Budget 2021: Change of Heart for Modi or a Pandemic Compulsion?

Budget 2021, as claimed by Finance Minister Nirmala Sitharaman, has indeed been landmark because it indicates a complete course change (maybe correction also) for Modi’s fiscal and economic thinking since 2014.

Unlike the pro-growth Modi we had seen in Gujarat, the Modi of New Delhi had been uncharacteristically socialistic in his thinking and conservative in fiscal approach. He was, like all BJP/NDA governments of the past, very careful about inflation and had worked hard to keep it in check (within 5%). He had also been strict about the fiscal deficit targets and never let it go out of control. All his favourite projects like Jan-Dhan Yojna, Mudra Yojna, Ujjwala Yojna, Sahaj Bijli Har Ghar Yojana, Swachh Bharat Mission, Ayushman Bharat, Jal Jeevan Mission, Kisan Samman Nidhi were those socialistic fruits which the Socialists and Communists could not deliver in seventy years despite consistent pro-poor posturing. In a way, Modi wanted to defeat the opposition in their own game. Alongside of this Modi presided over a 6-year plus period of decline in growth (which incidentally started from the 2nd UPA time, not after Demonitization). The staggering NPA figures, fugitive loan defaulters like Vijay Mallya, allegations of ‘suit-book ka sarkar’ had put Modi in a defensive position for no fault of his, but to overcome the situation and public perception, he had been tough on the industry and industrialists. The Bankruptcy and Insolvency Act (which is a harsh but good law), penalization of the bank management for bad loans, drying up of bank credit, investigating capital flight outside the country, crackdown on black money etc. scared the industry a little too much for investment and growth to happen. Loss of growth has a direct impact on employment numbers. Neither growth nor employment situation had been favourable for Modi. Despite those odds Modi managed a second term – based on successful delivery of his socialistic schemes topped up with Nationalist and Hindutva agenda.

Those who are interested can read my article on the reason for the growth decline: https://www.linkedin.com/pulse/economic-slowdown-2019-cost-cleaning-up-chirajit-paul/

The 2nd term was no different until the pandemic of 2020 struck. Three quarters of only expense and no income (lockdown and unlock period included) forced the government to shed its financial prudence philosophy and get back to borrowings throwing the fiscal deficit targets out of the window. After the target of 3.5% of the GDP in 2020 had been breached, in 2021 budget the government went a few steps ahead to set a target at 9.5% taking much more risk than before. Much of the money that would come from borrowings will be spent on infrastructure investments of 103 trillion. This will propel employment and create demand by taking the money into the hands of the employee-consumers which will trickle down throughout. There is also a plan for Agriculture infrastructure building which will be funded from an added cess on Petrol and Diesel. Infrastructure building and the spent on it is expected to drive growth through demand and that is the reason the stock markets and the industry hailed the budget with skyrocketing indexes and positive feedback.

Modi has finally realized that growth (besides bank a/c, toilet, gas, small loans) are also important for the people not only in survival/life-style terms but also in electoral decisioning as well. Growth, even if it is ‘jobless’ will generate revenue for the government to redistribute the wealth to the have-nots in some form or the other. Thus, it would give him a lot of flexibility with his socialistic dreams as well. Hence, by prioritizing growth over prudence, Modi opens a new door of sensible politics for himself.

Growth, at last, has been vindicated; the only test remains is to keep inflation under check (in times of greater liquidity) and inspire private investment. Only then, the full cycle will get completed.