Date: 04/02/2019    Platform: The Economic Times

Ready for surgical strikes

Acting finance minister Piyush Goyal did not merely present an interim Union budget for 2019-20 last Friday. He also signalled a transition in GoI’s economic strategy. For the last four years, Prime Minister Narendra Modi’s government aimed mostly at restoring macroeconomic stability and introducing broad frameworks of governance, such as the goods and services tax (GST), the monetary policy committee (MOC), and the Insolvency and Bankruptcy Code (IBC).

Restoration of macro-stability was necessary after years of high inflation and unrestrained bank lending. With inflation tamed, and the banks beginning to gradually recover from the non-performing assets (NPA) problem, GoI has initiated a new phase that focuses on specific problems and target groups. Thus, Friday’s interim budget focused on three specific groups: farmers, the middle class, and workers in the unorganised sector.

Indian farmers have long suffered from perennial problems such drought, floods and poor infrastructure.

They now suffer from a new problem: structural overproduction. The agricultural sector has succeeded in increasing food output to record levels in recent years with the harvest this year set to exceed the records of 2017-18.

In contrast, domestic demand for food is slowing as India’s population growth rate has dropped to just 1% a year, and is still falling. Thus, farmers face structural stagnation in prices. In effect, the Indian farmer is now subsidising the rest of the population with cheap food.

Planting Prosperity

Given the above problem, GoI decided to support small and marginal farmers (those with less than two hectares of land) with a direct income transfer of Rs 6,000 a year. This is not a panacea for all rural problems, but it is specifically meant as a top-up to compensate for the price stagnation.

Approximately 12 crore farmers will benefit from it at the cost of Rs 75,000 crore to the exchequer.

Note how it is a bold attempt to focus on interventions rather than provide generalised subsidies. We know from decades of experience that other forms of support, such as input subsidies and minimum support prices, have undesirable unintended consequences, such as overuse of certain inputs, and skewed production of certain crops. Direct income transfer would be a cleaner approach.

Importantly, for the first time, we have the technical framework for doing such a transfer in terms of unique identification, bank accounts and so on — although identification of recipients may still be a problem. If this approach works, it could be extended to target other social support schemes.

The second focus of the budget speech was the middle class. The introduction of difficult reforms such as GST, demonetisation and the banking sector clean-up may provide gains in the long run, but it must be acknowledged that they were disruptive in the short run. The middle class was impacted by these disruptions but, despite some grumbling, it has absorbed the changes.

With steady improvements in income-tax compliance, it was felt that the middle class should begin to see some of the benefits. Hence, the interim budget introduces an income-tax rebate up to Rs 5 lakh.

After accounting for standard deduction and exemptions on prescribed investments, it is now possible to pay zero tax for an annual salary of Rs 7.50 lakh — this is without taking advantage of additional exemptions on medical insurance, home loan interest, etc.

The government feels that this will cover a sizeable section of the lower and middle-middle class.

Finally, the budget speech announced a pension scheme for unorganised sector workers who earn below Rs 15,000 a month. In return for a small contribution during their working years, they will be given an assured pension of Rs 3,000 a month after the age of 60 years. An estimated 10 crore workers may benefit from this.

Geared for Growth

Unlike the other segments, this one was not targeted due to any recent developments but as part of a longerterm strategy to create a minimum social safety net for the country. (The Ayushman Bharat medical insurance scheme announced last year is part of the same effort.)

So, the interim budget is a shift in the government’s approach. Of course, the earlier gains in macro-stability still need to be maintained. But this provides a foundation for what one may expect when the full budget is presented in June-July 2019. For those listening carefully, some of the target areas for the next round were explicitly spelt out in the budget speech.