Arun Jaitley, a keen legal, political, economic and cricket mind, passed away way before his time at the age of 66. He was also a friend and mentor to many, and was part of the BJP trinity of Modi-Jaitley-Shah. Jaitley had many leadership attributes, but in my opinion, in the main, he was a policy ideas man.
India will feel his contribution for a long, long, time. Both the Goods and Services Tax (GST) and bankruptcy code are mega financial sector reforms, and possibly the most impactful. I want to briefly discuss his contribution and leadership towards making reforms happen.
The adoption of GST was not Jaitley s brainchild, but he certainly was the one who made it possible. There was a lot of opposition from the states, and from politicians of all hues. Its passage needed cajoling, negotiation, and single-minded pursuit. It required a constitutional amendment, and support from the Opposition. Both ex-post and ex-ante, Jaitley was born to make this legislation possible.
Via the adoption of GST, the world learnt of another of Jaitley s attributes the ability to own up to mistakes, and work towards rectification. It is difficult to conceive of mistake-less economic reform, particularly in implementation. The GST had too many rates, and mishaps were not properly accounted for. It had to be learning by doing. Never once did the then finance minister claim that things were working well; exporters not getting their credit in time true, and we will address that problem. And Nirmala Sitharaman has promised that all past dues will be paid within the next three months. Too many rates also acknowledged and the GST council, led by Jaitley, repeatedly cut rates. Again, no excuses were offered other than the realistic apology that GST decisions, given the federal nature of the tax, and the economy, had to be broadly by consensus. But India has seen more adjustments in GST law, and with zero flip-flops (to date), than any reform in recent memory.
Policy-making, even by the best, is never perfect. It is not my case, nor of any other admirer of Jaitley, that he made all of the right decisions at the right time. But not only was he most open to criticism, he was actually very good-humoured about it. I remember the July 2014 Budget, the maiden budget of the Narendra Modi government. PM Modi had run a successful political campaign against UPA economics, and one of the jewels of UPA policy was the retrospective tax. Everyone expected the tax to go, but it remained. When confronted, Jaitley smiled it off, took blame rather than point to any bureaucrat, and said it will be changed in due course.
Here again is a lesson for all of us recommending, or changing, economic policy. The power of the bureaucracy is quite supreme. That it should be so, and was so, in 1947 is well understood. But why that should be the case in 2004, or 2014, or 2019 is something that historians and psychologists should jointly consider.
I never worked for, or with, Arun Jaitley. Over the years, we have met at seminars. From my side (at least) there was a strong interest in establishing contact with Arun, especially since our interests overlapped so much. A law degree was my choice when very young; I am sure (I think!) that Jaitley at some time or another must have wished that he was an economist! We both had a strong and passionate interest in cricket and he bought me two tickets for a match at Ferozshah Kotla some 20 years ago. And that ticket came my way after a discussion over cricket. As it now transpires, and deservedly so, Ferozshah Kotla is going to be renamed the Jaitley stadium.
My real bond with Jaitley (again from my side) was in our obsession with policy ideas. The subjects for passionate discussion were economics, politics (elections) and cricket. He had very sound ideas about elections. For a long time, he was maintaining that 2019 would be a presidential-type election. It was. That the aspirational middle class would decide the election. It did. And that PM Modi s inclusive growth agenda would win him the hearts and minds of the Indian electorate right again. And substantiated rumour has it that his estimate of the BJP victory was very, very, close to the actual.
That policy-making is never perfect, even with the best of minds and the best of intentions, is illustrated by two mishaps in economic policy under Jaitley s stewardship. The first occurred with the guarantee of 14 per cent annual return in GST revenue for the states for five years from the date of implementation in July 2017. Nominal growth in GDP has averaged close to 10.5 per cent from that date. That is a loss of approximately Rs 45,000 crore annually to the Centre.
How much can this loss be attributed to an over-eager Centre wanting to get a mega economic reform under their belt? Was Jaitley a bad negotiator? No. The 14 per cent guarantee seemed the most expected reality at that time. Nominal GDP had grown by an average of 14 per cent over the previous five years. The newly formed Monetary Policy Committee (the main arbitrator of inflation rates in India) was predicting accelerating inflation and hence, 14 per cent growth in GST revenues, did not seem such a stretch. It is another story that the MPC (and associated economists) got their inflation forecast horribly wrong for the next 2+ years, and possibly at least the next 5+ years, and beyond.
The institution of MPC may not have been much of a reform at all. Again, a reality check-mate on a reform that on paper seemed reasonable. The UPA regime had unleashed a decade of historically the highest annual inflation in India, even higher than that in the wake of the global high-inflation decade of the 1970s (induced by the quadrupling of the price of oil in October 1973). This was also the period of the highest fiscal deficits. Economists put two and two together and reached five.
Fiscal policy is about taxation and expenditures. On expenditure, the restraint shown by Modi-Jaitley has been exceptional and from my point of view, too exceptional. Unfortunately, the fiscal hawks (including those in the Bimal Jalan committee) do not give the duo enough credit. I have already documented the path-breaking nature of GST reform. The first major direct tax reform was also initiated and inspired by Jaitley. Direct taxes were reduced in the 2019 interim budget; this was the first reduction in 22 years. Second, Jaitley announced that the goal of the government was to tax all corporates at a 25 per cent rate. Hopefully, we will reach, and exceed, his target soon.
Jaitley was an optimist, and someone who always saw possibilities for India well before most others. It is also remarkable (and a tribute to Jaitley s genius) that when no one saw potential in Modi post the 2002 Godhra riots, Jaitley was prominently by Modi s side. His ability to accurately size up inpiduals came across when he described me as a one-handed economist. Not sure he meant it as a compliment, but I took it as one and he was accurate.
They say, and research proves, that an optimist lives much longer than a pessimist. The real loss to the nation, his party, and even non-supporters, is that he was rudely taken away so much before his time.
Bhalla is contributing editor, The Indian Express. Views are personal