Mint published last week an interview with him in which he indicates rather plainly that the finance minister’s budget speech can be expected to favour fiscal prudence and productive spending that, the government hopes, will have a multiplier effect on the economy. He has thus legitimized the concerns both in and outside the finance ministry over the pace of fiscal consolidation being thought about, given the challenge is to reduce the deficit while protecting — better still, increasing — the capital expenditure allocations.
You might also like
Finance panel will firm up regulators: Jayant Sinha
5 global crises that will keep you on edge this year
'Successful investing is a piece of art'
Budget may give a big push to Railways
This is sensible advice. This year’s budget will have to balance a variety of demands, constraints and challenges — voters want relief on taxes; a variety of interest groups have voiced competing demands for tax sops, subsidies and allocations; the global economy projected to slow down or worse enter recession, and geopolitical situation remaining a source of uncertainty, making it not the easiest year for budget making; and there remain the long-standing unresolved issues of the manufacturing sector and private investments remaining fairly unresponsive to policy, fiscal and monetary push, and failing to become good drivers of growth and jobs creation.
Against this backdrop, the best strategy, as Dr. Debroy said, would be to remain fiscally conservative — something that has become the hallmark of Nirmala Sitharaman’s budgets. She does not over-promise on tax collections, does not hide or camouflage the size of the deficit, and hasn’t strayed from the glide path she committed to take two years ago for reducing the deficit to 4.5% of GDP by 2025-26 from the 2020-21 level of 9.4%.
Dr. Debroy recommends that she should find ways of de-incentivising the use of tax exemptions by taxpayers so that the tax base can be widened over the medium term. And that she should resist the demands being made on her for tax cuts supposedly for stimulating consumption. Policy certainty, he argues, will be the right recipe for reviving private investments.
Mint SnapView has also argued that the fiscal room isn’t available yet for stimulating consumption by lowering taxes despite the smart recovery seen in tax collections allowing for the deficit reduction to remain on course for meeting the goals the budget announced two years ago.
But Dr. Debroy’s interview this year is important not only for what he said about the upcoming budget scheduled for February 1, the Modi government’s last full-year budget in its second term. He also talked about the urgency of signalling that fiscal credibility will be sustained beyond the upcoming annual fiscal statement. That advice is even more significant.
Debt sustainability places demands bigger than the annual exercise this year on the finance minister. With the pandemic behind us, and the economy in recovery mode, economy watchers and the money markets want to know how she plans to make debt credibly sustainable over the medium term.
Despite the finance minister’s fiscal austerity, unlike the over-the-top response to the pandemic in many countries, India is in a situation of fiscal emergency. The burden government debt, including that incurred by previous regimes, is creating for future generations of taxpayers needs urgent attention.
Total government debt is estimated by the International Monetary Fund, IMF, at just under 85% of GDP, much higher than it should have been as per the finance ministry’s pre-pandemic commitment in which it was guided by the recommendations of an N.K. Singh-led panel. The red ink the exchequer ran up on account of the covid-time surges in spending on free foodgrains has rendered those recommendations and the commitments outdated. They will have to be updated in the context of the post-covid, post-Ukraine world.
By talking about there being need for a credible plan to reaffirm debt sustainability, Debroy may be hinting that the budget should revive the panel with a request to redraw the medium-term fiscal correction timetable. It wouldn’t be an unreasonable insistence.
What will the tax collections, schemes and projects costs, subsidies, non-tax revenues and, most importantly, the outgo on interest due past government borrowings look like in this new world? These questions demand to be reviewed – not just for this year or the next but over the next few years – and a new medium-term timetable for fiscal corrections formulated accordingly. The finance ministry does not have the technical skills or the credibility to carry out this exercise. It’s the job for domain experts.
Remember, British PM Liz Truss had to go precisely because her government had announced unfunded subsidies and tax credits without getting the budget calculations ratified by the UK’s Office for Budget Responsibility (OBR). Bypassing the OBR triggered market worries over a crisis of credibility of policy and the budget. India does not have a similar institution, but finance ministers have from time to time relied on recommendations of fiscal experts on how best to strive for macroeconomic stability and fiscal policy credibility.
Elsewhere in Mint
In Mint Special '2023: The Moderation Redux', Janet Yellen tells why the US won't chase the cheapest supply chains. Di Guo & Chenggang Xu argue that the Soviet endgame threatens to scuttle China's economy. Jose Antonio Ocampo says after covid-19, a pandemic of debt is rocking the world. Will the central banks do what it takes? Carmen M. Reinhart asks.
