Budget 2024: From Pakodanomics to a 'middle-class meltdown'
Economic Survey: 'The corporate sector has never had it so good.'
Welcome back to India Inside Out, for our last edition before the newsletter takes its customary summer break over August.
Expect very light posting over the next month, other than some plugs here and there, given that I will mostly be on the road (including popping into the Stade de France for a chance to see Neeraj Chopra at the Olympics!) We should be back to regular operations in September. If you have feedback, suggestions or will also be in Paris to see Chopra, give me a shout at rohan.venkat AT gmail.com
What you missed:
Foreign Policy: In the previous edition, we discussed Prime Minister Narendra Modi’s visit to Russia and the questions that trip raised. Since then External Affairs Minister S Jaishankar went to Tokyo for a Quad foreign ministers’ meeting, and also met Chinese Foreign Minister Wang Yi in Laos (prompting some to ask about a thaw in India-China ties) and reports emerged that Modi is considering a visit to Kyiv, Ukraine in August. Also, plans for a 2024 Quad Leaders’ summit in India are still on. Read Suhasini Haidar on Modi in Moscow, and Tanvi Madan on whether there will be an India-China deal.
West Asia: India has stayed silent so far on the killing of Hamas political head Ismael Haniyeh in Iran following the inauguration of the new President of Iran Masoud Pezeshkian (where Highways Minister Nitin Gadkari was in attendance, rather than Jaishankar), although New Delhi has asked Indians to leave Lebanon. The only other note here is, well, this tweet and its many reactions.
Politics: The Bharatiya Janata Party continues to face internal tension in its Uttar Pradesh unit, with fears now about what the infighting might mean for the party’s broader image and prospects. Amidst this, the SP’s choice for Leader of the Opposition is being noted as a missed opportunity. Meanwhile, even as Congress’ Rahul Gandhi continues to focus on social justice politics and questions of representation, the Supreme Court has delivered a major, controversial judgment permitting the ‘sub-classification’ of Scheduled Castes and Scheduled Tribes within the overall SC/ST quota. Put simply, the current affirmative action reservations for government jobs and seats for students in state-run colleges are broad based: Dalits and Adivasis from across those communities can apply for any of the seats or posts under the quotas. Now, state governments have been permitted to carve out ‘sub-quotas’ for what they identify as the most-backward among those communities. Read this for context and this for a more detailed legal backgrounder.
China: The Economic Survey, tabled a day before the Budget, made an interesting case for India to accept investment from China. Finance Minister Nirmala Sitharaman said that the suggestion wasn’t hers – the Survey is written independently by the Chief Economic Adviser – but she “wasn’t disowning” it. Now Commerce and Industries Minister Piyush Goyal insists there has been no rethinking within the government on the question. Read Anticipating the Unintended on the proposal.
Economy: We discuss some bits of the Budget below, but it’s worth noting that the big takeaway – at least in the very specific subset of people that turn up on social media and in TV studios – has been that of the ‘middle class’ (i.e. taxpayers) being squeezed further by the government without getting much in return, prompting much unhappiness and complaining online, including from otherwise unswerving BJP supporters. To get a sense of how this is echoing around the Op-Ed columns, read Andy Mukherjee, Vir Sanghvi and Shekhar Gupta.
What I’ve been working on:
On The Election Tricycle, Emily and I discuss the Democrats’ ‘weird’ attack line, and other attempts at reframing political bases as the ‘norm’ rather than the outlier, including more recently the Indian Congress:
What you need to know: Budget 2024
A few years when asked about data suggesting that India was not creating enough jobs for its youthful population, Prime Minister Narendra Modi offered this in response: “If someone opens a ‘pakoda’ shop in front of your office, and he earns 200 rupees every day, does that not count at employment? Now till me which register will capture this data?”
‘Pakodanomics’, as this was soon dubbed, was aimed at making two points on behalf of the BJP-led government: One, it cast doubt on the data that showed employment generation under Modi’s tenure had not kept up with India’s needs, and two, it was seen as an argument that self-employment could credibly play a significant role in solving India’s gigantic need for jobs. Needless to say, neither of those claims was terribly compelling at the time.
In July, as Finance Minister Nirmala Sitharaman delivered the first Budget speech of Modi’s third term, the employment and skilling portions – listed as the second priority after agriculture – tacked very much against Pakodanomics and the government’s previous attempts to rubbish any suggestion that India might be facing a jobs crisis.
“Tuesday’s revised budget promised five new programs, totaling 2 trillion rupees ($24 billion) in fiscal sops, to employers and new hires. These benefits, which aim to reach 41 million youth over five years, were first promised by Rahul Gandhi’s Congress Party, the main opposition grouping, in its election manifesto. Moreover, the cost is almost the same as the so-called production-linked incentives that Modi had offered, starting in 2020, to a range of industries, from solar modules and electric-vehicle batteries to smartphones, drones and textiles….
Among other things, the Modi administration will shoulder a part of the first month’s wage of anyone joining formal employment over the next couple of years. First-time employees in manufacturing — and their employers — will get help with social-security payments for as many as four years. Interns at the country’s top 500 companies will be given an allowance.”
