Government won’t resist pressure to spend4 min read . Updated: 13 Oct 2017, 10:33 AM IST
There are already signs of this: In response to a public outcry about fuel prices, the govt cut taxes on petroleum—although fuel taxes had gone a long way towards paying for govt’s spending over the past few years
India’s slowdown—recently confirmed by the International Monetary Fund (IMF), which sharply reduced its estimate of growth during the current financial year—has set off a couple of energetic and oddly contradictory responses from the government in New Delhi. On the one hand, Prime Minister Narendra Modi has aggressively defended his record, comparing it positively to the stagnation presided over by the previous government at various points and attacking “pessimists" who were “exaggerating" problems. The prime minister talked of “one bad quarter", although growth has slowed since January 2016; other data he presented was criticized for being cherry-picked as well.
On the other hand, there was good news. The government has taken steps to ease the burden of complying with an overly complicated new goods and services tax (GST), which has dampened economic activity. And Modi expanded the sorely limited pool of economic expertise available to his government, setting up an advisory council that included several smart economists.
The question is what matters more to the government at this fraught moment: economic efficiency or political credibility. In particular, the government faces a decision on whether to open up its pocketbook to relieve some of the pain caused by the introduction of the GST and by “demonetisation" — Modi’s withdrawal last year of high-value currency.
Given that the general government deficit — of both federal and state governments — is already north of 6%, expanding spending now seems unwise. On Wednesday, the chairman of Modi’s new economic advisory council said that there was a “consensus" that the “fiscal consolidation exercise should not be deviated from."
But he added that he could not reveal exactly what that meant. There’s a debate as to whether expanding spending next financial year would count as abandoning fiscal consolidation, since the government is working on a “medium-term fiscal framework" that seeks to create space in the short run for counter-cyclical fiscal policy.
Among world leaders, Modi would seem better insulated from populist pressures than most. It’s not as if India’s uninspiring opposition parties are forcing his hand. While the leader of the Congress Party, Rahul Gandhi, didn’t make a mess of his recent trip to Gujarat, where elections are soon to be held, it’s also true that Modi’s home state is a stronghold of his Bharatiya Janata Party (BJP) and unlikely to flip anytime soon.
Still, Modi and the BJP’s canny president, Amit Shah, will have seen warning signs. One of Gujarat’s most influential communities, the Patels — traditionally, strong BJP voters — have been up in arms for some time over a jobs drought. Small traders and factories in the state’s many industrial hubs are struggling with the consequences of the poorly planned GST rollout. Modi and Shah don’t like to take chances with crucial elections, so Gujarat has seen quite a few policy concessions come its way over the past few weeks. Twitter exploded with amusement at one in particular, a reduction in the tax rate on a deathly dry, savoury biscuit that I am convinced practically nobody outside Gujarat really enjoys.
If the BJP is being cautious about the Gujarat election, how cautious will it be in terms of national policy? The pressure on Modi is growing even from his benches. The BJP owes allegiance to a group of Hindu nationalist organizations known as the Sangh family; several of these are planning demonstrations against the government’s economic policies in Delhi. And several members of the BJP, including two well-regarded ministers from the last BJP-led federal cabinet, have given voice to dissent within the party about Modi’s economic management.
Given these various pressures, when Modi and Shah sit down to strategize, they will inevitably ask themselves whether they want to risk political pain or fiscal pain. They’re pragmatists to the bone; they’re no more likely than politicians anywhere to resist the temptation of handouts. There are already signs of this: In response to a public outcry about fuel prices, the government cut taxes on petroleum — although fuel taxes had gone a long way towards paying for the government’s spending over the past few years.
I agree we might well a see a bit of a rebound in the next few quarters, as the GST settles down and the first-order effects of demonetisation wear off. But I doubt the government will be willing to pursue the reforms necessary to achieve sustained high growth rates anytime soon. In the current climate, Modi isn’t likely to take the risk of doing anything that can’t be sold as “pro-poor."
Of course, the government will continue to tout its reform credentials. But the substance of its actions will be increasingly hollow. For example, the government will no doubt declare that, unexpectedly, it will meet targets for disinvesting in the public sector this year. Good news, until you read the small print: One state-owned company is buying another. That’s the sort of “reform" we’re likely to see in India till 2019. Bloomberg