Consensus building ability is a must besides political will to bring about any institutional change. A change is usually met by strong resistance but it is the responsibility of a leader to allay the fears of the rest and bring everyone on the same page to herald transformative policies. Arun Jaitley will be remembered for his strong political acumen and wider outreach; cutting across party lines to act as a harbinger of reforms. Jaitley being a distinguished lawyer and a seasoned politician, had a great hold on political economy and understanding of the dynamics of federal structure enshrined in Indian Constitution.
Long due measures touch finishing line
Goods and Services Tax was initially proposed by the preceding government and at that time vehemently opposed by Jaitley and his party over the fears of states losing out on tax revenue. But Jaitley put in tremendous efforts to bring GST to life in record time, just in around two years of his tenure. He can be fairly appreciated for giving the country an innovative gift of GST Council that made decisions based on consensus amongst all states. Although many technical glitches and the process of implementation itself invited criticism from different corners, prompt feedback followed by prompt corrective measures have improved the GST regime. GST not only integrated the different states into one single market, but also improved the tax system by taking a baby step towards simplification of tax regime in India. This is evident in World Bank’s Ease of Paying Taxes index where India’s ranking improved from 172 to 121.
Fiscal prudence- An example for posterity
Focusing on economic growth and fiscal consolidation at the same time is a rare combination to be seen anywhere. He was successful in bringing fiscal deficit down to 3.4 per cent in 2018-2019, a little short of the set target of 3 per cent ; however; much better than 4.5 per cent during 2013-14. Jaitley can be fairly credited with bringing another idea of the previous regime to finish line- Monetary Policy Committee. Establishing MPC meant giving up a large part of one’s power as the Finance Minister, but having sensed the positive leverage that controlled inflation gives in election campaigns, Jaitley effectively worked towards reducing inflation from 7.2 per cent to 2.9 per cent. Oil imports form a major chunk of our import bill. Even when oil prices fell during his term, he didn’t reduce the price of petrol and diesel in domestic market. This was a controversial move back then but if looked in retrospect, it helped in saving foreign exchange and also filling in the fiscal deficit.
Cleansing the banking sector
The twin balance sheet problem has been plaguing the Indian economy. Previous laws such as SARFAESI Act (2002) and Debt Recovery Tribunal could not help clear the menace of NPA in Indian banking sector. Insolvency and Bankruptcy Code, 2016 and National Company Law Tribunal promise to change the lending behaviour in India. IBC has already seen greater success than other mechanisms. Where IBC’s recovery rate stood at 41.3 per cent in 2017-18, recovery from older mechanisms hovers around 12.4 per cent only. Interestingly, NCLT’s recovery was the highest at 49.6 per cent of all the cases admitted by the tribunal. No wonder that the number of cases referred to IBC and NCLT are increasing whereas it’s decreasing for the rest. This indicates the increased faith of stakeholders in the new regime but also draws attention towards the need for upgrading infrastructure for these laws to be able to support higher traffic.
Arun Jaitley was a staunch supporter of economies of scale and wanted to exploit the same in Indian banking sector by having fewer but mega banks. His tenure saw the merger of five associate State banks and Bharatiya Mahila Bank with State Bank of India and also of Dena Bank and Vijaya Bank with Bank of Baroda. This had set a precedent for the recently announced merger of 10 public sector banks into 4 by the incumbent Finance Minister Nirmala Sitharaman. This will reduce the number of public sector banks from 27 to 12 only.
Financial inclusion and a fillip to FDI
Implementing Jan Dhan Yojana was the top priority of the new Finance Minister who wanted to bring the rural population under the ambit of formal banking sector. Introduction of Aadhaar-based direct benefit transfer to as many as 55 schemes was revolutionary. It saved the exchequer nearly 1 lakh crore rupees of leakage. JAM trinity of Jan Dhan, Aadhaar and Mobile banking proved to be a success in reaching out to the grassroots level. This also gave a big boost to FinTech companies in India by widening their prospects.
Jaitley was a liberal at heart. He had always been a proponent of increased Foreign Direct Investment. He worked towards cutting down the bureaucratic red tape by abolishing Foreign Investment Promotion Board (FIPB) and opening many sectors to automatic route. Higher FDI was allowed in defense, aviation and insurance sector. During the fiscal year 2018-19, a record 64.37 billion dollars worth FDI entered Indian economy.
Clouds of slow economic growth cast their shadow
Notably, Jaitley inherited a fast-growing economy with a GDP growth rate above 8% per annum from UPA regime, but left one with a sluggish growth below 7% today. This could be attributed to his own reforms such as GST and demonetisation which will hopefully yield results in the long run but proved to be shocks in the present times. Even after the introduction of MCLR, banks did not transfer the benefit of repo rate cuts by RBI to borrowers. This impeded borrowing and investment. However, external factors such as global economic slowdown and trade war between US and China should also be accounted for slowdown in domestic growth.
Gross tax revenue collection of NDA surprisingly fell way below 19.3 per cent under UPA -I to 14.4 per cent during the first three years of NDA. But the tax-GDP ratio fares better for NDA; 17.2 per cent when compared to 16.5 per cent under UPA regime. If Jaitley succeeded in cleaning the NPA menace in the banking sector, he failed to do so in NBFC sector.
Nevertheless, Jaitley has certainly left an indelible mark on Indian economic history. Whether it is the breaking away from redundant traditions like separate railway and union budget; and advancing the date of budget presentation or bringing major changes such as GST and IBC; there are various lessons in fiscal consolidation and inflation targeting for his successors. He will surely be revered as a farsighted reformist who bore a big basket of fruits during his tenure- mostly sweet with a few sour ones.
Picture Courtesy- Zee News