Even as finance minister Arun Jaitley was presenting the budget for 2018-19, the last full one in the National Democratic Alliance’s current term, the results of by-elections in Rajasthan and West Bengal were pouring in. These results, especially from Rajasthan, signalled a grave warning to the ruling coalition. The Bharatiya Janata Party (BJP) lost both the Lok Sabha seats, Ajmer and Alwar, as also the Mandalgarh assembly seat to the Congress with large margins. More humiliatingly, BJP lost to Congress in all the 17 assembly constituencies that voted in these by-polls.

True, one should not read too much in by-elections, or see results of assembly elections as an indicator of parliamentary elections. However, coming soon after the close contest in Gujarat and the BJP’s loss of the Gurdaspur Lok Sabha seat in Punjab last year, they do convey a deep sense of disappointment among vast sections of the people. The government claims it is doing an excellent job, but many people seem to think otherwise. The results are a shrill alert that BJP can ignore only at its peril.

Will Arun Jaitley’s budget help reverse the tide? Unlikely. Despite the customary high-sounding rhetoric about growth, jobs, farmers and rural folks, it is unlikely to make a positive difference on the ground in any of these areas. Long on announcements and short on money, it would not enhance the NDA government’s credibility to deliver on the promises made so glibly and liberally.  

The budget is not entirely devoid of good ideas, though. A heartening feature is the permission given to all sectors to use fixed-term contract hiring, paving the way for employers to hire workers on contract for specific projects on short-term assignments and terminate their services when projects are completed. This can spur investment and employment. Similarly, a 12 per cent subvention in provident funds for new employees has been extended to all sectors, a positive move for hiring in the formal sector. However, this has nothing to do with the budget per se and could (should) have been done much earlier by the labour ministry. 

Jaitley also announced the world’s so-called largest health insurance scheme covering 500 million people in the country, providing a cover of Rs. 5 lakh per family per annum for hospitalisation. While this has rightly earned him much praise, the devil is in the details. The scheme covers hospitalization for major diseases, not all sickness. Even for these, the country does not have even remotely enough doctors and hospitals to implement it. As against an estimated cost of Rs. 10,000-12,000 crore, the budget has allocated just Rs. 2000 crore. As clarified subsequently, the cost will be shared by the Centre and the States in the ratio of 60:40. The States are facing a tight fiscal position and may be reluctant to replace their own health schemes with this newly announced National Health Protection Scheme (NHPS).

As against these positives, the budget has several flaws.

First, the fiscal slippage. Notwithstanding brave declarations of intent, the government has failed to control fiscal deficit, which has surpassed the budget estimate of 3.2 per cent of the GDP to touch 3.5 per cent in the current  year and is pledged to be brought down to 3.3 per cent in the coming year. Worse, the revenue deficit (excess of government’s consumption expenditure over revenues) has shot up from the budget estimate of 1.9 per cent of GDP to 2.6 per cent and is expected to be 2.2 per cent next year.

In three out of his five budgets, Jaitley has slipped up on deficit target, which has dented his credibility. We need fiscal restraint at a time when inflation is up and oil prices are rising, but what we see is the opposite. The world economy is recovering and India also expects to grow at 7.5 per cent. If we cannot manage the fiscal in such good times, what will we do when the tide turns? The government has borrowed far more than the budgeted amount this year and plans to borrow much more next year. No wonder interest rates on gilts have risen sharply in recent months and rose further after the budget. Do not be surprised if the RBI decides to increase interest rates in its next policy statement due 7 February.

Second, the return to stale old-fashioned protectionism. At Davos, Modi lambasted President Trump for protectionism and promised to back globalisation. But the budget has increased customs duties from about 10 per cent to 15-50 per cent on a large number of items from electronics, toys, processed foods etc. Shortly before the budget import duties were raised on several electronic goods and agricultural items.

This is a retrograde move. India is backtracking to the bad old days of import substitution. In theory, the argument for high tariff walls is that protected from external competition the domestic industries can grow and achieve economies of scale to become competitive. In practice, the economy is saddled with high-cost uncompetitive industries which fiercely resist any reduction of duties. If high import duties could bolster industrial development, India would have become an economic super power in the socialist years under Nehru and Indira.

Third, the neglect of defence. It is amazing that the Modi government has consistently ignored the deterioration in external security situation and squeezed the defence budget year after year. As T.N. Ninan has pointed out, in five budgets of the Modi government, the defence expenditure has cumulatively increased by 38 per cent, or 7 per cent annually which barely keeps pace with inflation. After the Pay Commission report, much more money is spent on salaries and pensions and less is available to buy fighter planes, submarines, howitzer, minesweepers, missiles and helicopters. As a share of GDP, defence expenditure has shrunk from 1.8 per cent in 2013-14 (the last year of UPA government) to 1.5 per cent.

Ironically, this is happening under a government led by BJP which is widely believed to be more conscious about security issues than other parties. And it is happening at a time when we face a much more aggressive and belligerent China and the military advantage against the incorrigible Pakistan has been eroding. The only probable explanation is that the government does not expect a war soon and hence gives priority to development and civilian needs. But wars can happen when we least expect it, leaving us no time for rearmament.

Finally, the betrayal of the middle class, corporate sector and investors. There is no relief in income tax rates or slabs and the paltry amount allowed as standard deduction for salaried employees has been almost neutralized by withdrawing some currently available deductions. The corporate tax rate has been reduced from 30 per cent to 25 per cent for companies with turnover of Rs. 250 crore. This leaves out large companies which matter most in terms of growth and jobs.

The BJP has long forgotten its promise of withdrawing the retrospective tax amendments which greatly annoyed foreign investors. Now Jaitley has reintroduced long capital gains tax (without removing securities transaction tax which had replaced it) and also brought equity-linked mutual funds under dividend distribution tax. The last resort for middle class investors has been assaulted. This is a severe blow to the investor sentiment and will haunt the market for a long time. Ironically, these are the classes that have consistently supported BJP wholeheartedly in the hope of better treatment.

Overall, the budget represents an opportunity wasted. It presents a picture of economic mismanagement, of a government unsure of itself and vacillating between past and future. The carnage on the stock market since the budget is not due entirely to the long term capital gains tax or lack of relief in direct taxes. It represents much deeper and widespread concerns over the direction of the economy, political and ideological moorings of the Modi government and its ability to match words with action.

With several crucial Assembly elections scheduled later this year and the general elections next year, the BJP leaders find themselves in a situation that they will not like. Gujarat was too close for comfort. If Karnataka goes the Congress way and Rajasthan proves touch-and-go, 2019 would become far more interesting than it appeared a year ago. Sadly, Jaitley’s budget would be of no use to BJP in mitigating the mounting challenge from a resurgent opposition.