The Indian government is close to balancing its books for the first time since the Global Financial Crisis of 2007-2009. Final figures are due out later this month, but preliminary statistics suggest that India will achieve a primary fiscal deficit under 0.2% of GDP for the 2017-2018 fiscal year that ended in March.
If so, it would be the fourth consecutive year with a deficit less than 1% of GDP–and the fourth consecutive year under the highly controversial Prime Minister Narendra Modi and his sometimes controversial finance minister Arun Jaitley. For all their critics, both domestic and foreign, the numbers speak for themselves.
India’s primary fiscal deficit, which excludes interest payments on the national debt, has fallen from 1.1% of GDP to virtually nothing since Modi and Jaitley took office in May, 2014. The gross fiscal deficit, which includes interest payments, is down from 4.5% to 3.2%, based on preliminary figures.
The budget deficit targets were revised upward at the beginning of February, so they may come in a little higher than these preliminary estimates, but Economic Affairs Secretary Subhash Chandra Garg confirmed in April that the final numbers will come in closer to initial estimates than previously thought.
The disappearing deficit gives the government a fiscal free hand going into the next national elections , due by this time next year. The government could double down on deficit reduction, cut taxes or increase spending. Tax cuts would be popular with its urban commercial base. But spending increases might be better politics–and better economics.
How to spend it
If the government’s final pre-election budget is any indication, it’s gone for spending. For the fiscal year 2018-2019, which began April 1, the government has announced big increases in rural healthcare and infrastructure spending, partly funded through sales of stakes in state-owned enterprises and partly through deficit spending.
The most prominent divestment is Air India, where the government will sell its 76% stake to private investors. Air India is loss-making but plays a central role in the world’s fastest-growing large economy. The airline, with its chubby Maharajah mascot, is also a major symbol of India.
The sale of Air India would send a big signal that Modi’s ruling Bharatiya Janata Party (BJP) is serious about liberalizing the state sector, but given the airline’s militant unions and huge debt, it may never actually happen. More important for next year’s elections is the government’s apparent willingness to use its strong fiscal position to boost deficit spending. Rural India could certainly use the help.
Fishing for rural votes
Four years into a five-year mandate, Modi’s BJP leads in every poll and seems a shoo-in for 2019. But the BJP is running scared after losing a series of by-elections in March (though it still dominates India’s parliament, the Lok Sabha). Those reversals occurred in India’s two poorest provinces, northern India’s Bihar and Uttar Pradesh.
The GDP per capita gap between rural Bihar and richer states like Maharashtra (home of India’s commercial capital, Mumbai) is on the scale of 4-1. The gap with the capital Delhi is more like 8-1. That’s twice as large as the disparity between China’s Beijing and rural Gansu province. India needs rural development if the country as a whole is ever to achieve middle-income standards of living.
The BJP won’t be able to turn around rural India between now and the 2019 elections. But it can perhaps shore up its support among rural voters, many of whom seem to be returning to the once-dominant Congress Party, now led by Modi’s young rival, Rahul Gandhi. If political pressure from Congress drives the BJP to start paying more attention to rural development, all the better.
Budget deficits aren’t necessarily a bad thing. Government borrowing can sometimes be crucial as a foundation for economic growth, especially in a rapidly developing economy like India’s. The important thing is to use the deficit for productive purposes (like infrastructure), not wasteful ones (like subsidizing loss-making airlines). Modi and Jaitley seem to have the right plan. The only question is whether or not they can deliver in time for 2019.