Mid-year blues

When Finance Minister Arun Jaitley presented his first budget earlier this year, he perhaps misread the fiscal situation he had inherited and believed the rosy projections about growth. The outgoing Finance Minister, P. Chidambaram, had set a difficult-to-achieve fiscal deficit target of 4.1 per cent of the GDP for 2014-15. Being a hard taskmaster and enjoying the PM's full support, Chidambaram could have perhaps managed it, taking tough decisions he was famous for, as he had done in the previous fiscal year. Jaitley did realise the enormity of the challenge but accepted it, saying “one fails when one stops trying”. The BJP did not then question Chidambaram's ability to meet the target and is now facing the consequences.
Given the goodwill with which the new Modi government has assumed office, Jaitley may be averse to taking unpleasant decisions, though an austerity drive has been launched. As the mid-year review has revealed, the shortfall in the tax collection so far is massive at Rs 1.05 lakh crore, which is due to the lower-than-expected growth rate. Since the year is running to a close, the government has to do some brisk revenue mop-up. It can accelerate stake sales in government companies and banks. The move to offload 10 per cent stake in Coal India and 5 per cent in ONGC has started.
The fiscal constraints limit the government's capacity to spend on infrastructure, fund railway modernisation or undertake projects to clean cities and rivers. Though green clearances have been fast-tracked, still Rs 18 lakh crore worth projects are stuck in red tape. Banks’ money is held up in stalled projects and a large part is locked in cancelled coal projects. Given the pressure, banks have become risk averse. Many companies are under heavy debt and their loans are being restructured. The public-private partnership model has not lived up to the expectations. In essence, all this means the government's ability to spur demand, production and growth is limited, and all eyes are now on the RBI to do that by lowering interest rates.