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udget 2018 needs to balance reforms with political demands

The temptation for any finance minister to open the spending spigot in a bid to buy votes is at its strongest in the budget before a national election

  In his first budget speech as finance minister on July 10, 2014, Arun Jaitley had told parliament that he would bring in a policy regime that would secure higher growth, lower inflation, better external balance and fiscal prudence. It is fair to say that Mr Jaitley has delivered on all four fronts — till now. He has been given a helping hand by the global oil market, but it would be unfair to say that the improvement in the Indian economy over the past four years is only because of lower global oil prices.
How the final report card will look will depend a lot on how the finance minister manages public finances over the next few months. The budget that Mr Jaitley will present early next year could be the last full one from the National Democratic Alliance government led by Narendra Modi. He has already begun work on it. The temptation for any finance minister to open the spending spigot in a bid to buy votes is at its strongest in the budget before a national election. The damaging economic consequences of falling prey to such temptation was most evident during the second tenure of the Manmohan Singh government, when the fiscal profligacy that began in early 2008, much before the global financial crisis struck, almost sent the economy into a tailspin by July 2013.
There are four key issues that will define Budget 2018. First, the uncertainty about tax collections in the initial months of the new goods and services tax (GST) will ensure that there is uncertainty about government revenues. The finance minister should be conservative in his projections about how much money will flow into his kitty. Second, Mr Jaitley will have to make credible monetary commitments to support the recapitalisation of public sector banks, building new infrastructure and supporting a farm economy that is in distress. Third, the act of balancing between tax uncertainty on one side and the demands of higher spending on the other side will have to be managed without ending up with a higher fiscal deficit. Fourth, the budget speech will be an opportunity to make a fresh commitment to further economic reforms. For example, the finance minister does not have room for reductions in income taxes right now — but he needs to prepare the grounds for a new direct tax code that is free of a web of exemptions that lead to rampant tax avoidance. Every budget is preceded by pressure from various lobbies — economic and political — for special deals to benefit their constituents. The problem is especially acute as the national election get nearer. How Mr Jaitley manages to satisfy these political demands within the constraints of economic prudence will be watched closely.
Hindustan Times Editorial



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