Why Nirmala Sitharaman's Move Is A Tribute To Arun Jaitley

The Narendra Modi-led National Democratic Alliance government has, to put it mildly, under-performed on the economy. Under its watch the economy has sharply slowed twice, in spite of generally favourable global factors, particularly a low price for crude oil. But, politically, this has not hampered the Bharatiya Janata Party. Why?

Part of the credit goes to the finance ministers that PM Modi has picked. Across parties and professions, many in New Delhi will agree that Arun Jaitley's career was cut short too soon. Jaitley was a lawyer, not an economist or administrative expert - but over the decades he spent as the BJP's most articulate and middle-class-friendly face, he developed a finely honed instinct for what its core vote wanted. If he had one overriding economic instinct, it was to cut taxes for most Indians; he will have regretted, when demitting office as finance minister earlier this year, that he was not able to reform direct taxes the way that indirect taxes had been addressed through the GST - or, for that matter, the way that his great rival P Chidambaram had done in the "dream budget" of the 1990s. 


Arun Jaitley was an expert at identifying these pressure points, and Sitharaman appears to be willing to follow in his footsteps

One of the ways in which Jaitley originally sought to distinguish himself from Chidambaram, his predecessor as finance minister, was in a closer adherence to the rules on fiscal consolidation. Chidambaram had developed a reputation as FInance Minister for artfully moving expenditure around in such a way that the fiscal deficit looked good. Jaitley had a wonderful opportunity, in the first weeks of Modi's tenure, to simply say: "the Budget maths we have been given for years is wrong. The real state of affairs is worse; the real fiscal deficit is much higher; so our first task is to manage this problem." He chose not to do so; he felt that retaining confidence in the government's accounting was more important. He thus re-committed to Chidambaram's deficit reduction path. On the one hand, this is a wonderful statement about the maturity of political transitions in India - Jaitley understood such institutions if anyone in the government did. But it was also a missed opportunity. Perhaps if we had been given a clear picture at the start and subsequently, we would not now - five years later - be having to deal with widely distrusted official figures for revenue and expenditure. 

The fiscal crunch also stressed Jaitley's low-tax principles over time. In the 2016-17 Budget, he put a tax on withdrawals from the Employee's Provident Fund - a move that outraged the BJP's most vocal middle-class supporters. But he and the prime minister - with some help from the BJP's social media team - correctly gauged the depth of the anger, and rolled back the proposal. This flexibility, a reflection of his years engaging with middle-class BJP activists, is what truly set him apart from both his predecessors, Chidambaram and Pranab Mukherjee. The United Progressive Alliance's FInance Ministers developed a reputation for inflexibility; Mukherjee famously refused to roll back his controversial "Vodafone" retrospective tax amendment in UPA-II, in spite of widespread outrage. 

No verbal tribute to Arun Jaitley, therefore, is likely to match the actions last week of his successor as Finance Minister, Nirmala Sitharaman. In a lengthy presentation to the media on Friday - almost akin to a mini-Budget, the third such big policy roll-out this year - Sitharaman sought to address the growing concerns across the BJP's base about the government's economic direction. In doing so just a few months after the full year Budget was presented, Sitharaman has shown that she is Jaitley's true heir in terms of flexibility and openness to the BJP's core voters' concerns. She pointed out that the government listened to concerns about the criminalisation of corporate social responsibility (CSR) payments by companies out of their profits, and had chosen not to implement that section of a recent law. (She has also said that the finance ministry is willing to remove that clause altogether when Parliament meets.) Amid the prospect that revenue shortfalls will lead to further "tax terrorism" - concerns voiced by BJP-friendly businessmen among others - she has said computerisation of notices and summons will be sped up and the timeline under which those notices are examined will be condensed. She removed an enhanced surcharge on long-term capital gains. And she reiterated the government's aim to ease the "angel tax" on startup financing that had bothered many of the BJP's younger and entrepreneurial influencers. 


The fiscal crunch also stressed Jaitley's low-tax principles over time.

What does it mean to roll back provisions? It is not always a good thing. India's most influential Budget ever was Manmohan Singh's reform Budget of 1991 - but Narasimha Rao forced him to roll back provisions on the fertiliser subsidy, and ever since then agriculture has remained unreformed. Under Atal Bihari Vajpayee's NDA, the government rolled back a budgetary promise to ease labour laws - a turning point in India's economic history, because that marked the crucial point at which it lost the manufacturing race decisively to China. 


But there are also occasions when roll backs of this sort can be politically advantageous with minimal economic impact. Jaitley was an expert at identifying these pressure points, and Sitharaman appears to be willing to follow in his footsteps. The BJP is a more effective political party than the Congress precisely because of such actions. Jaitley was not the best Finance Minister of the past decades; but he was, perhaps, the most effective politically. Unsurprising given his eminence as a lawyer, he could make an economic case for political actions and vice versa. Sitharaman's task will be harder than Jaitley's was, because the problems in the economy have built up and intensified. But if she also continues to keep crucial interest groups on her side, the way Jaitley did so effectively, the government's supporters will have nothing to complain about. 

(Mihir Swarup Sharma is a fellow at the Observer Research Foundation.)

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