The finance minister of India, Arun Jaitley, tells Stefania Palma about the newly announced budget, as well as the state of the country’s banking sector following the alleged fraud at Punjab National Bank. 

Arun Jaitley

Arun Jaitley

In February 2018, India’s finance minister, Arun Jaitley, presented a budget broadly interpreted as expansionary. But questions arose on whether it was time for India to boost expenditure when the budget deficit is expanding and government debt remains high.

The new budget set the deficit target for the fiscal year ending in March 2019 at 3.3% of gross domestic product (GDP), implying a 0.3 percentage point slippage from the target set in 2017. When taking office in 2014, the current government said the budget deficit would drop to 3% of GDP by fiscal year 2018. It now expects to hit that goal by fiscal year 2021, after its term ends.

In addition to a widening deficit, at 68% of GDP, India’s total government debt is quite high. It is promising, however, that India plans to implement a ceiling of 40% of GDP on central government debt, which is expected to hit 50% of GDP in fiscal year 2018.

Paying for the budget

But if the budget deficit is growing and government debt remains high, how can India afford the new expansionary budget? “Over the past few years we have been gradually bringing [the fiscal deficit] down. The rough calculation is that this is affordable within the size of the Indian budget itself,” says Mr Jaitley.

He also argues government revenue is part of the answer. “Our [government] revenue expansion has been substantial. On direct taxes we are likely to grow this year by something close to 20%... which also indicates that our tax buoyancy is over 2%,” says Mr Jaitley.

“As far as indirect taxation is concerned, we have the goods and services tax in place and, after the initial months, the smoothening process is on, and we are putting in place the anti-evasion measures. This will expand the base of indirect tax, also. So India can look at much higher taxation in the near future.” 

Expanding revenue will be essential for India to support the proposed increases in expenditure, which come just a year ahead of general elections in 2019. In the new budget, the government announced it would increase minimum support prices for agricultural goods to 1.5 times the cost of production. The government also intends to fund a health insurance scheme to cover about 500 million people, as well as the construction and refurbishment of medical colleges and hospitals.

“One of the principle reasons why we thought we needed a proper healthcare support system in place is because we have a very large network of governmental health institutions. We also have very modern healthcare institutions of international quality in the private sector. But one of the issues is cost as far as the private institutions are concerned and over-crowding as far as the public institutions are concerned,” says Mr Jaitley. “And therefore to start off we made a more than modest beginning by looking at the economically weakest 40% of India’s population.

We have been gradually bringing [the fiscal deficit] down. The rough calculation is that this is affordable within the size of the Indian budget

Arun Jaitley

“The state support system [will] insure them against any possible hospitalisation and takes care of their hospital expenses with an upper cap of Rs500,000 [$7690], which can take care of most hospitalisations in India. The larger the volume, the cheaper the per capita cost,” he adds.

Tackling banking fraud

Earlier in 2018, India was rocked by what has been described as the largest alleged banking fraud in the country’s history. In February, state lender Punjab National Bank – the second largest public sector bank in the country by assets – announced a suspected $1.77bn fraud allegedly involving jeweller Nirav Modi and entities close to him. Mr Modi’s lawyer has denied the allegations.

Investigations are ongoing, but the announcement has taken the banking sector by storm and raised questions about India’s banking governance, supervision and risk management.

“This whole matter is being investigated. I already said that [there] appears to be collusion of certain banks’ officials. It appears to be negligence of some others, it appears to be auditors not doing their duty adequately and supervisory mechanisms needed to be strengthened,” says Mr Jaitley.

He adds that there is also scope for the banking supervisory processes – which are overseen by India’s central bank, the Reserve Bank of India – to be improved.

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