As India’s tiger economy stirs again

A revival hinges on how Arun Jaitley addresses the Centre’s fiscal deficit

Did a dying-day UPA queer the fiscal pitch for NDA Finance Minister Arun Jaitley? In the first two months of 2014-15, the former Government spent more and earned less than anyone had guessed. Oil subsidy payments were the chief cash guzzlers, and now with hydrocarbon costs aflare again and monsoon clouds gone astray, it must be a nightmare for the new regime to crunch this year’s fisc to 4 per cent or so of GDP. But this is exactly what economy watchers expect of India’s first ever self-declared ‘small government’; any slip down the spending slope would set off an alarm; after all, India’s ongoing stagflation crisis can be traced to a cash stimulus gone awry half a decade ago.

Keynes is out; Hayek, in.

In a country of colour-of-the- cat agnostics, however, there may yet exist such a thing as ideological half-pregnancy. The Finance Minister, accordingly, may well-advisedly be tempted to hold his fiscal fix off for a while. He could argue a coherent case for a stimulus that would spur all-round investment, one that could plausibly be effected without inflation as an instant response so long as the effort focuses on sectors of ample spare capacity and adequate ‘multipliers’ —for the money to ripple rapidly across key parts of the economy.

Identifying such sectors doesn’t promise to be easy, but Indian infrastructure has languished long enough to offer clues for a strategy of inter-sectoral revival. Maybe high-speed telecom or steel-and-concrete projects could set cash rolling from sector to sector, while power plants strapped for fuel could grunt to life on easier input supplies, financial incentives and even demand stirred by broad energy reforms aimed at slowly aligning local prices with global realities, snuffing out diesel gensets and directing subsidies exclusively to the needy. There would be big ifs and buts along the way, a lot would depend on the actual coordination of policy action, and any revival plan of such intricacy would entail risks that are hard to estimate.

In other words, the Finance Minister’s safer option would be to plainly do what every small government promises to: get out of the way, curtail its expenses, and let private players put the country’s cash to use with greater efficiency than it can. This, of course, would imply a fiscal deficit goal no larger than the former Finance Minister’s, even if it’s much harder to achieve than what Arun Jaitley had bargained for. Either way, it’s a crucial call. And it’s unenviably his to take.

About The Author

Aresh Shirali