Budget 2020 needs a Fiscal Operation Twist to balance short-term growth revival with long-term disicipline

Madhavan Narayanan

It was Winston Churchill who once joked about two economists in a room offering three opinions€"if one of them happened to be John Maynard Keynes. Now that we have many Keynesians or their derivatives in our midst in India, we may change that to four economists and six opinions.

Economists as a tribe are fretting over India's fiscal deficit in a manner that is yielding more confusion than clarity. Whether it needs to be increased or decreased depends on which expert you are talking to in a world where hair-splitting and studied vagueness are par for the course.

Finance Minister Nirmala Sitharaman, preparing to present her second budget on 1 February may take heart from the fact that when prominent economists disagree with each other, there is room for the politician to play some strokes. Abhijit Banerjee, fresh off the Nobel prize oven, may just help her bake a better growth Budget because he just said, echoing Prof Jayati Ghosh, that this may not be the time to worry about the fiscal deficit because inflation is not a serious problem.

Strange as it might seem, Sitharaman, a JNU alumna, may take heart from the words of both these economists from her alma mater at a time when the Jawaharlal Nehru University has become the fulcrum of protests against her government over other issues like Citizenship Amendment Act.

But how exactly do we unravel a puzzle in which the chief economist of the International Monetary Fund is the Indian-born Gita Gopinath, who frets about India's fiscal deficit being high? Nearly as decorated as Banerjee in some ways, Gopinath's orthodoxy may be partially attributed to the chair she is sitting on. IMF is more about discipline than growth€"and about reviving sick economies than making sluggish economies find back their mojo.

In 2019, we also saw Rathin Roy stepping out of the Prime Minister's Economic Advisory Council after warning of a 'silent fiscal crisis' amid a revenue shortfall. Revenue shortfall in the current fiscal year at Rs 250,000 crore is definitely worrisome and speculation is that fiscal deficit as a share of GDP may slip to 3.8 percent from the relaxed target of 3.4 percent. However, the bigger worry is that GDP growth at 5 percent compared with an earlier estimate of 6.1 percent does not tally with a work-force in which a million people are said to be added every month.

What exactly are we seeing? A mixed-doubles tennis match in which the fiscal deficit is the ball? Who is supposed to cry out double-fault in this Wimbledon-like budget?

The answer to this fiscal deficit riddle could well come for Sitharaman if she plucks a leaf out of the Reserve Bank of India's playbook. The RBI recently launched an 'Operation Twist' inspired by the US Federal Reserve as it sold and bought securities of differing tenures at the same time to align the short and long-term interest rates into a desirable shape. Let's call this the economics equivalent of physiotherapy: It kind of stretches some muscles and relaxes others to put the body in better shape. It also engineers perceptions to manage perceptions.

What we need next perhaps is the fiscal equivalent of the monetary Operation Twist. Here's what it might look like. The finance minister may say that there is an immediate need to go easy on fiscal discipline in order to revive growth from the 11-year-lows it has reached, but at the same time unveil a medium-term plan to reign in the fiscal deficit so that conservative financial markets and orthodox economists clearly see reason. This would need a sense of meticulous detail and the announcement of a roadmap€"something the current government with its penchant for overnight surprises (Think demonetisation) is not famous for.

Rathin Roy gave us a clue on how the government is going easy on some issues and hiding its warts on some others in an interview when he said: "We need to start thinking in a more structural way about who is producing for whom and who is able to consume affordably." In plain English, while talking of a revenue shortfall, he also implied a warped sense of spending in which there is a case to generate incomes while not making the rich richer through misplaced borrowing priorities.

What we need now is an honest admission of warts and a clear display of will. If the government that triggered global outrage and street protests by forcing the abolition of special status to Jammu and Kashmir under Article 370 and enacted a controversial Citizenship Amendment Act (CAA) shows only a quarter of that kind of political will in a Fiscal Operation Twist, Sitharaman may well have her dosa and eat it too. But crisp pancakes need the right combination of heat and spread and just the right time on the griddle.

Here's why the task is desirable but not so easy.

Let us look at how the NDA government has been dragging its feet and making excuses for that flying white elephant called Air India. If that is any indication, it would seem that the finance minister is not as keen to step on the gas and call a spade a spade. One cannot honestly think of a $5 trillion economy as a medium-term prospect and a Rs 102 lakh crore spending plan for infrastructure over five years to get there as real if there is lack of clarity on where the government would spend, where it would save and what it won't do.

A Fiscal Operation Twist may be a formula to get there with enhanced spending in some areas and a clear will to tighten the belt elsewhere. Considerable sympathy and support might come the Minister's way from credit raters and analysts if the twist is highlighted with the clarity with which the RBI is handling its open market purchase of bonds.

The year is 2020 and the Budget for it must have the 20-20 fiscal vision to make it work. Such a vision needs deft handling of centre-state relations (Think GST management) and an ability to resist routine requests from the bureaucracy or the public sector for increased budgetary allocations. On the other hand, a careful series of spending cuts in clearly wasteful departments or companies may be required. Can she do it?

(The writer is a senior journalist and commentator. He tweets as @madversity)

Also See: Budget 2020: FinMin likely to push for Rs 25,000-Rs 30,000 cr interim dividend from RBI; to help fiscal deficit slippages

Budget 2020: From simplification of tax-related compliances to easing credit facilities, startups hope for a 'power' package from Nirmala Sitharaman

Budget 2020: If government is serious about growth revival, it shouldn’t be too focused on fiscal deficit target

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