Budget 2019: The government will have it tough

The current government will present its last budget on February 1. While this will not be a full-fledged budget, it is unlikely to be a mere formality of placing accounts on the floor of the parliament. After all, it is the last big stage for the government to make big-ticket announcements before the 2019 elections. There is speculation about the budget containing a big package for farmers, income tax payers in the lowest income bracket and other small non-farm businesses. To be sure, the Goods and Services Tax (GST) Council has already announced sops for small businesses in its previous meeting. There is no point in joining the speculative game on what the budget will or will not do. But there is some merit in dwelling on two possible policy directions, as indicated by the political economy strategy of the government.

One is that the budget announces policies such as direct income transfers to farmers and abolition of income taxes for those in the lowest tax bracket. These are moves which might not bring major, tangible benefits to the intended beneficiaries before the next elections, but make for strong optics vis-à-vis the long term policy direction of the Bharatiya Janata Party (BJP). But such policies also carry a risk. Any significant direct income transfer scheme in agriculture, at the given level of fiscal legroom, will signal the beginning of winding down of existing producer-subsidy government support in the farm sector. Any significant concession in direct taxes has the potential of encouraging fragmentation of firms and businesses which can be counterproductive to both tax collection and productivity enhancement. Once implemented, these policies will be difficult to withdraw. Ideally, such policies should not be implemented without a comprehensive analysis of all related factors.

The other is that the budget gives a cyclical boost to pump-prime distress-ridden sectors of the economy before the elections. This could include a significant move to pump liquidity in the rural economy, increase rural infra spending with aggressive front loading of expenditure etc. through a moderate but discernible slippage on the fiscal front to give some boost to the overall level of economic activity. Such moves can provide an important short-term stimulus before the polls, but they could spook financial markets and multilateral agencies. The government , of course, could choose to do neither, either, or both.

First Published: Jan 29, 2019 07:59 IST