In Narendra Modi govt's year of living dangerously, failed fiscal romance causes political heartbreak and institutional wounds

As Prime Minister Narendra Modi's NDA government winds up Year 2018, it certainly has some wounds to lick and lessons to ponder on, but the biggest of them all could be its failed romance with fiscal discipline. It is as if in pursuit of a Utopia, the Bharatiya Janata Party (BJP)-led administration lost the earth it was standing firmly on.

File image of Prime Minister Narendra Modi. Reuters

File image of Prime Minister Narendra Modi. Reuters

Looking back, three big events of the year for the ruling BJP would be the defeat in state assembly elections in the heartland state of Madhya Pradesh, Chhatisgarh and Rajasthan, a controversial confrontation with the Reserve Bank of India (RBI) governor Urjit Patel leading to his eventual resignation and then the emergence of a balance sheet crisis in non-banking financial companies (NBFCs) as an extension of the non-performing asset (NPA) problem in the state-dominated banking sector.

The one thing connecting all of these seems to be the government's obsession with reining in fiscal deficit, keeping expenses in control while looking for new avenues to boost revenue. As it turns out, this has come at a heavy political as well as economic cost. What is worse, even the fiscal deficit target seems to have gone thoroughly awry for the current fiscal year. You can't even call the fiscal discipline as a Pyrrhic victory, because there is no win to celebrate unless self-certification is counted as an act of achievement. The fiscal deficit target is all set to be missed.

In the fag end of the calendar year, with only months to go for the next general election, it seems the government is throwing its famous caution to the winds as it has rolled out two surprise acts of fiscal footlooseness: A fresh dose of Rs 41,000 crore previously unplanned capital infusion into public sector banks and a sharp downward revision in the Goods and Service Tax (GST) on a wide range of items.

The big question: Would the government have fared better had it allowed its fiscal deficit numbers to be a bit more lax earlier in the game, say, in the previous fiscal year? It seems to have been in retrospect a year of living dangerously for the government, resulting in a political heartbreak and pains inflicted on the RBI. A double whammy, as it were.

By allowing the RBI chief to leave, the government has lost a bit of its global investor-friendly face. By confronting him on a range of issues including a request for laxity on the prompt corrective action (PCA) framework for public sector banks, it has a self-inflicted wound on its reformist credentials. By playing an usurious Shylock in extracting the maximum in terms of surplus dividends from the RBI, it has raised more questions than answers on the relationship between the central bank and the government. By staying clear of farm loan waivers, it vacated a political gap that was adeptly filled by the Congress.

Judging from the fiscal actions after the electoral debacle, it seems the NDA is realising that some fiscal flirting may be a lesser evil compared with some monetary transgression. Maybe the rulers wanted to take the risk to see how far they could push before falling in line with India's old formula to keep electoral marriages intact: Some fiscal infidelity.

Buffeted by an indirect tax revenue shortfall and growth stymied by a surge in global oil prices, the full-year fiscal deficit mark as per budget estimates was crossed by the end of October, with five full months to go during which the gap would  likely yawn, unless the government does better than it expects from the sale of public sector company stakes. The benign fall in oil prices in the last weeks of December may be a positive, but then, if truth is told, we do not yet know what the possible fiscal cost of the mess in the "systemically important" IL&FS non-banking financial group could be.

With Rs 648,000 crore (about 103 percent of budget estimates) already spent by the end of October, the target of 3.3 percent of the GDP for 2018/19 seems clearly missed. It compares poorly with the previous 2017-18 year in which the end of the fiscal year saw 96 percent of budget estimates spent. Who exactly did the belt-tightening benefit? None, it would seem.

The minor consolation would be that by the time the real fiscal numbers arrive, the heat of a general election would have numbed the noises of the high priests of economic perfectionism. We have also seen the unseemly act of two BJP governments joining newly elected Congress governments in Rajasthan and MP in waiving agricultural loan repayments, attracting ridicule  from the all-India champion of farm loan waivers, Congress president Rahul Gandhi.

All that should be worth it if the government smartly switches from fiscal fundamentalism to political chutzpah. But fiscal doses are like slow medicine. By the time some of the political goodies arrive as their result, it may be too late. The new year may be a tough one for Modi's government that promised good days for the average Indian. Ph.Ds in economics are not applauding in appreciation either. Bad politics has led to bad economics, never mind what they say in air-conditioned seminar rooms.

Unless RBI's new governor Shaktikanta Das delivers a dividend bonanza or some clever public sector juggling that boosts disinvestments, Year 2018 would go down as the year when the Modi government took too many risks, with not enough rewards to show.
(The writer is a senior journalist and commentator. He tweets as @madversity)

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Updated Date: Dec 24, 2018 09:35:59 IST

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