FM can increase the nominal value of benefits, but it will be less than the rate of inflation, resorting to what economists call money illusion
Will we have an election budget, replete with goodies for sundry vote banks? Since the next general election is due in May 2024, the budget in February that year will be an interim one, followed by a full budget after the election. So, this budget will be the last full one before the general election. Will it, therefore, be an election budget?
Very unlikely, for three reasons. First, giveaways have never been central to the approach of Narendra Modi, who has castigated them as ‘revdis’. Second, giveaways now will not stick in the public memory till the general election fifteen months later, and so will constitute wasted political ammunition. Third, even the interim 2024 budget can be stuffed with freebies if new developments make that politically necessary, so the BJP can keep this strategy in reserve.
Still, political pundits keep speculating about an election budget. Nine state elections are due in 2023, and their outcome will set the mood for the 2024 general election. Whether one likes revdis or not, subsidies are key issues in election campaigns, so BJP campaigners might look to the budget for assistance.
Semi-revdis to expect
Against this background, 2023 can be called a semi-election year, not a full one. And the 2023 budget may well be a semi-election budget, not a full one. That is, it can contain many seemingly populist schemes that appear to confer freebies on voters while still maintaining fiscal discipline.
Finance ministers often resort to what economists call money illusion. When thinking about taxes or sectoral allocations, ordinary voters rarely take into account the full impact of inflation, that erodes the real value of benefits. So, the finance minister can increase the nominal value of such benefits, but by less than the rate of inflation. That enables the budget to seemingly offer higher benefits while actually lowering them in real terms. We can call these semi-revdis.
Very unlikely, for three reasons. First, giveaways have never been central to the approach of Narendra Modi, who has castigated them as ‘revdis’. Second, giveaways now will not stick in the public memory till the general election fifteen months later, and so will constitute wasted political ammunition. Third, even the interim 2024 budget can be stuffed with freebies if new developments make that politically necessary, so the BJP can keep this strategy in reserve.
Still, political pundits keep speculating about an election budget. Nine state elections are due in 2023, and their outcome will set the mood for the 2024 general election. Whether one likes revdis or not, subsidies are key issues in election campaigns, so BJP campaigners might look to the budget for assistance.
Semi-revdis to expect
Against this background, 2023 can be called a semi-election year, not a full one. And the 2023 budget may well be a semi-election budget, not a full one. That is, it can contain many seemingly populist schemes that appear to confer freebies on voters while still maintaining fiscal discipline.
Finance ministers often resort to what economists call money illusion. When thinking about taxes or sectoral allocations, ordinary voters rarely take into account the full impact of inflation, that erodes the real value of benefits. So, the finance minister can increase the nominal value of such benefits, but by less than the rate of inflation. That enables the budget to seemingly offer higher benefits while actually lowering them in real terms. We can call these semi-revdis.
An excellent candidate for such treatment in the coming budget is the PM Kisan scheme. Launched in the run-up to the 2019 election, it offered a cash grant of Rs 6,000 per year to each farm-owning family. The pioneers in this tactic, Telangana and Odisha, had offered much more. The ruling TRS in Telangana launched ‘rythu bandhu’ in 2018, a grant of Rs 5,000 per acre per cropping season to farm owners. This helped the TRS get re-elected with a huge majority. Odisha followed with its KALIA scheme, offering around Rs 4,000 per year to not just farm owners but also tenants, sharecroppers and landless labourers. The Congress then offered Rs 72,000 per year to each of the 20% poorest families in the general election of 2019.
The BJP knew the key election issues lay elsewhere — actual performance in its first term, surgical strikes and the Balakot bombing to teach Pakistan a lesson for supporting terrorism, and — above all —the popularity of Prime Minister Narendra Modi. Nevertheless, the party could not risk being painted callous and uncaring by refusing to compete in cash grants. That led to PM Kisan.
The illusion
In the four years since its launch, inflation has eroded its real value by almost 30%. So, the finance minister can raise PM Kisan to say Rs 7,000 in 2023 and Rs 8,000 in 2024, which will mean actually reducing them in real, inflation-adjusted terms.
Many other budgetary items are candidates for semi-revdis. The income-tax exemption limit has been kept at Rs 2.5 lakh for years despite high inflation. It can be raised to say 2.65 lakh in the coming budget and again to Rs 2.75 lakh in the 2024 budget, giving the impression of revdis while reducing the exemption limit in real terms.
The illusion
In the four years since its launch, inflation has eroded its real value by almost 30%. So, the finance minister can raise PM Kisan to say Rs 7,000 in 2023 and Rs 8,000 in 2024, which will mean actually reducing them in real, inflation-adjusted terms.
Many other budgetary items are candidates for semi-revdis. The income-tax exemption limit has been kept at Rs 2.5 lakh for years despite high inflation. It can be raised to say 2.65 lakh in the coming budget and again to Rs 2.75 lakh in the 2024 budget, giving the impression of revdis while reducing the exemption limit in real terms.
Salaried taxpayers who opt for the old tax regime can claim a long list of tax breaks such as standard deduction, house rent allowance, child education allowance etc. The value of each of these tax breaks can be increased in nominal terms, giving political ammunition to BJP campaigners, while reducing their value in real terms.
Individual taxpayers get a tax break of up to Rs 1.5 lakh for investing in savings instruments such as provident funds, equity-linked savings schemes, seniors’ savings schemes, and infrastructure bonds. Increasing the number of eligible instruments can give the illusion of additional freebies without changing the ceiling. Raising the ceiling, but by less than inflation, will be another way of seemingly giving freebies while remaining fiscally prudent. The same tactic can be used to give the illusion of real increases in budget allocations for schemes to help the poor, backward classes, backward areas, green schemes, small industry schemes, and a host of similar feel-good allocations.
All these tactics have been used by past finance ministers. This column provides no new wisdom or tactic. But these tactics can be fine-tuned this time with the coming elections in mind.
All these tactics have been used by past finance ministers. This column provides no new wisdom or tactic. But these tactics can be fine-tuned this time with the coming elections in mind.
This article was originally published by The Times of India on January 29, 2023.
