Business Standard

Mr Jaitley: A pragmatist, not a fiscal hawk

If the situation demands, FM Jaitley won't hesitate to revise the fiscal consolidation road map yet again


A K Bhattacharya
The pre-Budget Economic Survey for 2017-18, tabled in Parliament early this week, has given rise to speculation about the fiscal consolidation stance that Finance Minister Arun Jaitley may adopt in his Budget for 2018-19, to be presented on February 1.

The Survey describes fiscal expansion as one of the pitfalls the government should avoid next year. At the same time, it warns against “overly ambitious” targets for fiscal consolidation in a pre-election year as these may carry the risk of not being realised. Thus, it recommends pragmatism and a middle path by pursuing “a modest consolidation that credibly signals a return to the path of gradual but steady fiscal deficit reduction”.

A return to the path of fiscal deficit reduction next year could imply that the current year’s target of 3.2 per cent of gross domestic product (GDP) could be breached and a small reduction in the deficit level for 2018-19 could be projected. Another interpretation is that Mr Jaitley may still surprise everyone by presenting for 2017-18 a revised fiscal deficit number that is no more than what he had proposed a year ago. After all, the Survey is a document produced by the chief economic advisor, but the Budget always carries the stamp of the finance minister.

So, what has been the finance minister’s track record on fiscal consolidation in the last four years? How serious has he been in adhering to fiscal deficit targets? And how consistent has he been in adopting the principles of fiscal consolidation?

In July 2014, Mr Jaitley presented his first Budget and had every reason to set his own target, departing from what his predecessor, Palaniappan Chidambaram, had prescribed in his interim Budget presented before the elections in May 2014. Mr Jaitley said: “My predecessor has set up a very difficult task of reducing fiscal deficit to 4.1 per cent of GDP in the current year. Considering that we had two years of low GDP growth, an almost static industrial growth, a moderate increase in indirect taxes, a large subsidy burden and not so encouraging tax buoyancy, the target of 4.1 per cent fiscal deficit is indeed daunting.”

But he sprang a pleasant surprise on everyone by adding that though the target appeared difficult, he had decided to accept this target as a challenge. “One fails only when one stops trying,” he added. Not only did he embrace a target set by his predecessor, he even outlined a fiscal consolidation road map that did look quite ambitious under those circumstances. Oil prices were still ruling at elevated levels, inflation was yet to be tamed and the magnitude of the stressed assets mess was not entirely assessed. Yet, he announced that he would aim at a fiscal deficit of 3.6 per cent of GDP for 2015-16 and 3 per cent for 2016-17.

Not that Mr Jaitley was setting a new direction for fiscal deficits. After reaching a high of 5.8 per cent of GDP in 2011-12, the Centre’s fiscal deficit began showing a declining trend to reach 4.9 per cent in 2012-13 and further down to 4.4 per cent in 2013-14 — and all this during the rule of the United Progressive Alliance and without the benefit of lower oil prices. The following three years, under the National Democratic Alliance with Mr Jaitley as the finance minister, saw the deficit decline to 4.1 per cent of GDP in 2014-15, 3.9 per cent in 2015-16 and 3.5 per cent in 2016-17. Of course, lower oil prices helped, but the declining trend was a clear indication that Mr Jaitley was keen to be seen as a finance minister, who believed in fiscal consolidation.

That, however, was not a complete picture of the finance minister. The reality was more nuanced. Presenting his second Budget in February 2015, Mr Jaitley recognised the limits of ambition, thanks to pressures on him to increase public investment and the likely burden of the recommendations of the Seventh Central Pay Commission. “Rushing into or insisting on, a pre-set timetable for fiscal consolidation pro-cyclically would, in my opinion, not be pro-growth,” he said before announcing a more staggered road map for achieving the fiscal consolidation targets he had announced in July 2014.

Instead of taking two years to reach a deficit level of 3 per cent by 2016-17, he decided to achieve the same numbers over a period of three years. Thus, the revised fiscal deficit targets were: 3.9 per cent for 2015-16, 3.5 per cent for 2016-17 and 3 per cent for 2017-18. The reason he cited for changing the road map is significant. “With the economy improving, the pressure for accelerated fiscal consolidation too has decreased,” he reasoned, but added that the additional fiscal space gained by postponing the target year would be used for funding infrastructure investments.

In his third Budget, in February 2016, Mr Jaitley changed his tone somewhat. That year saw a big debate over the need for being less aggressive on fiscal consolidation. He said: “I have weighed the policy options and decided that prudence lies in adhering to the fiscal targets.” Thus, the revised fiscal deficit for 2015-16 was retained at the targeted level of 3.9 per cent and the target for 2016-17 was set at 3.5 per cent of GDP. A promise was also made that while doing so, the development agenda would not be compromised. But there was no mention of the fiscal deficit target of 3 per cent in 2017-18 as indicated in his earlier road map.

Mr Jaitley’s fourth Budget, presented in February 2017, showed yet another change in his approach to fiscal consolidation. He did not consider it necessary to invoke the escape clause provided by the FRBM (Fiscal Responsibility and Budget Management) Review Committee to deviate from the target by half a percentage point in the event of far-reaching structural reforms with unanticipated fiscal implications. Instead, recognising the need for higher public investment, he relaxed the target for 2017-18 to 3.2 per cent of GDP and reaffirmed his commitment to reach 3 per cent in 2018-19.

In the last four years, Mr Jaitley has once accepted his predecessor’s difficult deficit reduction target. On one occasion, he resisted pressure on him to be less aggressive on fiscal consolidation. And on two occasions, he relaxed the target dates in his own fiscal consolidation road map. Clearly, Mr Jaitley is not a fiscal hawk. He is a pragmatist. If the situation demands, he won’t hesitate to revise the fiscal consolidation road map yet again. Will he do it? On February 1, you will get the answer.

Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of or the Business Standard newspaper

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First Published: Jan 31 2018 | 11:20 PM IST

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