Fiscal discipline may override election compulsions

Many previous governments have been prone to undertaking massive pre-election expenditure commitments. However, the NDA government may avoid this route of fiscal indiscipline, which would be in line with its policy thrust towards structural reforms aimed at augmenting long-term efficiency. Ad hoc fiscal concessions work as short-term palliatives, but do long-term damage. It is for this reason that successive governments at the Centre could not so far achieve the fiscal responsibility Act target of 3% fiscal deficit relative to GDP except for one year, way back in 2007-08. The current year's budgetary target for fiscal deficit to GDP ratio is 3.3%. This is still higher than the target specified in the Act, but was considered feasible when the 2018-19 Budget was prepared. After the successful incremental reduction in the fiscal deficit to GDP ratio, it would be costly to sacrifice the government's reputation for adhering to fiscal discipline. Apart from risking downgrade possibilities by the rating agencies, any excessive draft of the government on the available savings would push the interest rate up, thereby constraining private investment.

Loosening fiscal strings is contrary to government's thrust on structural reforms

There is currently considerable pressure to commit to an all-India farm loan waiver, which would fiscally be costly apart from offering no solution to the farmers' plight. The economic weakness of the agricultural sector in India has deep-seated structural roots that make the Indian farmers vulnerable to output and price volatility. Infusion of massive doses of capital and technology and effective insurance schemes aimed at protecting farmers' income would be the key elements in restoring farmers' economic health. The government may prefer to continue to focus on insurance initiatives, MSP reforms, and technology and capital infusion in agriculture rather than go for short-term palliatives in agriculture.

Another temptation that needs to be avoided is undertaking large-scale tax concessions in direct taxes. The corporate income tax (CIT) is already replete with excessive industry and output-based concessions, which forces a higher overall CIT rate than achieving a globally competitive rate for the Indian industry. In respect of personal income tax, considerable policy effort has resulted in increasing the number of tax assessees and the tax-GDP ratio. This may not be given up by yielding to the short-term temptation of uplifting the income tax brackets beyond some minor inflation adjustment. Only some saving-investment promoting concessions may at best be on the cards.

Revenue considerations constrain election-giveaways

Revenue prospects also heavily constrain government's policy options. The performance of indirect taxes is of particular concern, since for the eight-month period from April to November 2018 the growth rate of indirect taxes was only 1.9% as compared to a growth of 18.3% in the corresponding period in 2017-18. At the end of this period, the cumulated fiscal deficit is already 114.8% of the budgeted target. The fact that the government has been rationalising rates by bringing many goods from the higher to lower GST rates, also implies a revenue sacrifice. While the direct taxes are on par with the budgeted targets and any slippage in the disinvestment target may be limited, any indirect tax shortfall will call for an expenditure cut. But neither expenditure not capital side cuts are likely to be undertaken. Some revenue side comfort may be derived from the recent fall in the global crude prices, providing scope for garnering additional revenues from the taxation of petroleum products, which has remained outside the scope of GST. To some extent, some subsidies that are due to be paid this year may also be postponed for the next year.

The writer is chief policy advisor, EY India