Much of India’s recent success is down to the astute decisions made by its finance minister — in very difficult times
Over the last 18 months, most of the plaudits for india’s relative economic success have gone to the prime minister, Narendra Modi, and the governor of the Reserve Bank of India, Raghuram Rajan, who was recognised with Emerging Markets’ Central Bank Governor of the Year award for Asia last year.
But finance minister Arun Jaitley also deserves some recognition, for without his decisions and his stewardship of India’s financial direction, India would not have achieved what it has.
And it has achieved plenty, in trying circumstances. “The proof is in the pudding,” says Taimur Baig, chief economist for Asia at Deutsche Bank. “The market has voted quite clearly it considers the Indian economy to be a relative outperformer in this emerging markets rout. That is not just because of the macro situation and it not being a major commodity-producing country, but because India is considered savvy and adept in dealing with this uncertain environment.”
To give an example, in late 2013 Deutsche published a ranking of 25 emerging markets based on the adequacy of their reserves to defend exchange rates. Back then, India was bottom alongside Indonesia. Two years on, Indonesia is still down there, but India has climbed more than 10 places higher as reserves have grown and the rupee has become significantly more stable too.
Reserves clearly have more to do with the central bank than the ministry, but the central bank’s ability to do what it does has been made easier by sound practice at the government level. “After Modi’s election the temptation would have been to throw out some of the fiscal measures of the previous government,” says Baig. “To his credit, [Jaitley] has held on to those broad medium-term fiscal goals and has tried to energise the growth agenda through public spending, especially on infrastructure. Both from an efficiency of spending and an overall fiscal discipline standpoint, he has done an admirable job.
“I don’t think there is anyone out there,” Baig adds, “who doubts this government’s seriousness for fiscal reforms.”
The first big test for Jaitley was the budget and it was closely watched. By and large, it met high expectations. “Finance minister Jaitley rose to the challenge in delivering a pro-growth, pragmatic FY16 budget for India,” says Christopher Wehbe, global market strategist at Alquity Investment Management.
The budget pushed out fiscal consolidation targets slightly and increased government capital expenditure by 25%, while a cut in corporation tax, from 30% to 25% over four years, cemented the impression of a pro-business government. “Expectations were sky high for the Modi government’s first full budget since coming to power in May 2014 and markets reacted positively,” Wehbe says.
The commitment to capital expenditure is crucial because the danger was that the commitment to fiscal responsibility would necessarily also mean a lack of investment that is crucial to growth. “One thing that has been happening over the last couple of years is India starving infrastructure in order to meet its fiscal targets,” says Baig. “This government has made a U-turn. Its strategy is: whatever you do, do not starve infrastructure.”
GST BLOCK
Still, nothing is straightforward in India and Jaitley has many challenges too. The most obvious is the GST package he committed to in the budget but which he has been unable to get through India’s parliament. While Jaitley has blamed an intransigent Congress, a planned deadline has looked increasingly difficult to meet. “In truth, not only does the finance ministry’s hope of introducing the global services tax (GST) by April 2016 look unrealistic, implementation by April 2017 would be a stretch too,” says Shilan Shah of Capital Economics. That’s a blow, as the GST — which will replace a host of state and central taxes and create a more uniform tax base — could add up to two percentage points to India’s gross domestic product, according to some analysts.
The positive view is that all the underlying work on GST — talking to state governments, reforming tax bureaucracy, improving IT systems — has already been done. But does not count for much if it cannot be enacted.
Also, while India is weathering the storm of emerging markets sentiment reasonably well, it is not immune and Jaitley — like Modi and Rajan — will need to show some flexibility. Baig urges him “not to be too dogmatic. Yes, give them props for being disciplined fiscally, but in a world of substantial growth shocks it will be important to stem weakness in domestic demand.”
And while equity markets fall, the government’s privatisation process is put under strain; Jaitley and his team must convince the investment community that the sale agenda is intact and that the money can be raised.
But what Jaitley has done is to show that he, and India, can deal with challenges. The IMF is still projecting 7.5% GDP growth this year. There are clearly difficult times ahead but India no longer looks as vulnerable to them as it once did.