TOP ARTICLE Good job in bad conditions: Finance minister shows admirable fiscal restraint in an election year The Times of India Its easy to get lost in the weeds. For an economy burdened by adverse growth-inflation dynamics, its easy to get disappointed. There was hope in some quarters that the interim budget would boost sentiment and lay the groundwork for kick-starting the investment cycle while staying on a path of fiscal consolidation. Such hopes were always unrealistic. For starters, any vote on account is constrained in its scale and scope and avoids big-bang direct tax changes and policy reforms. So industry can always quibble that enough wasnt done. Yet others will bemoan the quality of fiscal adjustment. But while each of these may be legitimate concerns, collectively they miss the bigger picture. Six months ago India was the poster child of emerging market vulnerability. Current account deficit was an unsustainable 5% of GDP, the rupee was falling like a stone, RBI had hiked rates by 300 bps to prop up the rupee and capital market sentiment had plunged. With growth - and therefore tax collections - bound to suffer and subsidies under pressure from 15% currency dep-reciation, almost nobody imagined a fiscal deficit even close to 5% of GDP, let alone 4.6%. Not a day went by without mention of a sovereign ratings downgrade. As it turns out, for the first time in 28 years, GDP growth is on course to print below 5% for a second successive year. The fact that, in this adverse macroeconomic environment, and with general elections approaching, the finance minister has been able to meet - and beat - his target for each of the last two years, needs to be commended. On a cyclically-adjusted basis, total consolidation over the last two years is a substantial 1.1% of GDP. This is admirable fiscal restraint in a challenging environment. More generally, fiscal adjustment has been crucial to restoring macroeconomic stability. Unlike South Africa and Turkey - Indias emerging market peers - Indias current account deficit is expected to print at 2% of GDP, less than half its level of 4.7% of GDP last year. Much of this is because of the curb on gold imports. But some of this is because current accounts evil twin - fiscal deficit - has been consolidated. Indias twin deficits are now seen as the most visible manifestations of macroeconomic adjustment and there is no more loose talk about a ratings downgrade. Consequently the rupee is among the best performing currencies since the taper began! So lets ascribe credit where its due. But with emerging markets expected to be under sustained stress as the Fed normalises monetary policy, one cannot sit back on laurels. And while the fiscal consolidation of the last two years is laudable, reaching 3% of GDP by FY17 - as per the fiscal roadmap - will not be sustainable unless we see genuine fiscal reform going forward. In fact, pressures are likely to rise next year itself. FM has pegged next years deficit at 4.1% of GDP - a 0.5% of GDP consolidation over the next year. These numbers are not binding. The full budget in July can alter these estimates. But the math currently laid out illustrates the magnitude of the challenge. To get to next years deficit, tax revenues - which grew less than 12% this year - will have to grow at a whopping 19%. And this despite excise duty cuts in consumer durables and capital goods! Similarly, disinvestment proceeds have only been able to manage Rs 25,000 crore in each of the last two years. Yet, next year they are budgeted at a whopping Rs 57, 000 crore. Finally, subsidies have been budgeted at almost the same level as this years outturn. But with food subsidies sure to surge under the Right to Food security, one will have to see appreciable rationalisation of LPG, kerosene and urea prices - apart from the ongoing diesel price increases - to stay close to subsidy targets. The bottom line is next years consolidation looks challenging barring a sharp upturn in growth. All this underscores a more fundamental point - that further consolidation cannot rely on pushing out Plan expenditures, running up arrears on subsidies, and squeezing public sector enterprises. We need genuine fiscal reforms - like long-overdue GST that truly makes India a common market and promotes allocative efficiency, and extending Aadhaar to all subsidies - so that de-duplication benefits of eliminating ghost beneficiaries can accrue. Without these reforms, its hard to envision sustained fiscal consolidation. But the challenge for the new government - of whatever political hue - is even greater: to boost potential growth. The reason why GDP growth is below 5% but core CPI inflation is above 8% is simple - Indias potential growth has fallen markedly in recent years. And its not hard to see why. Indias corporate investment rate - which reached a high of 17% of GDP in the pre-Lehman year - has collapsed to 9% of GDP. Government has to mount an all-out war on implementation bottlenecks, bureaucratic risk aversion and regulatory uncertainty. And we need comprehensive and quick resolution of the debt overhang on infrastructure balance sheets, and the associa-ted stress on bank balance sheets. Only then will the investment cycle revive. And only then will potential growth rise again. The challenge is daunting. But not impossible. Because as the fisc over the last two years has demonstrated: when policymakers truly put the weight of their resolve behind an outcome, they find a way or make one. The writer is Chief India Economist at J P Morgan. Views are personal.
Posted on: Tue, 18 Feb 2014 04:27:30 +0000
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