Arun Jaitley: striking a balance as polls loom

India's finance minister is attempting to please various interest groups while also maintaining fiscal responsibility. That challenge will only intensify ahead of elections in 2019.

Our Finance Minister of the Year study is approaching the podium places. Falling just outside the top three in our study is a minister whose reformist streak has twice seen him named runner up on this list. It's been rather more difficult for him this time out. 


India’s finance minister Arun Jaitley is facing mounting pressures from his countrymen amid concerns over a slowing economy. With national elections scheduled for the summer of 2019, their wish list is long: a revival in growth, higher employment, and more investment.

The latest reading shows the country’s growth rebounded slightly to 6.3% in the three months to September. Even so, the government’s January forecast for fiscal year 2018 may be the lowest in four years at 6.75%.

Presenting the administration’s last full-year budget in early February, Jaitley promised to ratchet up farmer incomes by increasing the minimum support price (MSP) to 1.5 times of their production costs. He stressed that Prime Minister Narendra Modi’s government wanted to double farmer incomes by 2022 when India celebrates its 75th year of independence.

The MSP is the price at which government purchases crops such as paddy and wheat from farmers. The policy was declared for the first time in 1965 to ensure adequate food grains production and give sufficient remuneration to farmers.

In the face of slowing growth and rising oil prices, India’s expected budget deficit for the current fiscal year to March-end will exceed the government’s initial target of 3.2% of GDP and come in at 3.5% of GDP, Jaitley said. He also raised the deficit target for the following fiscal year to 3.3% of GDP, dealing a blow to the fiscal consolidation roadmap.

“The revised fiscal consolidation path is modestly shallower than the previous roadmap, but does not fundamentally alter India’s overall fiscal strength,” William Foster, an analyst at Moody’s, wrote in a Feb 1 note. “However, some ambitious revenue assumptions and uncertainty about some spending items could result in a shortfall to overall fiscal consolidation.”

In the context of upcoming elections, it was not surprising to see measures in the budget aimed at boosting the rural economy, while unveiling plans to scale up the rural employment scheme by putting Rs55,000 crore ($8.3 billion) for the fiscal year ending March, 2019.

With the government increasing rural and farm sector spending to tame angry voters, inflation is likely to stay above the central bank’s target. For the six months to September, inflation is forecast at 5% to 5.6%. It is expected to moderate to 4.5% in the second half, but that’s still higher than the Reserve Bank of India’s 4% medium-term target.

Bond market investors have already anticipated the pickup in inflation, which is why yields on 10-year Indian government bonds rose to 7.3% in February, up from 6.5% in mid-November.

Clearly the minister’s intent is to focus on job creation and improvements in rural areas, but fiscal prudence has to be maintained with a keen eye on inflation. In short, Jaitley should make it clear the government is ready to improve its revenue base, as short-term stimulus measures risk putting India into a credit bubble.

Jaitley slips slightly from the second place he held last year and in the 2016 edition of this survey.

TOMORROW: A voice of reason who should keep better company

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