Sunday, January 29, 2017

The Budget will tell if aspirational Modi is now a populist Modi

The question on our minds is: has the Prime Minister changed? Is Narendra Modi turning populist? We shall have the answer on Wednesday when the finance minister presents the Budget. The nation elected Mr Modi on an aspirational platform of creating jobs, containing inflation, and stopping corruption. Indeed, in the first half of his term, he has pursued responsible policies to meet these goals. As a result, the economy has turned around; inflation has been licked; fiscal indicators are healthy. The big weakness is the lack of jobs, an objective that has suffered a setback in the past three months by a badly executed demonetisation. Modi has recognised this, and is this why his rhetoric has changed?

Instead of the aspirational talk of opportunities and jobs — of startups, ease of doing business, make in India — we have begun to hear the tired, pro-poor rhetoric of the Congress party. Nowhere was this more obvious than on New Year's Eve when Modi peppered his defensive speech with populist giveaways to farmers, pregnant women, senior citizens, etc. Gone was the refreshing talk of personal responsibility that we heard during his election campaign: 'India doesn't owe you cheap diesel, free electricity and loan waivers; the only thing it owes you is good governance; after that, it's up to you to work hard, pull yourself up, pay your taxes, and make India a great nation.'

So, what should we expect from this coming Budget? Let us hope the government will stay the course with the sound strategies pursued so far. Let's not take high growth for granted. Every rupee given away in populist doles is a rupee not available for job creation. Remember, recent state elections have also been won through purposive, long-term development, not giveaways. The window of opportunity for a grand demographic dividend is limited to the next decade, and it would be tragic to lose it to populism.

Job growth has been weak because the economy has been firing on a single cylinder: consumption. The other cylinders — private investment and exports — have failed. It is easy to get discouraged when jobs are disappearing around the world through technological change. The best course is to stay focused on bettering infrastructure, logistics, ease of doing business, implementing sectoral plans — such as the fine package for the labour-intensive textile industry — and resolving NPAs (non-performing assets) of public sector banks. The long-term solution is to bite the bullet and privatise these banks; eliminate the power of politicians to tamper with state electricity boards, and reform labour laws. So, no new schemes, please! Tell people that achhe din will take time; if you are honest, they will believe you.

Since non-farm jobs will take time, keep improving the productivity of farm jobs by allowing traders and farmers to buy and sell freely via e-NAMs (National Agriculture Market), thus ending the APMC (Agricultural Produce Marketing Committee) raj. Have a predictable export-import regime for farm products rather than the present switch-on, switch-off policy. Get over the unscientific bias against genetically modified crops, which is holding back productivity. On taxes, keep lowering corporate tax rate by 1% a year as committed (while eliminating exemptions) until we get to the effective rate of competitors. Move indirect tax rates closer to where they will be in the Goods and Services Tax. On personal income, stretch out the slabs rather than raising the limit for tax-free income to protect the tax base. Only implement the universal basic income scheme when all subsidies have been scrapped and supporting infrastructure is in place.

Whatever the cost-benefit of demonetisation, the Budget must snatch its long-term gains of a wider tax base, higher savings rate, and more resources for investment. Technology has offered a chance to bring banking to the masses. If we seize the opportunity, the aam aadmi can leapfrog over the bank branch into a digital banking future, just as he hopped over the landline with the cellphone. The Budget can fuel this revolution and keep alive the moral crusade against black money.

It was a fresh voice that reminded us in early 2014 that the state did not owe us anything except good governance, and it won Modi the election. People want opportunities and jobs, not loan waivers and sops. In fact, Arun Jaitley would do well on Wednesday to quantify the jobs that each lakh of rupees in the Budget will bring. It would be a pity to lose the Narendra Modi who wanted to make vikas a 'jan andolan', a mass movement.

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