Every budget poses a dilemma for the government. If Hamlet’s question was “to do or not to do,” the one before every elected administration is how far it should throw caution to the winds on populism. Should it take the ‘apres moi le deluge’ (after me the deluge) approach of Louis XV of France, spend its way to popularity and election victory? Or should it take a long-term view and do what is eventually best for the country? Economists call this the ‘time inconsistency’ problem. This annual tug-of-war plays out in New Delhi every year before the Union Budget. But it comes to the fore more starkly if the budget is interim, with its stakes driven up by looming Lok Sabha polls, after which a new government must present the actual plan of inflows and outflows for the fiscal year. Such a vote-on-account is not meant to propose any changes in the tax structure, nor announce any major policy initiative. But giveaways are always a temptation. Recall the Manmohan Singh administration’s farm-loan waiver on the eve of 2009’s general elections. Or the direct cash transfer scheme for farmers announced a decade later under the Narendra Modi government.
Let’s accept it. The electorate likes freebies. Why should it not? It is human nature to want something in return for nothing. The political class, on its part, likes doling them out. So this is a win-win game. The hapless taxpayer, however, must pick up the tab for free water, electricity, debt waivers, you name it, while politicians romp home at the hustings. The moment of reckoning comes later, by which time it is usually too late to undo the damage. We have seen this happen at the sub-national level, with some state governments showing scant respect for fiscal prudence, their re-adoption of the old pension scheme being a case in point. Fortunately, our record at the national level has been far better. For all the opprobrium we in India love to direct at our political class, it must be said our leaders have behaved far more responsibly than their counterparts in other parts of the subcontinent. Which explains why even as Bangladesh, Pakistan and Sri Lanka had to go, hat in hand, to the International Monetary Fund in 2023, we maintained macro stability. The last time we approached the Fund for help was back in 1991.
Sure, the Fiscal Responsibility and Budget Management Act of 2003 has helped; though critics might say it has been observed more in the breach than in practice, with successive governments pushing the Act’s fiscal-deficit target—3% of GDP—further into the future. Yet, while the law could be amended for more Keynesian flexibility, to the extent we do have it on our statute, it serves as a Lakhman Rekha for governments. It certainly has for the Modi administration, which, to its credit, had reduced the fiscal gap to 3.4% of GDP in 2018-19 before covid upended its efforts and it widened to 9.2% in 2020-21. This was in response to a crisis that justified a huge fiscal expansion. A glide path for reversal has since been laid out. This year’s Budget estimate is 5.9% of GDP, and even for Finance Minister Nirmala Sitharaman’s modest aim of 4.5% by 2025-26 to be met, the government will have to bank on its political capital and not let 2024’s elections deflect her from that goal. It was with Sitharaman as FM that a welcome new level of fiscal transparency was achieved. Her track record gives us reason to hope that the long view will prevail.
