Be flexible on reforms, ensure ‘pain’ is shared

Normally, the fate of the next fiscal is sealed even before the year begins. Barring windfall gains, the economic engines of value addition are quite stable — business keeps running and salts away its surplus; the government similarly keeps churning out public goods; and individuals — particularly us Indians — keep squirrelling away something for a rainy day, even out of our meagre earnings. But who can predict shocks?

India remains very vulnerable to external shocks — changes in the price of oil, the monsoon, the cost of guarding against external aggression, the state of the world economy and domestic events — more specifically elections, as these take away whatever mindspace the politicians have for sustainable development.

Fiscal 2018-19 is littered with state-level elections followed by the national general election in the first quarter of the next fiscal. Consequently, expect “plug the hole” type of fiscal tactics to be rampant in the government. Borrowing from banks to invest back in them is one such tactic to stick to the targeted fiscal deficit. Borrowing long but promising to liquidate short-term liabilities is another. This is great fiscal accounting. But that’s where it ends.

There is a world, beyond the fiscal math, in which we all live. Did you feel the change economically in 2014-15 when economic growth jumped from 4.7 per cent in 2013-14 — the last year of the UPA government — to 7.4 per cent — a jump of nearly three percentage points? Yes, our hopes soared with Narendra Modi’s elevating optimism and high energy. Yes, he made us believe in the future. We felt that we had put a large part of our colonial baggage behind us. But at the ground level, nothing much changed because GDP growth data is just that — numbers which are useful for nerds to track policy impacts and take corrective actions. It’s like the speedometer on your car. It can tell you when you rev up or slow down. But it tells you very little about when you will get to your destination. So please don’t tie your dreams to data. Treat it with the caution it deserves.

Fiscal 2017-18 will end with a real GDP growth of 6.5 per cent, helped by low inflation, versus 7.1 per cent last year. If you didn’t notice the upswing in 2014-15, you are unlikely to be substantially affected by this year’s downtick. Or for that matter by the uptick to seven per cent growth next fiscal, as the “satta market” for growth (if there is one) would predict. The stock market valuations, as measured by the Sensex, rose by 29 per cent over 2017 with just 6.5 per cent growth. Consider also that the market capitalisation of the top 10 family-owned business groups rose by 46 per cent. Clearly, the business biggies don’t live or die by GDP growth data, so why must you? Far better to hone your own tunnel vision of the economy — real stuff which matters to you, and leave growth rates to the genteel debates between the macro policy wonks.

If you are one of the 20 million students graduating next year, judge the health of the economy from the availability of jobs. For 118 million farmers, who eke out a living on landholdings of less than two hectares, keeping a lookout for the timing and adequacy of the monsoon means much more than GDP growth. For 21 million large and medium farmers, who account for the bulk of the surplus foodgrain produced after meeting the needs of the family, it’s the government’s minimum support price for your produce, the cost of fertiliser and availability of water and electricity, which will determine your well-being. The point is that each of us has a specific reality which is only loosely tied to the GDP growth data.

Tying our well-being to the GDP growth rate is seeking false comfort when the numbers rise and equally false despair when they fall. The last two fiscals have been costly. Demonetisation in the third quarter of fiscal 2016-17 and implementation of the Goods and Services tax in this fiscal year were both major disrupters for businesses and their employees. But these are behind us now.

Over time business entities who survived earlier by not paying tax will disappear. They will be substituted by more efficient, possibly scaled-up substitutes. But all that will take time, well beyond the next two fiscal years. Till the efficiency impacts of tax reforms kick in, the government must take steps to insulate citizens from the pain, just as it held state governments harmless — by insuring them against a fall in their tax revenues. Citizens, particularly those who took to digital payments and bank transactions with gusto, find they now pay, not only the GST, but also the income tax (possibly never paid before) of the seller. Direct and indirect tax rates must be reduced to keep household budgets stable, till the efficiency impacts of tax reforms kick in.A fiscal bridge is necessary.

Reforming governments factor in fiscal turbulence. If reform translates into collateral pain for consumers, it is dead in the water. We are battling a perfect storm of reforms — restoring the health of banks; reforming the tax structure to improve compliance while reducing transaction costs and dealing with the additional costs of mitigating climate change. It can’t all be done painlessly.

This pain must be shared. The government must abandon its managerial instinct to stick to the budgeted fiscal deficit target of 3.2 per cent this year — in fact it already has. For the next fiscal, the “glide path” for the fiscal deficit must be kept stable, as advised by the majority opinion in the N.K. Singh Committee on Fiscal Reform. Even at 3.5 per cent, the fiscal deficit will be 15 per cent (0.6 basis points) less than the 4.1 per cent achieved in 2013-14. When the facts change, one must change one’s opinions and tactics. That’s the way to shared growth.