So far, there has been very little assessment of the political content in Finance Minister Arun Jaitley's second Budget, presented last Saturday. Its proposals on higher investment in infrastructure, more disinvestment including strategic sale of public sector units, higher tax mobilisation, a reduction in subsidies and a rise in transfer of tax revenues to states have been commented on extensively. But what has so far largely been ignored is the Budget's strong political message - which is as significant as the economic policy package it contains or the outlay numbers on various schemes it trots out.
First, take a look at the grand announcement on the government's vision on economic federalism, guided by the recommendations of the 14th Finance Commission. Higher devolution of tax collections was not this government's idea. It was the key recommendation of the 14th Finance Commission, raising the states' share in the divisible pool of tax revenues of the Centre from 32 per cent to 42 per cent. Indeed there were some within the government who were not averse to the idea of either postponing the implementation of the recommendations or tweaking them to suit the Centre's revenue requirements. In the end, however, the finance minister decided to accept the recommendations without any dilution.
That was a class political act, much more significant than the economic prudence of going ahead with the 14th Finance Commission recommendations even though they reduced the Centre's fiscal space to raise capital investments. It is remarkable how the top leaders of the Bharatiya Janata Party (BJP) completely owned the commission's recommendations as though they emanated from the party's think tank. The day the commission's findings became public, Prime Minister Narendra Modi welcomed his government's acceptance of them as an article of faith for him - one which he believed would help him achieve the goal of cooperative federalism, and even further it by making the federal structure of the country stronger. Chief ministers of a few BJP-ruled states complimented Mr Modi for ushering in a new era of economic federalism. A few days later, Mr Jaitley's Budget hailed the same recommendations and the government's acceptance of them as the government's commitment to economic federalism - a process in which taxes are collected centrally, but the revenues mobilised are disbursed across states so that they can spend those resources without any strings attached.
The politics of the new devolution formula was in evidence also at a different level. The Modi government and its Budget swore by its commitment to uphold the principle of economic federalism and greater tax devolution to states, but at the same time used the current tax distribution formula to make good some of the revenue losses that it incurred after the implementation of the commission's recommendations. Thus, the wealth tax, whose revenues were to be shared with states, was abolished and instead, a surcharge on income tax for those earning taxable income of over Rs 1 crore was levied to fetch the government an additional Rs 9,000 crore, none of which would be shared with the states. The reason: the commission's recommendations mandate sharing of only tax revenues and not those mobilised through cesses and surcharges. In the same way, the increase in excise duty on petrol and diesel, effected in the last few months was rolled back even as the cess on the two fuel items was raised by a similar margin.
The states lost out on the revenues from the increased cess and the Centre mopped up the entire revenue. The finance minister has defended the change in the tax rates on the ground that such resources would be used for investing in common infrastructure. But that does not explain why the resources could not be raised by simply increasing basic tax rates, so that the revenues could be shared with the states, enabling them to spend the money according to their requirements. It is this divergence - the stated commitment to fiscal federalism as opposed to tweaking tax rates to share less of the revenues with the states - that underlines the political nature of the Budget. That many states have not caught on to this masterstroke is an indication of how the politics of the whole exercise has worked so far to the BJP's advantage.
The Budget for 2015-16 displays its political character in yet another area. This is with regard to the way it has managed the government's subsidies expenditure. The headline numbers show that major subsidies expenditure is slated to decline next year to around 1.7 per cent of gross domestic product, compared with 2.1 per cent in the current year. But a closer look reveals that this reduction is largely attributable to savings on subsidies on fuel products and that was possible mainly because international crude oil prices have declined in the last few months. Indeed subsidies on food have gone up and there is even indication that no price reform for fertilisers is likely, which means subsidies for them would not decline either.
Remember that Mr Jaitley's first Budget in July had set up an expenditure management commission to reform government expenditure. Its interim report has been lying with the government for the last three months. Its recommendations have not been even made public. And the Budget for 2015-16 makes no mention of how the government intends to implement the many recommendations made by the commission headed by former Reserve Bank of India governor, Bimal Jalan. Is this also a sign of a different kind of politics that influenced the Budget - one that shows the government's lack of political courage in taking tough expenditure reform measures that could have upset many sections of society? And is this what establishes the causal connection between the rise of the Aam Aadmi Party with its populist promises and Mr Jaitley's second Budget that shies away from taking tough measures - and indeed raises the allocation for the Mahatma Gandhi National Rural Employment Guarantee Scheme?