It's a beginning none anticipated, nor desired.
The Indian economy came up roses with FY24 GDP growing at 8.2%, inflation has come off its peak, tax revenues are purposefully marching higher and higher and the RBI became a bonus genius handing over a windfall Rs 2.1 lakh crore dividend.
Yet, Nirmala Sitharaman's record second stint as the country's finance minister has begun from a pitch that's roughed up.
Unlike her first term when she inherited an ailing economy -- led by a crazy macro cocktail of sick banks and corporate balance sheets, and washed-out private investments and consumption -- this time around, the economic scorecard appears rather respectable. What's unsettling though is that it's a coalition government at the Centre and the chorus is only growing louder to increase the size of the State by spending more on welfare measures without needlessly obsessing over fiscal deficit.
Over the past ten years, the government has shown restraint against populism and followed fiscal prudence with a holy passion. Fiscal consolidation became even more pronounced in the second term, notwithstanding the pandemic and global macroeconomic shocks and as a result, revenue expenditure saw aggressive compression. So much so that, the growth in the total expenditure remained flat in the past two years, if you exclude capital expenditure. In fact, the government didn't even see any need to indulge in a pre-election bung, but following the electoral outcome both supporters and critics came out of the woodwork terming it as a grave mistake.
So when PM Narendra Modi cut a Rs 20,000 crore cheque towards the PM Kisan Nidhi benefiting 90 million farmers last week -- within hours after assuming office for the third time -- followed by another measure benefiting 3 crore rural and urban households under the Prime Minister Awas Yojana for construction of houses, it seemed as though the penny dropped and the government was quick to re-work its spending profile.
Truth be told, these aren't any new schemes, but only ongoing programmes and perhaps Modi signed them off more as a customary gesture and to be seen as doing something after taking charge. That said, an extensive agenda awaits the government as it works to sustain economic growth and importantly to create jobs. At the same time, there will be pressure to allocate more funds towards social security, while industry will want the government to spend more on infrastructure.
Conscious of the wide expectations, Sitharaman addressed the ball on day one. While emphasizing that the government was fully committed to ensuring 'ease of living' for citizens, she stressed in the same breath that the government will continue its reforms agenda initiated after 2014, which includes the fiscal glide path.
Regardless of who's at the helm, we all want one thing: That the government should spend more, tax less and borrow even lesser. The very idea flatters us all, but in reality, it's like asking for a shorter Monday and a longer Sunday, which is simply impossible. For, every increase in government spending will have to be matched either by higher taxes or borrowings. And the lure of higher tax proceeds or higher growth paying for additional spending is nothing but squaring the circle.
So which way will Sitharaman tilt when she presents the union budget next month? Will she stick to fiscal prudence or open the purse strings?
Whatever she chooses, her priorities will remain the same, which is to boost growth without hurting inflation and create jobs and improve income levels. There's an undeniable stress in agriculture sector to deal with, while consumption, particularly in rural areas, needs an urgent revival. It's also essential to sustain the capex momentum even though private investments are showing proof of life.
The BJP's election manifesto rightly talked about expanding the free health insurance programme to senior citizens, piped cooking gas connections, free food rations for the next five years, and free electricity to poor households, among others. It also mentioned a broader government push towards supply-side reforms including higher infrastructure spending (both digital and physical), a manufacturing push and creating employment opportunities. But more programmes need to be rolled out covering education and health.
While doing so, Sitharaman will be watchful about fiscal deficit. During the interim budget in February, Sitharaman set herself a 5.1% target for FY25, and thanks to more-than-budgeted tax revenues, rating agencies expect that the actual figure will be plenty handsome. In fact, the S&P Global Ratings even dangled the ratings upgrade carrot should India stick to fiscal consolidation in the next two years.
Non-tax revenue remains a challenge with the strategic disinvestment remaining a non-starter. There have been no big-ticket strategic sales after Air India, while a host of central public sector enterprises like Shipping Corporation, NMDC, are put on the wait list.
While IDBI Bank is endlessly waiting for its Mr Right, the government needs to put some muscle into the long-pending strategic sale of others like Shipping Corporation and NMDC. Likewise, it needs to fast-track secondary market offers of different public sector enterprises to raise resources. However, the wheels seem to have come off regarding privatisation with the government not even uttering a word about it. Moreover, critics reason that the government will now lack the gumption to sell state assets like Vizag steel, which could miff its coalition partner TDP.
As for the taxpayer, the biggest grumble is about personal income taxes. While corporates got a breather with lower tax rates, individuals got only FM's half-a-heart during her first term. Needless to say, Sitharaman's second term will be a decider and how she emboldens the aspirations of the salaried class will determine both her and her party's future.
