New Delhi: Finance Minister Arun Jaitley on Sunday accused the UPA regime of compromising on fiscal prudence to support sagging economic growth in the wake of the 2008 global financial meltdown.
This debate comes two days after a preliminary set of GDP back series numbers was released by a study commissioned by the National Statistical Commission. The data show that the UPA-I and UPA-II governments managed to achieve double-digit growth twice – in 2007-2008 and in 2010-2011 (after the international financial crisis).
While Jaitley’s point of increased government expenditure fueling a rise in inflation during the UPA-II years deserves further debate, the Narendra Modi government’s track record when it comes to fiscal discipline is also questionable.
The Centre is obligated to comply with the Fiscal Responsibility and Budget Management Act (FRBM) Act, 2002. Despite being helped by lower global oil prices, the Modi government has struggled to rein in fiscal deficit as per the FRBM Act, despite raising record revenues via disinvestment.
Understating fiscal deficit by 50,000 crore
Moreover, its fiscal numbers have been questioned by the national auditor as well. The Comptroller and Auditor General (CAG), in its FRBM audit report for 2015-16, highlighted several flaws in the NDA government’s accounting procedures for the financial year 2015-16, which led to an understatement of both the fiscal and revenue deficits.
In particular, it noted that the government understated its fiscal deficit by a little over Rs 52,000 crore in 2015-16, which helped in showing compliance with the target.
“For financial year 2015-16, the variation in actual fiscal deficit figure worked out based on data contained in AFS/Union government finance accounts and those in BAG was Rs 52,706 crore,” the CAG report, which was tabled in December 2017, states.
While the government has claimed that it met fiscal deficit target of 3.5% for 2016-17, the final picture will be known only when the CAG presents its audit report. The CAG began auditing the Centre’s annual compliance with the FRBM Act from 2015-16 after the Modi government amended the Act.
Jaitley has thrice failed to meet the fiscal deficit targets set out in annual union budgets and has, consequently, stretched medium-term fiscal consolidation roadmap from 2017-18 to 2020-21.
Silence on oil prices
What the finance minister fails to mention, something The Wire has highlighted over the last two years, is that the Modi government has enjoyed a fair amount of luck with the fall in oil prices from 2015 onward.
While India’s total oil imports in terms of value stood at $124.9 billion in 2014-15, it fell sharply to $73.9 billion in 2015-16 and $80.8 billion in 2016-2017. This is a reduction of India’s oil import bill by 41% and 35% respectively.
This increased elbow room, and a refusal to cut oil taxes, has helped the government meet the 3.5% fiscal deficit.
While the Centre and the finance ministry have defended its policy of high fuel taxes despite lower global prices by stating that it allowed the government to increase spending on infrastructure (capital expenditure), this actually isn’t the case.
‘Disinvestment’ and GST collections
Significantly, the government could not avoid the fiscal breach in 2017-18 despite raising more than Rs 1 lakh crore via sale of its stakes in central public sector enterprises (CPSE).
Of this, as The Wire has reported and analysed, nearly Rs 37,000 crore came from a curious form of disinvestment, where state-owned ONGC bought the government’s 51% stake in refiner HPCL. As M.K. Venu and this author have noted, this deal will see ONGC borrowing money from the markets in order to bridge the Centre’s fiscal deficit and treats the public oil and gas exploration company like a milch cow.
Meanwhile, there is a fear that the fiscal deficit target for this year could also be breached as the government continues to face shortfalls in monthly collections on account of Goods and Services Tax (GST).
GST collections have picked up after initial disruptions, but they are still nowhere near the expected target. The government mopped up average monthly collections of Rs 97,540 crore on account of GST this fiscal, against the requirement of Rs 1.1 lakh crore a month.
The fiscal deficit at the end of the April-June 2018 stood at 68.7% of the budget estimate. In 2017-18, the government had to revise fiscal deficit target from 3.3% to 3.5% due to a Rs 50,000 crore shortfall in GST collections.
With 2018-19 being the last year of the current term of the Modi government, it cannot afford to cut expenditure, say economists.
The government can justify potential fiscal slippage by implementing N.K. Singh panel’s recommendation for shifting to a fiscal deficit band from a fixed annual target. Jaitley has already accepted recommendations of the committee to reduce debt-to-GDP ratio to 40% by 2024-25 from 50.1% in 2017-18 and has introduced amendments to the FRBM Act.
It has targeted to reduce its debt-to-GDP ratio to 48.8% in 2018-19, 46.7% in 2019-20 and 44.6% in 2020-21.
Under the revised fiscal consolidation roadmap, fiscal deficit has to be reduced to 3.1% and 3% in 2019-20 and 2020-21, respectively.
Jaitley attacks UPA’s macroeconomic policies
Jaitley’s disparaging remarks came in a blog, posted on his Facebook page on Saturday, after the Congress cited new back series GDP data to argue that UPA did better on the economy compared to the NDA. The finance minister claimed that UPA’s wrong economic policies triggered macroeconomic instability.
“The policies of the UPA to promote growth led to macro instability, thus producing a poor quality of growth,” Jaitley wrote in the blog.
The finance minister cited data on fiscal deficit, bank credit growth, inflation and current account balance to make his points.