Finance Minister’s Trilemmahttps://indianexpress.com/article/opinion/columns/finance-ministers-trilemma-4499648/

Finance Minister’s Trilemma

He must stimulate the economy, keep tax incentives, placate people post-demonetisation.

Union Budget, budget, Arun Jaitley, Jaitley trilemma, Indian economy, demonetisation, indian express editorial page, latest news, indian express
Finance Minister Arun Jailtey (File Photo)

What would we like on February 1? More important, what can we expect? The figures on the demonetisation dividend from the RBI to the Government of India (GoI) are being rumoured at less than Rs 30,000 crore — not a large sum of money. Most of the old notes have been declared in one form or other. But the GoI will also get the collections from tax payments on income earned earlier, but not declared. The economy has gone through a major turmoil on account of demonetisation, but now, policies for recuperation are possible. Given the slack in resource use, the migration of skilled labour back to the village and idle machines, some initiatives in expenditure on a public-private partnership basis are possible on the fiscal front.

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In all, there seems to be enough for at least two major initiatives on the infrastructure front and a reversal of the decline in social sector spending. Most schemes for investment or for goodies are Rs 50,000 thousand-crore plus. We may, of course, get a large number of schemes announced with token provisions which perish in the drought of resource scarcity in the second quarter.

Thank you, Niti Aayog chief, for saying that the Universal Basic Income idea is a non-starter. Debates are good but governments have a bad habit of closing debates with a whip and so, universities and research institutes will be the place to talk that out. But the requirement of a more modest stimulus to the economy is now very pressing. When the Central Statistics Organisation makes its next prediction, November/December 2016 will be history.

The case for a stimulus will be overwhelming. With the slack in the economy and skilled labour back in the village, demand growth will have a great booster effect. From all accounts, the rabi crop will be good. Late sowing in kharif did dampen growth in the harvested outcomes over the “normal”, although growth on the 2015-16 base is good. But retained moisture was good on account of the late rains and so, rabi will compensate, assuming no major rain/storms as the standing crops ripen. The base is set. Will the finance minister act?

Tax cuts are getting all the attention. Just as the RBI chief is refusing to play ball on reducing the bank rate, I doubt if the FM will drastically cut resource raising rates. The usual raising of minimum tax-free income levels will continue and some sweeteners on investment must be there. These add to the feel good factor, but the aggregate numbers are not affected. The fact that demonetisation has not appreciably added to the RBI’s profits makes the fiscal resource squeeze compelling. The FM’s trilemma is to stimulate, keep tax incentives alive and give some goodies to his compatriots, particularly of the other sex, who braved the cold in queues. Their pain has given him a much larger and cleaner monetised economy, riding on the crisp new notes the government is trashing in its messianic mode on cashlessness. On this, the Indian homemaker is 180 degrees away from the finance ministry and will remain so until we really build our financial infrastructure. But it’s good to ride a cleaner economy.

Having said that, the FM also has the task to stop further black marketing and that’s difficult for the roughly 20 per cent potential taxpayers for whom paying taxes was a strictly optional habit. A bed of thorns! Will he bite?

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Commentators in the pink press have made a tax cut the central issue and will gripe after midday on February 1. The real question is: Will industry revive? It was faltering earlier. Output, rather than value-added growth, was poor, having fallen from 8.8 per cent in 2005-06 to 5.8 per cent in 2009-10. Since then, it crashed to 2 per cent or so. April to December 2016 was mildly negative as compared to the same period in 2015. Value-added growth was high but that helps the corporate balance sheet and if physical output does not grow, jobless growth is passé. If the FM has a credible infrastructure plan, the economy will rebound, by my reckoning, in a matter of weeks. If not, this is going to be a long and dark night. Insha Allah, we will make the right choice.

The writer, an economist, is a former Union minister.