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Friday, March 4, 2016

Jaitley’s Leaning Towards Fiscal Discipline Saved the Day …

In the run up to the budget, as Mr Jaitley, Finance Minister convened his customary pre-budget meetings with various segments of the society, including from within the government, he has been inundated by advice, but of conflicting nature.  One segment advised him to go all out for investment boost, while the other segment demanded that he should not err on fiscal consolidation. The former group is well represented by his own chief economic adviser, Arvind Subramanian, when he articulated that the finance minister should ignore fiscal consolidation for one more year—wished to keep the fiscal deficit unchanged at 3.9 per cent of GDP this year—so as to give a countercyclical boost to offset global headwinds and thereby ensure that the economy is kept on growth path. He indeed advised that the government should rise its investment in infrastructure to offset the shortfall in private investment.

As against the known stand of CEA, the RBI governor, Raghuram Rajan is forthright when he said that if India gives a go by to its fiscal consolidation, global investors may lose their confidence and pull out capital. He is indeed categorical in his assertion that fiscal reputations are hard to build but easy to destroy. In one of his recent lectures, drawing the nation’s attention to Brazil’s experience, he cautioned the policy makers thus: “The enormous costs of becoming an unstable country far outweigh any small growth benefits that can be obtained through aggressive [fiscal] policies.” With a combined fiscal deficit of 7.2 per cent of GDP that is quite high for a country whose debt-GDP ratio is already at 66 percent, he said, India could hardly afford to do anything that threatens its macroeconomic stability.

Amidst these conflicting demands and particularly, in the face of threatening global financial storms, Jaitley faced a real challenge in drafting his budget but finally came out commendably by rightly pegging the fiscal deficit at 3.5 per cent of GDP in 2016-17, while the nominal GDP growth is pegged at 10-11 per cent, which, should I say, well reconciles the opposing needs of fiscal consolidation and the growth.   Despite the inherent weaknesses of the budget figures—even a slight slippage in GDP growth from the projected level or slippages in the realization of disinvestment plans, the financial trouble in China that lead to unprecedented exodus of capital, while its overcapacity likely to flood the markets with its cheap goods, the trouble in the banking industry of Europe, which can all cumulatively generate chill winds that can ultimately blow our budget calculations off the track—and given that this year the government has to bear the additional financial burden under 7th pay commission recommendations and One Rank One Pension scheme implementation, which is likely to immediately raise the spending by 0.6 per cent of GDP, what Jaitley accomplished is truly brave and laudable.  And this is sure to help India stand out among the emerging markets.
Fiscal prudence aside, Jaitley also taxed the ultra-rich by levying an additional tax surcharge of 3 per cent and an additional tax of 10 per cent on dividend income exceeding Rs 10 lakh. Luxury car buyers will have to pay an infrastructure cess ranging up to 4 per cent. Higher taxes will be levied on jewellery. He has also increased service tax by 2 per cent.   Although there is no radicalism in the budget, true to the assertion made in the Economic Survey—“persistent, creative, encompassing incrementalism”—Jaitley, by allocating Rs 35,984 crore towards agriculture and Rs 87,765 crore for rural development; and fixing the capital expenditure on roads and railways together at Rs 218, 000 crore, ensured that the much desired multiplier effect is created.  Which means, creation of employment and sustainable growth in the country side. This in turn is sure to stimulate demand in the market for goods besides addressing the supply-side weaknesses—supply of food grains and other related agro-products—of the market. He has also reduced customs and excise duties on certain inputs  to reduce the cost of manufacturing in sectors like IT, hardware, capital goods, defense production, etc. to give a boost to ‘Make in India’ programme.

He has also expressed a strong desire to arrest the slippages in the administration of subsidy schemes by linking cash transfers to bank accounts of the needy by legalising Aadhaar card as the prime identity source of citizens through the proposed Aadhaar Bill. He has also proposed to introduce another Bill that can offer guidelines for PPP negotiations and also help resolve the disputes in infrastructure PPPs. He has also expressed a view to avoid ‘retrospectivity’ in creating fresh tax liability. Above all, he has not resorted to any adventurism in taxation.

Of course, there are people who freely air an opinion that the government being in the middle of its tenure could have taken bold decisions such as stemming energy subsidies that stood at an whooping level of Rs. 2.5 lakh crore, that too, when the oil prices are at record low levels, pruning food and fertilizer subsidies, etc., to limit the unproductive revenue expenditure and divert the so released capital for infra investment. Similarly, much is being said of the government’s ill-preparedness to implement the much-desired Goods and Services Tax (GST). Of course, these are all very desirable elements that needs to be addressed by the present government which indeed came to power promising some such good and meaningful acts. And, so they are within their right to conclude that there is nothing exceptional in the budget to gloat about. 

True, there is no much radicalism in the budget that the country looked forward to Modi government but how can we ignore the age old saying: “Politics is the art of the possible.”  Look at the behaviour of the opposition parties in Parliament. An unbiased look at it engenders a painful feeling that opposition in Indian democracy means always opposing what the ruling party in power proposes, irrespective of the fact whether it is good for the nation or otherwise. Unless this attitude changes and leaders of either side show statesmanship, nothing radical is perhaps possible in our present system.   

That being the reality, one must admit that Jaitley did a fairly good job. The rest, of course, lies in how well it is executed.


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