Modi’s Budget and the New Macroeconomic Policy Consensus in India

What has struck me about Modi’s maiden budget is not the fiscal arithmetic, but the framework. And while this note confines itself to analyzing the budgetary framework rather than the numbers, it should be noted that the effectiveness of the fiscal arithmetic has gone for a toss with the announcement of token provisions on too many programmes with too little money. The underlying framework of the speech revealed the thematic priorities of the Modi government, which were twofold: (i) growth revival and (ii) macroeconomic stability. This sets the track.

The general budget was simultaneously ensuring “continuity” and “change.” The continuity elements in the budget may be designed to ensure a bipartisan approach in tackling issues of national interest, especially in the case of fiscal consolidation and the “rights-based” public policy decisions (e.g., employer of last resort, food security) of earlier governments. However, the changes suggested in the budget, in terms of monetary framework, are disturbing.

Backdrop of the Budget

The Modi government has inherited an economy characterised by low growth, high inflation, a high current account deficit, and large fiscal imbalance at the Union level. It will be interesting to analyse the underlying principles of the new macroeconomic consensus adopted in the General Budget 2014-15 towards fiscal consolidation and inflation management. One could sense a deal for fiscal-monetary policy coordination in the budget speech. The dynamics between North Block and Mint Road are always challenging, and so far India has witnessed fiscal dominance over monetary policy.

The announcement by the Finance Minister of a “new monetary framework” for India needs to be co-read with the advancements in RBI seeking more “central bank independence” to manage inflation, and how it plays out in the macroeconomic context in light of the Expert Committee to Revise and Strengthen the Monetary Policy Framework (Urjit Patel Committee report).

Fiscal Consolidation

The growth revival and fiscal consolidation involve conflicts and tradeoffs. The Finance Minister’s speech highlighted the significance of fiscal prudence. He was honest in accepting that limiting the fiscal deficit to 4.1 per cent of GDP in the current fiscal year is the government’s biggest challenge. The budget sets the fiscal consolidation path for the medium term, with the aim to reduce the fiscal deficit to 3.6 percent of GDP in 2015-16 and 3 percent of GDP in 2016-17.

Though the Economic Survey highlighted that “India needs a sharp fiscal correction, a new Fiscal Responsibility and Budget Management (FRBM) Act with teeth,” the budget has not specified anything other than the accepted target of 3 percent of GDP. However, the path of fiscal consolidation was vaguely spelled out: the target would be achieved with tax buoyancy rather than expenditure cuts. This is a welcome shift.

The analytical framework of the fiscal consolidation highlighted by the Finance Minister was different from earlier frameworks. The Finance Minister, surprisingly, has not highlighted the popular neoclassical frameworks that fiscal deficits crowd out private investment or raise interest rates. Rather, what he highlighted was the “intergenerational debt burden, that today’s debt is next generation’s tax burden.” This is more appealing, in the sense that government uses the deficit for productive purposes like infrastructure investment that can “crowd-in” rather than “crowd-out” private corporate investment.

New Monetary Policy Framework

Even if, for argument’s sake, we highlight that inflation is the most important obstacle for achieving macroeconomic stability and growth, the question remains: Is inflation strictly a monetary phenomenon in India? There are equally convincing discourses which suggest that supply-side shocks determine inflation, in addition to the monetary determinants. The General Budget 2014-15 has identified the need to tackle “price volatility in agriculture”, by constituting a Price Stabilisation Fund of Rs 500 crores. However, the Iraq war and bad monsoon create more supply-side irregularities in price determination, and the fiscal route to inflation management should have been spelled out more clearly in the budget. Instead, the Finance Minister has emphasised the need for a new monetary framework, which is a change, compared to earlier budgets.

In India, we have been accustomed to fiscal policy dominance, and always the first-mover advantage in policy making was vested with budget policy makers. What I refer to here as fiscal dominance is definitely not the financing of deficits through printing money (which is technically called seigniorage financing of deficits). We have come out of monetising deficits through printing money a few decades back. What I highlight here as a new macroeconomic consensus is the move towards providing more central bank independence in tackling inflation. If so, the framework of this budget raises concerns. Is this really a new macroeconomic policy consensus?

Expenditure Decisions on Human Development

The debates prior to the elections related to “economic growth versus public policy for human development” dominated academic and policy circles. Using high-quality survey data on 118 countries, a recent study by David Dollar, Tatjana Kleineberg, and Aart Kraay found that the majority of poverty eradication that took place in recent decades was driven by economic growth rather than public spending on human development. Findings like these lead us to policy dilemmas: whether the maiden budget should be focusing on policies related to the revival of economic growth or specific public policy interventions for human development.

Focusing on the Bhagawati-Sen debates, if “removing unfreedoms” is real economic development, we require public policies broader than just infrastructure. This debate is closely linked to decisions related to the welfare state and the relative emphasis on state versus market solutions. In other words, it is closely related to Modi’s future choices on the “size of government.”

Looking at past budgets, the reliance on an active role for the state was evident in more ways than one, including using the state as the “employer of last resort” and ensuring food security (though we failed in terms of effectiveness of the spending and outcomes). Modi’s budget reinforced continuity with rights-based approaches (viz., MNREGA, food security), though it emphasized revamping the institutional mechanisms and a move towards cash transfers.

Applying a “Gender Lens” to the Budget

What I enjoyed most in Modi’s budget was the signaling of the role of fiscal policy towards gender-sensitive human development. There is an increasing macroeconomic policy consensus regarding the role of institutions in combatting endemic social constructs, including patriarchy, and how public policy can change these constructs. What makes it so compelling? Recall the debate set off by Amartya Sen when he claimed that millions of women were “missing.” This refers to the number of females who have died as a result of unequal access to intra-household resources, nutrition, and health care. There is a need to analyze the role of budgetary policies and institutions in correcting these blatantly oppressive prejudices—which run deep in society and result in a female survival disadvantage—and the role of fiscal institutions in upholding the right to life for India’s girls and women.

Against this backdrop, the budgetary announcements related to women and girls in Modi’s maiden budget are heartwarming. The integration of gender concerns was not only confined to a specific portion of the budget, rather it was spread to the budgetary decisions related to infrastructure, security, education, savings, financial inclusion, and entrepreneurial skill development. This approach of applying a “gender lens” in budgetary decisions is a bold step.

If this sensitivity shown in the General Budget 2014-15 towards gender development is built into the long-term policy priorities of Modi’s macroeconomic policy, it can ensure inclusive development. As recently as a decade ago, including the word “gender” in the budget was considered irrelevant.

Gender budgeting created a silent revolution in the early 2000s, and we have come a long way in integrating gender concerns in macroeconomic policy making. However, the budget has also maintained an unfortunate version of continuity, with respect to the mere token provisions for these programmes. This “too many programmes with too little money” must indeed change.