What might these new Employment-Linked Incentive schemes, each of which are built around formal jobs, tell us about the government’s economic agenda, or how it evaluates its own shepherding of the economy over the last decade?1
To some extent, Modi’s ‘pakodanomics’ seemed less like a genuine belief in the vitality of India’s informal sector, and more of a narrative tactic to take on criticism ahead of the 2019 election. As Yamini Aiyar points out, India’s economy has over the last decade “favoured growth via the small formal, corporate sector, leaving unincorporated enterprises that make up the informal economy, where the bulk of India is employed, to bleed.”
Instead, the BJP-led government’s economic strategy, particularly under Finance Minister Niramala Sitharaman, has focused on creating the conditions for the private sector to thrive – and invest in a big way – in the hopes that this would trickle down into the broader economy, eventually creating jobs and momentum for sustained growth.
What were the elements of this strategy? Clean up the mess on corporate and bank balance sheets, steadily lower the deficit so that the government isn’t crowding out private borrowing, improve ease of doing business, signal support for firms as ‘wealth creators’ even amid accusations of crony capitalism and the government picking winners and have the government focus its spending on physical and digital infrastructure (rather than welfare, human development or monetary stimulus) with the hope that it acts as a ‘multiplier’ until private investment kicks in.
As Sitharaman explained in 2019, soon after her first few months in the job,
“Once you start laying roads, start building bridges, strengthening airport, seaports, once you start building inland waterways, you are indirectly or probably even directly increasing the demand for industrial material — cement, steel, concrete, everything else. So if those industries can see demand, their investment, therefore, should automatically be focused on expansion of the capacities or utilisation of the capacity to the fullest extent.
As you are spending on infrastructure, in-situ promotion of labour is what is happening. Giving money they need in their hands instantly is what is needed. So if government’s expenditure is diverted to only prioritising on infrastructure, the ripple effect, I expect, will be on labour, everywhere rather than concentrated in one place…The virtuous cycle kicks in from there. Consumption increases, demand increases, investment increases, as a natural course.”
Former Chief Economic Advisor KV Subramanian’s Economic Survey of 2019-20 (in which he promised to depart from “traditional Anglo-Saxon thinking”) also laid out the strategy:
“During the last five years, India’s economy has performed well. By opening up several pathways for trickle-down, the government has ensured that the benefits of growth and macroeconomic stability reach the bottom of the pyramid… International experience, especially from high-growth East Asian economies, suggests that such growth can only be sustained by a “virtuous cycle” of savings, investment and exports catalysed and supported by a favourable demographic phase. Investment, especially private investment, is the “key driver” that drives demand, creates capacity, increases labour productivity, introduces new technology, allows creative destruction, and generates jobs.”
Despite the several global shocks that followed – the Covid-19 pandemic, protectionism and the fear of a trade-war because of US-China tensions, and the Russian invasion of Ukraine – Modi’s government has been quite successful both at keeping the deficit broadly in check and keeping corporations happy.
A significant corporate tax cut, announced as a mid-year mini-Budget by Sitharaman in 2019, was a big part of this, so much that this graph, from a piece by Roshan Kishore, shows how the share of income tax revenue has overtaken the revenue India earns from corporations.
This year’s Economic Survey spells out how successful this element of the strategy has been, even at a time of muted global indicators:
“In terms of financial performance, the corporate sector has never had it so good. Results of a sample of over 33,000 companies show that, in the three years between FY20 and FY23, the profit before taxes of the Indian corporate sector nearly quadrupled. Further, newspaper headlines told us that the corporate profits-to-GDP ratio rose to a 15-year high in FY24.”
Where, then, is the private investment that is the “key driver” to this whole project? A Mint analysis finds a “surge in operating cash flows” for Indian firms over the last year, but the “investment spigot is still shut tight.” Which is why Indian leaders, from Sitharaman to Modi, have spent the last few years berating the business community and pleading for them to invest.
Given that background, what did the first Budget of Modi’s third term in power put forward to address this? Here’s Rajeswari Sengupta:
“The ask from the Union Budget therefore was a policy framework that would encourage the private sector to expand capacity, generate employment and thereby pave the way for sustained, rapid growth. This growth strategy had to be accompanied by fiscal consolidation to bring down deficits and debt levels that have been running high since the pandemic…
From the macro stability perspective, this Budget exceeded expectations… From the growth perspective, the government, perhaps for the first time, acknowledged the problems in the economy, albeit indirectly…
Having said that, the Budget did not outline an economic strategy to tackle the problems nor did it lay out an economic vision for the next few years. Instead, the plan seemed to be to address the deeper structural problems using schemes. It is not clear how these schemes will solve the problems, or even, how they will really work.”
(Meanwhile, as Finance Secretary TV Somanathan says here, there is still no interest in directly stimulating consumption).
Not everyone’s quite so down on the Budget. Mihir Sharma points out that, on three different counts, it appears – “if obscurely” – that Sitharaman has been paying attention to the criticism leveled at the government’s economic policymaking and is promising a shift.
