What Jaitley's two FB posts tell us about the economy and finance ministry

A 'virtual' resignation and the resolve to raise the tax-to-GDP ratio by 1.5 percentage points say a lot about North Block

Last week, Cabinet Minister Arun Jaitley made two significant announcements on social media that instantly became big news. More than their significance, they stood out as highly reassuring messages for those who worry about India’s macroeconomic fundamentals and how the government treats its professional economists. Observers also noticed in those social media posts a reflection of the state of affairs in North Block, headquarters of the finance ministry.
 
The first statement from Jaitley was on the challenges before the economy. Note that Jaitley is not technically in charge of the finance ministry as he is recovering from a surgery and the finance ministry is now being temporarily looked after by Railways and Coal Minister Piyush Goyal. But the statement shows that even while recuperating from a major surgery, Jaitley is still thinking like a finance minister with his eyes firmly focused on what the government should be doing at a time when global economic headwinds may undermine whatever gains were made in the last four years.

 
His  larger message on the need for maintaining fiscal prudence and encouraging greater tax compliance to provide funds for development without incurring fiscal slippage is unexceptionable. But equally important is his clear hint that there would be no roll back of  the excise duty rates that were raised for petrol and diesel when crude oil prices were ruling at low levels.
 

The government has come under intense pressure to cut excise duty on petrol and diesel whose retail prices rose to record highs. The government has so far withstood such pressure. Now with the crude oil prices softening a bit and the Organisation of Petroleum Exporting Countries (Opec) deciding to increase output, though by a modest margin, it seems the oil-led risks to the government’s fiscal consolidation plan have been mitigated to some degree. If the crude oil prices remain below $70 a barrel, as is expected now, the government will be less worried on the oil front.

 
Other worries will still remain and Jaitley’s first statement correctly refers to them. Indeed, the overall share of central taxes in gross domestic product (GDP) has gone up from about 10 per cent in 2014-15 to 11.6 per cent in 2017-18. But the fact is that a good part of this 1.6 percentage points increase, over 43 per cent, is due to higher taxes on petrol and diesel. Take away the oil taxes, the share of non-oil taxes in GDP has moved from 8.77 per cent to 9.68 per cent in the same period.
 
In contrast, the states, at an aggregate level, did not take advantage of lower crude oil prices. Their share of taxes on oil products in GDP actually declined from 1.29 per cent in 2014-15 to 1.24 per cent in 2018-19. To some extent, this was because their taxes were ad valorem. But there is no denying that while the Centre used the oil sector to boost its tax-to-GDP ratio, the states let go this opportunity.

 
In this context, Jaitley underlining the need for the Centre to further increase the tax-to-GDP ratio by 1.5 percentage points in the next few years is a pointer to the Modi government’s approach to fiscal policy. Importantly, Jaitley notes that there is no further room for increasing the share of oil taxes in GDP. Thus, the entire increase of 1.5 percentage points would have to come from sectors others than oil.
 
Expect, therefore, no further increase in oil taxes. Already, in the current year, the share of central taxes in GDP is set to go up to 12.1 per cent, an increase of 0.5 percentage point over last year. How much of the proposed increase in tax collections will come from greater compliance and coverage or through changes in tax rates will have to be decided by the next government.

 
Jaitley’s second social media post announced the resignation of Chief Economic Advisor Arvind Subramanian. It was unusual for a Cabinet minister to acknowledge in glowing terms the many contributions of Subramanian towards the formulation of economic policies in the last four years. Some interpret this as a reflection of the special relationship of mutual affection and confidence the two enjoyed with each other.
 
There are also those who believe that this was a subtle way of Jaitley minimising the reputational damage that the Modi government would have incurred with three economists leaving the government system in just two years. Could it be that Jaitley’s post was aimed at assuring the community of professional economists that the Modi government does not mince words when it comes to appreciating the good work of those who join it and make significant contributions?

 
Observers, however, do not fail to note the unique situation in North Block, where a chief economic advisor can ‘virtually’ tender his resignation on a video conference with Jaitley, who subsequently announces the departure on his social media post. North Block has never in the past seen an arrangement where its senior civil servants also have to interact with two Cabinet ministers. Many of them hope that there would be greater clarity soon.