Piyush Goyal: Exacerbating India’s fiscal imbalance

India’s fiscal management over the past year might be summed up as a tale of two finance ministers – one that could not stop a drop in its standing to sixth in this year’s FinanceAsia finance minister ratings. 

Arun Jaitley, the 66-year-old incumbent for the bulk of the financial year was taken ill as 2018 came to a close, leaving the laying out of this year’s interim budget at the beginning of February to his stand-in at the Ministry of Finance, Piyush Goyal.

With national elections due in May, it is hardly surprising that Goyal’s financial statements had a distinctly political tinge to them and were shot through with largesse despite a warning in last year’s FinanceAsia rankings that Jaitley would do well to avoid short-term stimulus measures to avoid a credit bubble.

Goyal’s budget speech was loaded with populist measures, including sweeping tax cuts for India’s middle class, a new income support scheme for farmers, and a new pension plan for labourers in the world’s biggest democracy.

Meanwhile, efforts to boost the revenue side of the national fiscal equation by divesting state-owned assets appears to have been less than successful, if the numbers up to and including the fourth economic quarter of 2018 are anything to go by.

Jaitley had set a divestment target of Rs800 billion ($11.2 billion) by November last year but had raised only 42.7% of that amount by the appointed time, according to media reports.

Another possible source of revenue mooted was an interim dividend from the country’s central bank, seen as a temporary boost to the government coffers.

Moody’s, however, issued a warning over the transitory impact of such a move.

“Achieving deficit reduction through such unpredictable revenue sources denotes weaker fiscal policy effectiveness than if consolidation were achieved through more durable and predictable sources, such as tax revenue,’’ the ratings agency said.

Another major issue facing Jaitley and Goyal, is pressure to keep India’s corporate tax structure globally competitive while maintaining fiscal prudence.

Both men are walking a difficult line. If existing rates are maintained the country could see a corporate drift towards jurisdictions with lower tax rates.

Observers say that US President Donald Trump’s massive corporate tax cut last year – the largest in American history –  ratcheted up the pressure on those whose hands manipulate India’s purse strings and drove up speculation that a corporate tax rate cut was in the offing.

Having spent big on farmers and individual taxpayers, however, Goyal’s interim budget did not address demands from business to reduce corporate tax from the current 30% rate.

In another signal that alarmed investors, Goyal followed up his interim budget, pre-election largesse by saying that he favoured printing currency as a method of deficit funding. He cited the US as an example.

“As finance ministers we are always in need of money,’’ he told a gathering of the state-run Security Printing and Minting Corporation of India in February.