In particular, Sitharaman in her speech said that the government will formulate an Economic Policy Framework and also initiate and incentivize reforms for “improving productivity of factors of production, and facilitating markets and sector to become more efficient” covering “all factors of production.” She also noted that “effective implementation of several of these reforms requires collaboration between the Centre and the states and building consensus.”
That might be both noteworthy and even commendable, in terms of a willingness to absorb critiques and recommendations, but it is important to put it in context: Prior to the election Modi spoke of a clear-cut 100-day agenda2 to be in place once his re-election had taken place, and Sitharaman already mentioned plans to reform “all factors of production” before the election.
Yet on Budget day, Indians were told that 10 years after Modi first took charge, and more than four years after the pandemic, the government now needs the time to “formulate” a policy framework. Moreover, barring Sitharaman’s rhetoric on collaboration and consensus, has there been any genuine indication that the government will now take a different approach to policymaking alongside the states?
A few more voices on the Budget:
“This is not a budget for Viksit Bharat. There is nothing remotely Viksit about a collection of ragtag and bobtail schemes without an analytical framework or a coherent spending plan. There is no plan to mobilise resources for public investment — the public investment (Central government plus the pubic sector) GDP ratio is 3.6%, the same as last year and lower than that in FY 2019. There are concrete spending proposals to deal with political issues — coalition allies and troublesome farmers. The actions to tackle unemployment and broad-base growth are clumsy and the financing math is poorly done.
There is fiscal prudence and for that we give thanks. But there is no plan to match the boasts and the rhetoric of Amrit Kaal and Viksit Bharat. As an indication of intent, this budget sells India a future that is high on rhetoric and empty on action.”
“The budget is indicative of a government in drift. It seeks to buy time for discussing reforms, fails to specify timelines for when these will be taken up, and in the meantime wants to retain the attention of the BJP’s key constituencies—unemployed youth, farmers, and the middle class—by tinkering here and there.”
“Fiscal and financial prudence apart, the real contribution of this year’s budget is in starting a much-needed conversation on the plumbing of different parts of the economy… on the exports front, it was refreshing to see customs duties across several sectors reduced or done away with. A foundational theorem in trade theory is that an import tariff is equivalent to an export tax. If we can continue on this path of rationalising tariffs, we are simply making our exports more competitive…. Cyclical policy space is largely exhausted. Sustaining growth will require the less flashy task of fixing the economy’s plumbing.”
“Much depends on the details of the schemes and the effectiveness with which they are implemented. But already there are some reasons to wonder.
For a start, because they are schemes, not policies. That is to say, there’s no overarching change that would alter the policy framework in which all firms and individuals operate, as Arvind Subramanian and I advocated recently. The government did not set out an economic vision, much less a policy strategy to achieve it. Instead, it offered narrowly targetted programs, designed to alter certain incentives of certain firms and individuals. Will this approach really work?
“The new political context was the underlay of the final Budget 2024-25. And it was quite a change. Unlike the 2019 interim and final Budgets (where the change in the two versions was negligible), this Budget — and the reactions to it — reflected the new Lok Sabha, with reduced numbers of the Bharatiya Janata Party (BJP), its dependence on alliance partners Telugu Desam Party (TDP) and the Janata Dal United (JDU), and the number of times Andhra Pradesh and Bihar cropped up in the Budget speech.
“What about Kerala,” asked Congress MP from Ernakulam Hibi Eden when Finance Minister Nirmala Sitharaman mentioned assistance to states like Bihar struck by flooding, leading to loud jeers. “What about Tamil Nadu,” questioned Dravida Munnetra Kazhagam (DMK) MP Dayanidhi Maran when allocations were announced to projects to support development of tourism in Bihar like Nalanda and Rajgir. “This is an Andhra Pradesh-Bihar Budget,” said NCP leader Supriya Sule.
“A coalition government is in the saddle again. That was the underlying message of Union Finance Minister Nirmala Sitharaman’s seventh consecutive Budget on Tuesday, with BJP allies Nitish Kumar and N Chandrababu Naidu cornering a major share for their states. It was also a response to Mandate 2024 – and the lessons drawn from it.”
“Nudges – this is what most of the measures announced in the budget are – are more likely to fix behavioural issues than hard macroeconomic constraints. There is good reason to believe the jobs problem is more in the realm of the latter than the former. The biggest proof of this is the stuttering private investment engine and historically low levels of core inflation. If companies are not willing to undertake investment and markets are not overheated, it is a clear reflection of a demand constrained economy. It is difficult to understand why they would want to hire a lot of new workers.
What is the best way to solve this problem? The most obvious answer, namely, the government spending more, is not necessarily the correct one. The government has been running a high fiscal deficit between the pandemic and now and this has clearly not done much to solve the employment or demand problem. Solving the problem requires a deeper engagement with the Indian economy.”
Can’t Make This Up
Might be able to get into this in later issues, but do read this interview of Finance Secretary TV Somanathan for more on the thinking behind the schemes.
Note: July 29 was day 50 of the new government being in charge.