Modi And Jaitley May Be Setting Themselves Up For Another Budget Flop

If the reports now leaking out of North Block are anywhere near true, we are going to get even more initiatives from the centre in the 29 February budget. Both the Modi government and the finance ministry are setting themselves up for failure through an initiative overload.

With less than four weeks to go for the budget, the signals coming from North Block are ominous. The NDA’s third budget is unlikely to set the Yamuna on fire, leave alone chart a new path to growth or reforms. Instead, it may well bury itself under an initiative overload.

According to a report in The Hindu,

…the big thrust areas of the Union Budget 2016-17…..will be the agriculture and transport sectors and big-ticket disinvestment, including strategic sales in high-value companies such as Bharat Heavy Electricals Ltd (Bhel), and oil and defence public sector units (PSUs) such as Oil and Natural Gas Corporation (ONGC), Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL), Bharat Petroleum Corporation (BPCL), Hindustan Aeronautics Limited (HAL) and Bharat Earth Movers Ltd (BEML)….

Also being planned is a new centrally-sponsored scheme for irrigation, apparently to help reduce user charges though the use of technology. And then there is a  Godzilla-size expenditure item – the payout on the Seventh Pay Commission award. The most frightening aspect is the report’s claim that Arun Jaitley will be announcing pay “hikes slightly more generous than the Commission’s recommendations.”

Let’s take the ideas one by one, and see why much of it does not make sense.

First, earnings from public sector share sales. The report talks of three ideas: closure of loss-making units; additional listings of public sector units; and strategic sales of bigger public sector units such as Bhel, and the oil marketing companies like BPCL and HPCL. The wind-up of loss making units was mentioned even two years ago, but the government hasn’t done that yet.

As for listing new PSUs and strategic sales of oil companies, the former will not bring in much money if the markets are down, and the latter won’t happen unless the government passes a bill to denationalise some of the oil companies. Most of the ideas are probably pie-in-the-sky. It is worth recalling that this year’s ambitious disinvestment target of nearly Rs 69,500 crore has already bitten the dust.

The government hasn’t even been able to sell the non-strategic stakes in SUUTI (L&T, ITC and Axis Bank), or the rump stake in previously privatised Balco and Hindustan Zinc. So all the talk of strategic sale is likely to be just that – talk.

Second, the scheme for yet another centrally-sponsored scheme to boost irrigation (apparently by creating a new revenue model to bring down user charges) may be well-intentioned, but goes against the long-term trend of tapering down such schemes. Irrigation is a state subject, and central funding in a year of difficult finances is foolish.

The money will be spent, but no one can be sure of a return on the investment. The centre should be winding down all centrally-sponsored schemes one by one, including the Food Security Act, and instead use the money saved to improve defence, infrastructure and public sector banking, which are starved of capital. Central money should be used in areas where the central has control of outcomes.

Third, the decision to pay even more to central government staff is again foolhardy; not only does the centre not get bang for the buck from its employees, giving them even more will pressure the states to follow suit, now that they will have to set up their own pay commissions.

Any pay hike not linked to measureable productivity gains is essentially wrong in principle when government employees effectively have jobs for life. The only way to justify this is by retiring hordes of current employees. If that is what the government is planning to do, hats off. But we haven’t heard about any such radical intentions.

Fourth, the report also says that all the additional spending will be financed without relaxing the fiscal consolidation path. But the math does not add up. If Rs 1.02 lakh crore (or more) is to be paid out to government employees, and more money will be paid for new schemes in irrigation, etc, and both the food security and NREGA safety nets will cost even more, fiscal consolidation can come only at the cost of cutting out productive investment. This is the old Pranab-Chidambaram strategy of cutting out muscle to feed flab that led to the slowdown.

The Modi government is guilty of spreading its efforts thinly over too many ideas. We have Swachch Bharat, Smart Cities, Digital India, Skill India, Mudra Bank, Make in India, Namami Gange, the Jan Dhan, the Jan Suraksha, crop insurance, a bullet train and scores of other initiatives that cannot succeed unless they are given concentrated financial and administrative support.

If the reports now leaking out of North Block are anywhere near true, we are going to get even more initiatives (this time on irrigation, transport and agriculture) from the centre in the 29 February budget. Both the Modi government and the finance ministry are setting themselves up for failure through an initiative overload.

One can only hope that the news report is off the mark.