Governments need to balance their political impulse towards populism and the need for sound expenditure management, Union Finance Minister Arun Jaitley said.
Highlighting the importance of the Fiscal Responsibility and Budget Management (FRBM) Act and its related targets in ensuring this, Mr. Jaitely said: “One of the reasons why the FRBM targets in India were statutorily brought in was really because, in public life and politics, there was always a conflict between populism and financial discipline.”
The government in May announced the constitution of a panel under Former Revenue Secretary and Rajya Sabha MP N.K. Singh to review the FRBM Act of 2003, as outlined by Mr. Jaitley in his Budget speech. The panel will also look into the possibility of replacing absolute fiscal deficit targets with a target range.
Brownie points“Populism is when you act on the spur of the moment and make a sound-good noise which pleases the audience of the day,” Mr. Jaitley said at a convocation function at the National Institute of Financial Management. “You earn a few brownie points, and whether you earn votes on that account is still a doubtful proposition. But at the end of the day, you find your accounts have gone haywire and the financial management itself has suffered.”
Mr. Jaitley went on to exhort those present, as well as all participants of the economy such as individuals, private companies, and even governments, to borrow prudently. These comments come a day after Mr. Jaitley reviewed the performance of the public sector banks and highlighted the high levels of non-performing assets in these banks.
“We are now located at an important point of history where we can claim we are the fastest growing major economy in the world, which itself brings its own sense of responsibility in our fiscal planning,” Mr. Jaitley said. “And that holds true for a private institution, a PSU, or a state or central government itself. The underlying principal behind this financial management is that everybody must learn to live within their means.”
Servicing debtLiving within their means was too conservative a proposition for either governments or companies, which need to borrow to grow, he said. But most of the problems arise when this borrowing is disproportionate to the ability to service that debt.
“Living strictly within means for governance or business purposes is too conservative a target,” Mr. Jaitley said. “If you want to expand, you can’t do so merely on the strength of savings. You also do it on the strength of debt. But then you have to borrow as much as you can service. Whenever the world has seen any sort of crisis, it is when you disproportionately borrow and the asset quality to support that borrowing itself goes down.”
Mr. Jaitley said the NPA issue was entirely a product of poor fiscal foresight.
“You expand disproportionately, take debt disproportionately, the capacity of the business to service that debt is inadequate,” he said, adding certain sectors have very high levels of NPAs. “That holds true for governments as well. We are at a historic moment in trying to balance political populism with spending within your means, and borrowing only such amounts that you are able to service, not to leave the next generation heavily in debt.”
