry is the absence of incentives for job creation. Economists fear that the freebies to farmers and the middle class (income tax exemptions) might create at best a temporary consumer boom. Without investment in capital formation, there will be little job creation. The government’s refusal to accept the findings of its statistical arm on unemployment muddies the waters further.

Here too, the best way of creating jobs – rooftop solar—has been ignored. Further, needlessly stoking the cattle slaughter ban has hurt farmers more than other sectors because they lost the ability to earn Rs 20,000 for each old cattle. The collateral damage was felt by the leather and meat industries (major employers in the economy). Thus, instead of creating jobs, the government destroyed jobs. It also destroyed wealth instead of creating it.

And this brings us to the third problem. The government says it wants to control the fiscal deficit. But there is clear evidence that the government has done this through off-budget sources of income. That could explain why a Coal India is now being persuaded to go in for a (closed-loop) share buy-back. No prizes for guessing that the proceeds will go to the government. It also explains why the government has been insisting on a higher dividend from the Reserve Bank of India.

GBS and IEBR

Look at chart 2.  CARE Ratings’ analysis shows how off-budget sources of income for the government have zoomed. As noted economist Ajit Ranade points out, the “number has grown from Rs78,000 crore in 2014-15 to nearly three times at Rs208,000 crore in the current year.”

With so much of government spending sloshing around, inflationary pressures could reappear. That, in turn, could push up borrowing rates.  It could further weaken the rupee as well.

To counter this, the government has to create more jobs. That will require wooing private investment. But that won’t be easy if the government does not keep the courts away from reopening arbitration awards. Nobody likes to make investments if the rule of law is not made effective and expeditious. And no one likes laws that are applied retrospectively either.

There’s one final cause for worry. The government talks about creating two lakh additional seats in institutes of higher learning.  But it remains silent on how to fund this. There is no budgetary proposal for this (though there is one for funding cows). The government hasn’t even dismantled the licence raj for medical education, even though there is a huge shortage of doctors–made more acute by the Aayushman Bharat scheme. The truth is that if you cannot invest in education, human capital will remain unexploited and the country won’t grow in a healthy manner.

The budgetary proposals sound good.  But the anxiety just won’t go away.

The author is consulting editor with moneycontrol.com

 
First Published on Feb 4, 2019 01:58 pm
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