A K Bhattacharya: Credibility of fiscal promises

With less than eight weeks to go before Finance Minister Arun Jaitley is scheduled to present his third Budget for the Union government, the focus is back on the roadmap for fiscal consolidation and the fiscal deficit target that he plans to set for next year. There is little talk about whether Mr Jaitley would be able to meet the fiscal deficit target that he had set for the current year - 3.9 per cent of gross domestic product or GDP. That target should be achieved without much stress, going by the trend so far, the buoyancy in indirect tax collections and the savings on subsidies on account of the government's scheme on direct benefits transfer for cooking gas and a significant fall in international crude oil prices.

The big debate within the finance ministry and among experts is about the fiscal consolidation path that Mr Jaitley should follow in the coming years. Should he stick to the targets that he had announced last February or should he press the pause button on fiscal consolidation yet again? Remember that Mr Jaitley has already pressed the pause button once and very rarely can a finance minister do this twice while retaining credibility.

While presenting the Union Budget for 2014-15, Mr Jaitley had outlined his fiscal consolidation roadmap with these numbers - a fiscal deficit of 3.6 per cent of GDP in 2015-16 and three per cent in 2016-17. That announcement gave an instant boost to the investing community's confidence in the newly elected government's commitment to fiscal rectitude and responsibility. Here was a finance minister, who accepted with courage and determination his predecessor's fiscal deficit target of 4.1 per cent of GDP for 2014-15, even though he was adequately advised in advance that the target would be a difficult one and he had the option of relaxing it on the ground that it was an unrealistic target. Few could have faulted Mr Jaitley if he had indeed done that. But that he did not opt for that easy path helped build his reputation as a finance minister whose commitment to fiscal responsibility was resolute.

So, there was relief all around when Mr Jaitley, rising in the Lok Sabha to present his second Budget on February 28, 2015, announced that the fiscal deficit for 2014-15 had indeed been kept within the promised 4.1 per cent of GDP. If his subsequent announcement of a new relaxed roadmap for fiscal consolidation carried some credibility, it was because of his track record of having adhered to a difficult fiscal deficit target and the recognition that the new path was more realistic. But there was no doubt that Mr Jaitley had used that goodwill to opt for a more relaxed fiscal consolidation roadmap - a fiscal deficit target of 3.9 per cent of GDP for 2015-16, 3.5 per cent for 2016-17 and three per cent for 2017-18.

Would Mr Jaitley enjoy the same goodwill and credibility if he were to announce in his forthcoming Budget a further relaxation in the fiscal consolidation roadmap for the coming two or three years? That is unlikely even though the Mid-Year Economic Analysis presented to Parliament a few weeks ago had suggested that the fiscal deficit targets for the next few years needed to be reassessed in light of the demand for ramping up public investment to revive growth. Nobody can question the logic of increasing public investment to boost growth at a time when private investments are still scarce and banks are still burdened with bad assets undermining their ability to lend more resources to bankable projects. The question that the finance minister will have to answer is whether relaxation in the fiscal deficit targets is the only way of finding additional resources to increase public investment.

A higher fiscal deficit will have its own debt dynamics and the finance minister must be wary of that. A better option for him would be to look at the areas where expenditure reforms can help the government garner more savings that would provide additional resources with which investments could be ramped up. The finance ministry has before it a set of recommendations sent to Mr Jaitley's office by the Expenditure Management Commission that he had set up in 2014. It is unfortunate that the Commission's reports have not yet been made public, raising doubts on whether the government has the will to take what must be hard steps to curtail wasteful expenditure. Reviewing these recommendations for possible implementation during the next year would be a good exercise in the run-up to the next Budget. It would also be a fulfilment of a promise Mr Jaitley had made in his first Budget.

Instead of worrying over justifying a relaxation in the fiscal deficit target, the finance minister would be better off with devising ways to improve the quality of government spending. The next Budget can make a bigger difference to the economy if the government, along with a clearly articulated and realistic reforms agenda, sticks to the fiscal consolidation path laid out by the finance minister in February 2015. Credibility of fiscal promises is a virtue that no finance minister can afford to lose.