Budget: Economics dominates over politics

135 years ago, British economist Alfred Marshall, equated economics to political Economy. What he said was not as clear then as it is to be today. The later theories of economics have made his definition more appropriate now than in his times. Autocratic communism that saw “politics itself economics” collapsed within 50 years. And globalization, which proclaimed “economics is global market,” is seen as a failure in 25 years. These economic doctrines, popularized as modern economics for 100 years, now confused and stuttering. The inadequacies of globalization and distortions of global supply chains that once threatened to integrated the world without borders have left the world bewildered.

This is where Alfred Marshall’s concept of political economy which is a mix of national economics and national politics an alternative to globalization. The ratio of mix of economics and politics in Marshall’s political economy varies from country to country. In India, since 2014, Modi govt has had a greater share of economics than politics. Itt was the other way round particularly in the second half of United Progressive Alliance [UPA] dispensation. The 2024-25 budget presented last week by Finance Minister Nirmala Sitharaman seems to be a continuation of the Modi tradition of economics predominating politics.

Balancing of Politics and Economics
In democratic countries worldwide, today there’s a clear trend towards politically-driven economics that provides subsidies to the people. Studies show that even in the most liberal and open America, due to politically-driven economics, a majority of Americans are beneficiaries of government subsidies. What constitutes a politically-driven budget versus an economically-driven one? A politically-driven budget may prioritize current subsidies and freebies, potentially reducing future economic growth expenditures. An economically-driven budget, conversely, might limit subsidies and freebies to avoid hampering future economic growth investments. Since the 1950s, our budgets have taken three distinct forms. Until 1990, under the socialist and planned economy, our country’s budgets focused on export-import production controls, taxes, and central bank financing. After the introduction of liberal economic policies in the 1990s, the focus shifted to stock markets, foreign investment, and liberalization of production and foreign trade. Particularly over the last 15 years, our economy has begun to transform into Alfred Marshalls’ political-economic hybrid. The second half of the UPA budgets were more politically driven with less economic and more political focus. The Modi government’s budgets have been more economically and less politically driven. The UPA’s politically heavy, economically light budgets resulted in lower growth during their tenure. In contrast, the Modi government’s more economically budgets have led to higher growth. This impact is tellingly  reflected in the following data.

Undeniably the growth during decade of Modi’s rule has been manifold as compared to the UPA regime. The phenomenal growth is attributable to substantial increase in development spending by the Modi government In this context, it’s crucial to examine whether the current budget in the coalition government continues Modi’s 10-year economic growth pattern or if there are changes.

Continued Development Expenditure

There’s a rule of thumb to assess whether a budget is economically driven – read growth oriented – or not. That is whether the government borrows for development spend or non-development spend like freebies and subsidies. In the current budget, the total development spend is Rs 15 lakh crore. Modi government plans to borrow a total of Rs 16 lakh crore this year. It means that 94% of the borrowing is for development. Clearly Modi government borrows for development. This marked a significant shift from the UPA rule which was the other way round. In the 2013-14 budget, the UPA government borrowed Rs 5.42 lakh crore, out of which only 3 lakh crore [55%] was for development spending – balance Rs 2.42 lakh crore was for non development  including freebies and subsidies. Undoubtedly UPA budgets were more politically and less economically driven, while Modi’s budgets, the current one included, are more economically and less politically. There are elements of coalition politics in the allocations for Andhra Pradesh and Bihar. But those allocations are also fundamentally development spending. In Andhra Pradesh, the Telugu Desam Party government had invested thousands of crores of rupees in the Polavaram project and the New Capital Amaravati. However, Jagan Reddy who came to power effectively scrapped these projects, rendering those investments futile. The budget has allocated ₹15,000 crore to revitalize these investments. This is not merely a development project for Andhra Pradesh, but for the country as well. Similarly, the ₹12,500 crore allocation for flood control and irrigation projects in the Kosi-Mechi Link Project in Bihar is also a development-oriented allocation.

 Four Core Themes

The Finance Minister highlights four core themes of the budget: employment, skill development, MSME sector, and middle-class-oriented schemes. For generation employment in the formal sector, which is the first theme, a three-pronged approach is planned: The government will cover the first month’s salary for new employees. For businesses creating new jobs, the government will pay two years of provident fund contributions. In the manufacturing sector, the government will cover four years of provident fund contributions for new employees and employers. These initiatives are projected to create employment for approximately 3 crore people, addressing the shortage of job opportunities for the educated. The second theme, skill development, includes upgrading 1000 industrial training institutes, aiming to train 20 lakh people over 5 years, and educational loans to 1.25 lakh students. The third theme focuses on MSME development, featuring government guarantees for uninterrupted bank loans, directives for banks to lend on inhouse appraisal and without rating agency opinion, a special government fund to prevent MSME failures during economic crises, and an increase in the MUDRA scheme’s maximum loan amount from 10 to 20 lakh. The fourth theme targets the middle class with an annual income tax relief of ₹17,500, a ₹10 lakh crore housing scheme for one crore urban middle-class families, and loan facilities for overseas education. While the success of these measures are

Other Key Aspects

Beyond the four core themes, the budget contains several significant elements: A plan to create one million certified natural farmers with continuous marketing structures. Allocation of ₹11.11 lakh crore for infrastructure development, crucial for successful job creation and implementation of other schemes. Infrastructure has been the foundation of industrial growth since Modi’s focus on it began in 2014, leading to significant economic growth.b While the Finance Minister has highlighted the four core themes due to current political considerations, some crucial long-term aspects of the budget have not been prominently featured. Let’s examine a few of these:

Planting mango plant for grandson

India has signed the global pollution control agreement, committing to fulfill pollution control guarantees by 2070. This requires reducing thermal power usage and pollution. Clean electricity production through nuclear and solar power is a key alternative. We need to invest in these alternative energy sources with the next generation in mind. The budget has initiated research and construction for developing small nuclear power plants domestically. This is akin to planting a  mango tree for one’s grandchild – a long-term vision that political parties focused on short-term electoral gains cannot undertake due to financial constraints.The budget has increased the allocation for the nuclear sector five-fold from ₹442 crore last year to ₹2,228 crore. Similarly, the solar power allocation has been doubled from ₹4,970 crore to ₹10,000 crore. The semiconductor industry, considered the future of global technology, has seen its allocation double from ₹3,000 crore to ₹6,000 crore. Research and development funding has increased from ₹840 crore to ₹1,200 crore.These allocations are investments for the next generation. However, the Finance Minister hasn’t neglected current necessities. The rural employment scheme’s allocation has increased by 60% from ₹60,000 crore to ₹86,000 crore. The free cooking gas scheme’s allocation has seen a tenfold increase from ₹180 crore to ₹1,800 crore. The free food distribution program initiated during the 2020 COVID-19 pandemic continues, benefiting the underprivileged.

To end, this budget has not drawn any abnormal criticism even form a hostile opposition. Even former Finance Minister Chidambaram, has only claimed that the Modi government has “stolen” their schemes. Rahul Gandhi tweeted his usual political criticism, calling it a “budget to stay in power.” Apart from routine political accusations, no major economic flaws have been pointed out by anyone, including the opposition parties. To restate this is indeed a budget with economics predominating politics.

Note to the Reader: This article originally appeared in Thuglak Tamil Weekly Magazine. It was translated in English by Shri Venkateshwaran, who is the Chief of Thuglak Digital and personal secretary to Shri S Gurumurthy, exclusively for www.gurumurthy.net.

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• Budget
• Shri Venkateshwaran