The Budget is a balance sheet for an organisation called the government. Most of us will never bother to look at the balance sheet of any company, even if we are employees or own shares. But the government’s balance sheet is different for two reasons. One is a question of principle and the other is just a matter of scale.

The government is responsible for making laws that affect our daily lives. While not the primary purpose, the balance sheet is a good place to get an idea of the government’s expected actions in a particular year. Aware of this, the government uses the Budget to signal appropriately.

Most announcements in this year’s Budget fall in this category, such as allocating Rs 500 crore for promoting entrepreneurship among Scheduled Castes and Scheduled Tribes. While the figure is small with respect to the total Budget amount of Rs 20 lakh crore, it shows that the government is doing something with respect to that particular cause.

Even the Rs 20,000 crore that has been allocated for re-capitalisation of public sector banks is a signal of sorts, given that the amount is clearly insufficient for getting these banks back on track. But once again, it is an indication that the government is concerned and taking action. And as the finance minister said in a recent interview, more action will follow.

Seeking impact

It is important to separate signaling from allocations meant for impact. This Budget does make an impact in the roads and railways departments as the government plans to spend a whopping Rs 2.18 lakh crore.

The Pradhan Mantri Gram Sadak Yojana, which is aimed at connecting villages through roads, has been one of the best implemented and most impactful schemes of the government. The availability of good transportation infrastructure has a multiplier effect on economy – total value created is many times the amount invested. But much will depend on the ability of Union Road Transport Minister Nitin Gadkari and Union Railway Minister Suresh Prabhu to deliver on the promise.

Rural infrastructure development has also got a big push, with close to Rs 80,000 crore allocated to irrigation and groundwater recharging – essential long-term solutions for agrarian distress.

Fiscal discipline

The sheer size of the Budget is the second reason why it matters to everyone in the country. At more than 15% of the Gross Domestic Product, the government is the single largest spender in the economy. This spender’s actions have a big impact on growth, prices, and availability of goods and services in the country.

Keynesian theory suggests that an increase in government spending has a multiplier effect and spurs growth. But for the third consecutive Budget, the government has decided not to adopt that approach. Instead, it is treading the path of strict fiscal discipline. This essentially means that the onus of growth has been shifted from the public to the private sector. But can the country’s private sector deliver on the trust that Mr Arun Jaitley has put in them?

Well, much will depend on the finance minister’s cabinet colleagues. The Reserve Bank of India must surely be monitoring the situation and is likely to reduce interest rates.

Again, classical economic theory suggests that when interest rates go down, companies borrow more and there is growth. But like most developing economies, the Indian economy suffers from supply side issues.

Supply and demand

From changes to the bankruptcy law to a slew of measures for ease of doing business, much supporting legislation was promised during the Budget speech. If the government does not come through on these promises in the coming months, then the ability of the private sector to satisfy the market demand will be seriously impaired.

The problem becomes acute because One Rank One Pension, increased allocation for Mahatma Gandhi National Rural Employment Guarantee Act, and the Seventh Pay Commission (when it happens) will mean a lot of ready cash in the hands of the people.

If people have money to spend but supply cannot keep up with demand, then it invariably leads to inflation and loss of value to the consumer. And unfortunately, this part of economic theory has no exceptions.

Siddarth Gore is a research scholar at The Takshashila Institution. His Twitter handle is @siddhya