Mindful of the daunting task, the Finance Minister has—even before settling into his portfolio—begun to ready the nation for the tough choices ahead. On his Facebook account, Jaitley candidly acknowledged how India must prepare itself for “tough measures”, especially given the current trend of “low and jobless growth”. To strengthen his case, he warned that the failure to generate jobs had “serious social implications”, especially since it was occurring against the backdrop of high inflation and economic slowdown.
“Short-term disciplining till we reverse the present trend will give us long term benefits,” Jaitley said, pointing out that there was need to move towards an era of fiscal discipline with the intent of tamping down on inflation in the economy; not only will it bring relief to millions of households across the country, it will also improve the competitiveness of Indian manufacturing.
A report put out by Moody’s, the international rating agency, on 19 June, emphasised that the primary objective of the finance in the budget would be to rein in the fiscal deficit. Implicitly fingering the Manmohan Singh-led United Progressive Alliance (UPA), the rating agency said, “Wide budget deficits have kept India’s inflation high and contributed to a widening current account deficit between 2011 and 2013, which heightened exchange rate volatility and resulted in higher domestic interest rates. These trends have exacerbated the slowdown in GDP growth since 2011.”
Clearly, there are no more free lunches ahead, following a dismal record by the UPA in managing financial troubles. Worse, the policy paralysis that forced a rapid slowdown in the economy from a high of 9 per cent-plus growth to less than 5 per cent—in the span of less than four years—has meant that revenues to the exchequer have fallen even while expenditure levels remained at elevated levels.
What would be particularly worrying to Jaitley is the kind of expenditure compression that his predecessor P Chidambaram effected in his bid to stick to his committed fiscal targets. The brunt of it was borne by capital expenditure at a time when investment levels in the economy are at their lowest in a decade. Not only did Chidambaram (and his predecessor Pranab Mukherjee) miss the targets, he has also jeopardised future growth in the economy by short-changing on federal investment spending.
However, the one thing going for the new Finance Minister is the high level of trust that the BJP has managed with the Indian electorate. With the UPA, the trust deficit was so high that even achievements were dismissed as spin.
So when Modi first, and Jaitley later, claimed that the Centre’s coffers were indeed empty, their statements did not invite scorn and criticism, but attention. What they do is provide crucial political room to the finance minister, to allow him to undertake tough economic decisions. The National Democratic Alliance (NDA) has already signalled that there is no subject that is untouchable.
The feisty Chief Minister from Rajasthan, Vasundhara Raje, has embarked on reform of labour laws that are more than half a century old. As if on cue, the Union labour ministry has sought comments from the public on similar amendments to its own set of laws. At present, the labour laws are very rigid and do not recognise the changes in contemporary India—which today is an impressive $1.8 trillion economy. As a result, they are less friendly for employers, forcing them to employ back door techniques like contract labour hiring, as opposed to tenure jobs. The changes initiated by Rajasthan and later proposed by the Union labour ministry have not—largely thanks to the personal credibility Modi currently enjoys as a non-nonsense doer—drawn the sharp response any such previous attempts usually elicited.
“In fact, candidness and honesty, underpinned by the immense trust that the electorate placed in Prime Minister Narendra Modi could prove to be Jaitley’s biggest boon: the people of India expect honesty, however stark, from both the PM and his FM. They are well aware that tough decisions and belt tightening could be called for now, agar achhe din ko aana hai [if good days are to come],” points out a colleague in the government. Both Modi and Jaitley, taking a cue from the electorate, have therefore minced no words in underscoring, quite early on, that people will have to bite the bullet first in order to work towards a booming economy.
Given that restoring balance to the fisc is the primary task of the Finance Minister, it is clear that he will have to address the receipts side of the budget—this is because expenditure is given and very difficult to turn around immediately. Ministry of Finance officials have indicated that Jaitley may pass over on the option of hiking tax rates, and instead focus on non-tax revenue sources such as disinvestment.
On the expenditure side, the Finance Minister has to deal with the sleight of hand performed by Chidambaram in adding up figures to meet targets. A large chunk of the spending—one estimate pegs it at Rs 1 trillion—has been shifted to this fiscal: an inheritance that can be a nightmare in any year and more so in one when the economy is buffeted by chilly winds of uncertainty and slower growth.
This apart, there is also an overhang from previous actions of Chidambaram, who has routinely undertaken off-balance sheet accounting practicing, as in the case of fertiliser subsidies; handing out long-term bonds to fertiliser companies in lieu of their dues, clearing his own books out in the process and putting the squeeze on the ability of fertilizer companies to buy fresh stocks of raw and finished material without exposing themselves to high interest rates from banks. Not surprising, therefore, that the former FM has come in for sharp criticism for the latest episode of “window dressing” accounts; primarily in order to show fiscal deficit targets for financial year 2014 as having been met.
However, Chidambaram has rejected the criticism over subsidy payments rolled over into the current fiscal, maintaining that it was normal and routine for the subsidy in the last quarter of the previous financial year to be paid out in the first quarter of the new financial year. This, in fact, is believed to have been reiterated by Ministry of Finance officials to a disbelieving Jaitley, when he asked for clarifications on fiscal deficit numbers.
Significantly, some time earlier this year, news reports in a section of the media suggested that the Revenue Wing of the Ministry of Finance had stopped all refunds in March. North Block swung into action quickly to deny the reports. Oblivious to the developments, some officers had gone ahead and issued tax refunds, even to individual tax payers. They were immediately chastised and pulled up by their seniors. The unwritten order in March, in Chidambaram’s official quarters at Raisina Hill, was categorical: no payments should be made, including tax refunds to individuals. The bill of pending payables alone quickly added up to a whopping Rs two lakh crore. This is in addition to unpaid food, fertiliser and fuel subsidies.
