Never waste a crisis

If the 7th Pay Commission award will lead to a feel-good factor, disinvestment and subsidies rationalisation would control the fiscal deficit

What will be worse, Union Finance Minister Arun Jaitley asked his Budget advisers recently. If I pause further on fiscal consolidation in the Budget or if I commit to pare it down in line with the deficit reduction road map but find myself slipping at the end of the year?

The team had assembled to make final touches to Budget 2016-17, which was then sent to Prime Minister Narendra Modi for approval. This proposal is usually sent across the road to South Block by the end of January, but as Mr. Jaitley finds himself on the horns of a fiscal deficit dilemma, it was delayed this year.

Finance ministers are judged unsympathetically on fiscal deficits and Mr. Jaitley is well aware of this. No finance minister wants to be remembered as the one on whose watch the government missed a target. And for Mr. Jaitley, who committed this sin by pausing on fiscal consolidation in his last Budget, it is time to seek redemption.

Yet, back on his table again this year is Keynesian advice: invest your way out of sub-8 per cent GDP growth to steer the economy to a higher trajectory.

The highest GDP growth rates in India’s history came under the United Progressive Alliance government. But the boom ended quickly when growth plummeted to sub-5 per cent in its dying years. GDP grew 7.3 per cent in the October-December quarter of 2015-16, slower than the upwardly revised 7.7 per cent in July-September. On February 29, when Mr. Jaitley will present the Budget, scrutiny will be greater than what he has had to face earlier. Among those cautioning Mr. Jaitley against this type of growth strategy is the Reserve Bank of India Governor Raghuram Rajan, who holds the key to lower lending rates. Mr. Jaitley knows that without Mr. Rajan’s support, spurring private investments and growth will be almost impossible. Fiscal credibility will also make it possible to sustain the current growth rate, and to convert potential into actual growth. Should Mr. Jaitley preserve it by keeping the fiscal deficit reduction targets as they are? Or should he spend now with the hope that public investments will generate so much growth that he will be able to recoup the lost fiscal space in the form of higher taxes?

Since the passage of the Fiscal Responsibility and Budget Management Act in 2003, governments have paused on the consolidation path four times. In 2008-09, the year the 6th Central Pay Commission award was implemented, the government’s fiscal deficit doubled to 6 per cent. Living beyond its means meant that the UPA government’s borrowings from the markets shot up to a little over Rs. 3 lakh crore by the next year, thereby playing a big role in distorting interest rates. The then Finance Minister Pranab Mukherjee projected the fiscal deficit at 6.8 per cent of GDP in his Budget; this earned the epithet ‘Going for Broke’. It is the same old devil again this year.

Mr. Jaitley has budgeted Rs. 1.1 lakh crore for pay and pension hikes, slightly more generous than the 7th Pay Commission’s recommendations.

This payout to 48 lakh Central government employees and 55 lakh pensioners will spur consumption spending in the economy and therefore support growth, but it will also stretch the resources that the Finance Ministry has to keep the fiscal deficit under the 2016-17 target of 3.5 per cent.

Challenges as opportunities

The challenge of this huge outgo can only mean one thing: unpopular reforms are now inevitable. If challenges are opportunities, finance ministers need the strong support of their prime ministers. Mr. Modi must lend his weight to the bold and massive disinvestment plan that Mr. Jaitley has proposed. It can bring in revenue and also deliver on the goal of ‘minimum government’. Why must the government own and run the Balmer Lawrie, a Mini-Ratna I public sector enterprise, under the Ministry of Petroleum and Natural Gas? It makes steel barrels, industrial greases, specialty lubricants and runs a corporate travel and logistics service. Mr. Modi will have to show political appetite for strategic sales of such profitable state-owned companies.

Success on the disinvestment front will only help the Finance Minister and the Prime Minister sell de-control of urea prices and other such expenditure-side reforms to their Cabinet colleagues and industry lobbies. The low-hanging fruit of higher taxes on petrol and diesel won’t yield sufficient revenue. Mr. Jaitley will have to clean up the clutter of tax incentives for the corporate sector to plug revenue leakages and to set the stage for lower tax rates, as was promised in the last Budget. The business lobby is bound to be unenthusiastic about giving up sops, but Mr. Jaitley will have to resist pleas for their retention. The tax-GDP ratio has fallen below 11 per cent. The only way to improve this is to widen the net. Mr. Jaitley could chip away at the growing impression of the government as being pro-rich, by taxing high salaries. Industrialists, a big support group of the BJP, are by and large facing tepid domestic and international demand and are carrying mountains of debt on their balance sheets. They will expect a rescue operation. The public sector banks with the exposure to these bad loans and stressed assets will need bailouts.

In the Finance Minister’s defence, Union Budgets cannot be one-time fixes. Annual allocations to States were broadly fixed by the 14th Finance Commission last year, which Mr. Jaitley can only build on to some extent. Mr. Modi doesn’t wait for the Budget to announce big-ticket schemes such as crop insurance or financial inclusion. But having said that, some measures such as fixing the fiscal deficit can be taken only during the Budget.

If the decision to disburse the 7th Pay Commission award will suffuse into the economy the missing feel-good factor, disinvestment and discretionary urea and leaky kerosene subsidies rationalisation would score on the parameter of reforms and control the fiscal deficit. The chief architect of the National Democratic Alliance government’s first budget was a bureaucrat: former Finance Secretary Arvind Mayaram. The prime mover of the second was an economist: Chief Economic Adviser Arvind Subramanian. The strategy this time ought to be one scripted by Mr. Modi and Mr. Jaitley.


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Printable version | Apr 7, 2020 10:26:10 AM | https://www.thehindu.com/opinion/columns/Never-waste-a-crisis/article14080873.ece

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