Gujarat election scare will force BJP to present a populist Budget

Gujarat was one of worst affected states on account of demonetisation and implementation of GST. Many experts believed that BJP would lose its voter base in urban Gujarat on account of these two disruptive policies. However, with BJP winning over three-fourths of the urban seats, the prophecy seems to have fallen flat.

In fact, BJP was leading in all 16 seats in Surat, the place supposed to be worst affected by demonetisation and GST on account of the diamond and textile markets.

But the fact remains that BJP has won fewer seats this time than in the 2012 elections. The seats lost were in rural Gujarat, especially in those places which had a strong Patidar (Patel) presence. And this has the potential to change the narrative in the months ahead.

What the results point out is that while nationalist fervour is profitable and will continue to be whipped up, appeasement based on caste lines is the new order of the day. We have seen it happening in Maharashtra where the Marathas made the BJP government in the state agree to their reservation strategy. A vociferous Patel community has made its presence felt in Gujarat.

The government will be forced to take this reality in its stride as it readies itself for the 2019 general election. This means more socialist measures will be announced going forward for the backward classes as the government would like to increase its grip on them. What the elections also indicate is that the BJP will have to take its coalition partners with it – something it has struggled with -- and possibly add a few more ahead of the next election.

Budget 2018, the last full budget by the government in its current tenure, will have to incorporate the learnings of the Gujarat polls.

Fiscal prudence will be the last thing on the mind of the finance minister. Apart from infrastructure spending, the government will have to provide money for job-creating sectors like textile, leather and gems and jewelry. More freebies or subsidised policies in sectors like housing, agriculture and small and medium sector enterprises cannot be ruled out.

Given the current growth in GDP, it is unlikely that the government will be able to fund its expansive budget through tax collections. The only way to do it is by increasing borrowing which would mean that interest rates are unlikely to come down next year.

The problem for the economy, especially for the smaller companies, is access to funds. Bank funds are largely not available to them, so the only way to raise money is either through the costly non-banking finance company (NBFC) route or the costlier private financier route. The government would like to push banks to start lending, signs of which can be seen from the cabinet clearing a bank recapitalisation of Rs 2.11 crore, most of which will be funded by the central government.

The government would also like to keep investors happy as it heads to the 2019 polls. One can thus not rule out a reduction in corporate tax, which the finance minister had promised will come down to 25 percent by the end of the government’s tenure.

A number of socialist measures announced by BJP just ahead of the elections could not help it improve its tally, but it has gained in popularity with a vote share of over 50 percent, a gain of 2 percentage points. This will come in handy in the 2019 general election as caste-based politics will take centrestage over religion-based politics.