There is an interesting fact in the recent economic history of India. There have been only six finance ministers since liberalisation in 1991. With one exception, none of them belonged to a government that had an absolute majority in the Lok Sabha. The exception is Mr Arun Jaitley.
282 is a boon. The government enjoys the support of 282 members of the Bharatiya Janata Party (BJP). Adding the allies, it has the support of 336 members. Some months ago, at a book release, I reminded Mr Jaitley that he has no cause for worry about passing the Finance Bill. My worry is what will the finance minister do with his worry-relieving majority?
The first clouds appeared on the horizon immediately after the result of the Delhi elections. I counted the remains of the day: Urea prices will remain controlled, the number of subsidised LPG cylinders will remain at 12, and the General Anti Avoidance Rules (GAAR) will remain under deferment.
Course correction is difficult and often painful. It requires more than numbers, it requires courage and conviction.
Mr Narendra Modi and his ministers started by believing their election rhetoric that the Indian economy was in the doldrums. They hold the belief that the key to lifting economic growth is more ‘capitalist’ reforms. Examples: the Ordinance to amend the Land Acquisition, Rehabilitation and Resettlement Act, the constant talk of ‘tax terrorism’, and the insidious dilution of environmental standards.
It is possible that the government believes that it is on a reformist course and will plough ahead with more public expenditure (fiscal deficit be damned), more tax sops and benign rules of tax collection (revenue deficit be damned), and a liberal import regime for defence equipment and gold (current account deficit be damned). If all of these and more find a place in Mr Jaitley’s budget, he will be hailed as a hero and the Confederation of Indian Industry (CII) can be expected to publish another unabashed full-page political advertisement.
I sincerely wish Mr Jaitley will resist the temptation of being hailed as a hero. Here is my unsolicited advice.
Temper expectations: The economy has been on the mend since 2013-14 when the growth rate jumped from 5.1% in the previous year to 6.9%, but there is still some distance to go. The CSO has estimated that growth in 2014-15 will be 7.4%. Accept the estimate and don’t aim for a higher growth rate. Given the current situation, a growth rate of between 7% and 8% will be satisfactory and non-inflationary.
Stick to fiscal consolidation: UPA II lost its way when it prolonged the policy of fiscal stimulus. I requested Mr Vijay Kelkar to suggest a path of fiscal consolidation. He did, we adopted it, and it has paid rich dividends. Inflation has moderated, the exchange rate is reasonably stable, and the credit rating is intact. If the chief economic adviser or the vice-chairman of NITI Ayog demurs, invite Mr Kelkar for a one-week tutorial that will keep the two gentlemen occupied until Budget day. The first numbers that analysts will look for is whether the government has achieved the targeted fiscal deficit of 4.1% in the current year and has set a target of 3.6% for 2015-16.
Increase public sector investment, not government expenditure: Public sector enterprises (PSEs) are woefully reluctant to invest. In 2012 we told them “Use it or Lose it”. We told them that their profits have to be invested, failing which they should give the government more in the form of dividend. The diktat worked. In 2012-13, the capital expenditure of central PSEs was R193,737 crore and in 2013-14 it was R257,641 crore. Public sector investment stimulates demand for goods and services, creates jobs, and has a ‘drag’ effect on private sector investment.
On the other hand, government departments are happy to spend. Departments will ask for more money to spend on buildings, travel, seminars, outsourcing studies, and forming monitoring committees. They will propose “new and better” schemes and promise to name them after BJP icons. Mr Jaitley should firmly reject such requests and give only a little more than what each department actually spent in 2014-15.
Tax sops may be required, but only for enhanced savings: Tax concessions for financial savings is a good idea. Higher deduction under some heads of expenditure is a bad idea. Ideally, exemptions and deductions must go, so that everyone above an income threshold pays tax.
Budget should pass equity test: On equity, the government’s intentions are suspect and its capacity doubtful. Scarce public goods and falling standards impose a huge burden on the poor. There are many ways to promote equity, so let’s see how the finance minister goes about it.
Budget should also pass the equality test: Rising inequality—of income and wealth—is the bane of development. It is the prime cause of social strife, crime and erosion of democratic values. Only some Scandinavian countries have faced up squarely to this challenge. Given the BJP’s core beliefs I can predict, with regret, that the Budget will fail the test of reducing inequality.
My best wishes to the finance minister!