Business Today
Into The Unknown

The government is leaving a mixed bag in terms of economy for its successor.

Into The Unknown

Illustration by Raj Verma

Prime Minister Narendra Modi and Finance Minister Arun Jaitley have often said that their performance could have been better if they had not inherited a boatload of problems and an economy in a shambles. There was quite a lot of substance behind that claim. Economic growth had plunged - though as a subsequent revision by the Central Statistics Office showed, the situation was perhaps better than originally envisaged and a recovery had already started when the current NDA government took charge.

The fiscal deficit was also too high, and the outgoing government had left a stiff target towards fiscal consolidation when it handed over the baton. However, former Finance Minister P. Chidambaram had started on the path of fiscal discipline though the deficit target was still far too high. Finally, the bad loan problem for banks was beginning to show up as the economic growth remained low. Inflation was high. More importantly, because of policy missteps and accusations of corruption, and also strident opposition from the BJP, the last few years of the second UPA government were marked by policy paralysis and no really important economic bill had become law.

However, the Prime Minister and the Finance Minister had some unexpected luck as well. Global crude prices, which were at over $100 a barrel, started falling within months of their taking office. This was a huge bonanza - especially as the Modi government did not pass the full benefit of the crude drop to citizens, choosing instead to increase excise duties several times and thus collect a windfall benefit. That apart, the global economy and global trade had started improving, and this also meant a more benign backdrop for the Indian economy. These, coupled with the fact that the domestic economic recovery had started, gave them a significant tailwind in the first couple of years.

As the nation prepares for a general election, what kind of economy will this government leave its successor - whether it is another NDA government or another political formation? There is enough evidence to show that the new government will not inherit a bed of roses at least. Problems have been piling up, though the overall macro economy seems quite stable.

First, Finance Minister Arun Jaitley has managed the fiscal deficit so far largely because of some creative accounting. This was pointed out when the Comptroller and Auditor General (CAG) rapped the government pointing out that some big expenses had been kept off-balance sheet, some expenditure had been deferred or payments pushed into the next financial year, and other such things, which made the government's fiscal performance look better than it actually was.

The second problem is that despite claims of record rise in direct tax assessees, the actual rise in income tax collections has been slower. Similarly, in indirect taxes, the GST is yet to stabilise, and the government has been facing a shortfall month after month. Non-tax revenues have also not covered up the tax shortfalls.

The bigger problem the next government is likely to face though is the Modi administration's flurry of announcements and sops and incentives to keep voters happy, all in the run up to the coming elections. That in turn means promising and spending big sums of money, the bill for which will have to be borne by the next Finance Minister. Sops for agriculture, healthcare and infrastructure when your revenues do not match up is going to haunt the next government. The bad loans problem of banks is in a much worse shape than what the current government inherited. Agricultural distress, anaemic exports and a sluggish economy along with rising unemployment are the other issues that will face anyone who takes over the reins after the elections.

In essence, the government might be leaving as many problems for its successor as it inherited.


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