Why Arun Jaitley gave us a unique Budget

When finance ministers get down to preparing annual budgets in times of slowdown, they have only two ways of engineering an economic growth: the demand side; and the supply side. Or, a combination of both.

Demand-led growth is essentially consumption led growth which is typically triggered by low rates of direct and indirect taxation to leave more in the hands of the consumer to consume. And some sops, even subsidies. This triggers demand for products and services and props up the economy.

Supply-led growth is investment-led growth where mostly the government - or the private sector - invests in new projects, manufacturing facilities or infrastructure which creates new economic activity as well as jobs.

Finance ministers rarely choose one over the other. Rather, they often provide incentives in a mix with the objective of triggering economic activity from both the demand and the supply side.

Arun Jaitley’s Budget 2017 is most unique in that respect. For a change, the finance minister has predominantly chosen investment-led growth over demand-led growth in the Indian economy. Given that India is grappling with very low consumer and industry sentiment, his chances of churning a consumption boom through tax reduction were next to nil. Hence, taking a hit in taxes in the hope of a pick-up in demand was leaving too much to chances. It was better to take control of the situation by increasing government investments for a sustained and definite growth.

Perhaps, that’s prompted Jaitley to pump the investment/supply side of the economy with nearly all the resources at his disposal. There’s Rs 3.96 lakh crore for infrastructure projects; Rs 2.44 lakh crore of loans under the UDAY scheme for entrepreneurship; Rs 1.85 lakh crore for the rural, agriculture and allied sectors, Rs 48,000 crore in MGNREGA to create productive assets in rural areas; Rs 1.84 lakh crore for schemes for women & children. The belief is that such projects will create enough demand for affiliated sectors which will create a chain reaction of higher economic activity.

In contrast, while indirect taxes have been left largely untouched (anyways, from July 1 any changes in indirect taxes will be the absolute preserve of the GST Council and not the finance ministry alone), there is minor tinkering in direct taxes - halving of personal income tax in the Rs 2.5 to five lakh bracket to five per cent and reducing corporate tax rate by 5 per cent for SMEs with turnover up to Rs 50 crore.

But while the ultimate objective of both demand and supply-led economics is to churn the economy into action, inherently the way they manifest is vastly different. Demand-led growth push creates instant consumption growth in the economy. Often, within the quarter. In contrast, investment-push growth has a lag effect and only shows up in higher GDP numbers as late as three quarters later.

In a way, Jaitley’s decision to resist overspending to trigger growth and sticking to fiscal prudence is noteworthy. But by opting for investment-led growth, the FM has also chosen deferred growth over instant growth. In effect, the fruits of the Budget announcements will be visible no sooner than Q3 of 2017-18. That too, because the government brought forward the Budget presentation by a month so that all ministries can start spending on April 1 rather than the middle of the year as used to be the case all this while.

But then look at it this way. Greater economic activity, job creation, project execution and consequent higher economic growth will be music to the ears of the electorate in the run-up of the 2019 elections. Just what the government would need to get re-elected.

Also read - Finance minister Arun Jaitley presents Budget 2017: All you need to know