It was a stroke of genius: Chidambaram had managed to juggle his figures and pretty up his fiscal deficit target numbers for financial year 2014, leaving the real mess for the new government to deal with.
Among the Finance Minister’s biggest worries is fuel subsidy, which has proved to be the fastest-growing expenditure head during the 10 year stint of the UPA. Compounding matters, the government doubled the original cap on subsidised cylinders to twelve annually, primarily at the behest of Congress party Vice President Rahul Gandhi. Although the government swore by targeted subsidies for the very needy, most of the subsidy continued to be cornered by the vocal middle class and even the rich. To boot, the much-vaunted direct cash transfer programme was a non-starter, eroding the credibility of the strategy to shift to a cash transfer system.
On the external sector, stability was brought about by clamping down on gold imports. Yes, it has improved the current account deficit, but Chidambaram has in the process ended up incentivising the smuggling of gold into the country. So, a balance sheet item has now gone off balance sheet without really solving the problem.
Food inflation spikes persisted at regular and seasonal periods over the years, primarily affecting essential goods such as fruit, vegetables, milk and poultry. A focused pulses production programme notwithstanding, annual imports from Canada, Myanmar and other countries ratcheted up as the government bought at high import prices to cater to the consumer at home. Several projects to ameliorate the situation remained at the blueprint stage, including fruit and vegetables hub creation outside metros and incentivising fruit, vegetables and poultry farming in rural and semiurban areas to boost income and cut transport overheads to consumers in cities—thus containing chances of any rapid price hikes and possibilities of hoarding.
Similarly, the plights of efforts to enhance warehouse receipts as negotiable instruments, creating a chain of state-incentivised, temperature controlled warehouses countrywide, languished. Again, as with the European Union and Alphonso mangoes earlier this year, mismatched phytosanitary standards and the lack of awareness around these meant consignments of Indian food products were held up with regularity; allowing much smaller countries such as Vietnam and Thailand, and even more distant ones in South America such as Brazil and Columbia, to score with timely exports to importing nations close to India.
The crucial banking sector, too, wasn’t allowed to function at optimum efficiency. Some of India’s senior bankers in state-run banks have horror stories to tell of how the UPA regime functioned. Those bankers, who were selected to senior positions, would be approached by middlemen claiming that they could influence their postings to some of the better banks. Those who refused to play ball had to wait longer and settle for the smaller banks. Banking secretary Rajeev Takru, as head of the Department of Financial Services, would lord over even the most senior of bankers. At one meeting, he is believed to have pulled up a senior banker for attending a meeting chaired by him, saying he would want only the chairmen of banks to attend meetings, not their juniors.
Some bankers note that it was Takru’s attitude that led to a standoff between him and the Reserve Bank of India (RBI) top brass at a meeting in Kashmir. The relationship between the previous central bank head, Duvvuri Subbarao, and the government led by Chidambaram, at one point, soured so much that the outgoing governor on his last speech, a day before his term ended, took a dig at his minister.
“I do hope finance minister Chidambaram will one day say, ‘I am often frustrated by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the Reserve Bank exists,” Subbarao said, in his last public lecture as RBI governor.
A month or two after this bitter parting, officials prevailed upon Chidambaram to host a formal farewell at the Delhi Gymkhana for Subbarao, saying that such public spats were unhealthy from a public policy perspective.
During this period of acute acrimony, senior bankers and other officials who approached the then PM for succour, were told by an impassive Manmohan Singh: “But what can I do?”
What made the relationship between the central bank and the government a difficult one was the influence which Chidambaram, Planning Commission Deputy Chairman Montek Singh Ahluwalia and the PM—himself a former governor—sought to exert subtly on interest rate management and offering banking licences. The RBI was strongly opposed to giving licenses to new banks, especially the ones promoted by corporates. Subbarao’s digging in his heels left the triad infuriated. It was left to his successor, Raghuram Rajan, to announce two new licences: to Infrastructure Development Finance Company (IDFC) and Kolkata-based microfinance firm Bandhan Financial.
In 2012, with global headwinds, an economic slowdown and the urgent need for lowering the fiscal deficit, a top official of the Cabinet Secretariat was busy sounding out stunned policymakers on another fiscal stimulus. The gaffes continued.
After Pranab Mukherjee was elevated to the Rashtrapati Bhavan, one of Manmohan Singh’s earliest moves was to handle the issue of retrospective taxation for corporates and related issues. But nothing came of his promises. A meeting was chaired by Pulok Chatterji of the PMO to discuss the matter and arrive at a decision. Officials who attended the meeting recall that no decision was taken to improve the investment climate of the country.
Things didn’t end there. Whistleblower KM Abraham, who wrote to the PM that pressure was being exerted on Securities and Exchange Board of India (SEBI) by then FM Pranab Mukherjee, was issued a memo, flouting all norms issued by the Central Vigilance Commission (CVC) on whistleblowers. He escaped suspension, sources contend, only because Mukherjee moved to the Rashtrapati Bhavan, but had to pay a price nonetheless: not being empanelled as Additional Secretary despite his sterling record.
But he was hounded by the tax authorities during that period with notices from three jurisdictions. Similarly, two others, SEBI Chairman CB Bhave and another member, MS Sahoo, also received tax notices. Officials maintain that this was primarily because the regulator was did not respond “promptly” to instructions from the finance ministry.
There are no easy options for Jaitley.