Sanjeev Ahluwalia | A wish-list for Budget: If I were Nirmala Sitharaman

Union finance minister Nimala Sitharaman is all set to make history. Some may say she has already made history by being the first woman to become finance minister, if one excludes Prime Minister Indira Gandhi who held the finance portfolio in 1969. If all goes well, she will become the first FM to serve for more than six years and 125 days by the end of 2025, smashing Palaniappan Chidambaram’s record over two separate spells (2004 to 2008 and 2012 to 2014). For continuous service, the venerable C.D. Deshmukh (1950 to 1956) holds the record of six years and 53 days, which Ms Sitharaman will equal even earlier.

Contrary to popular perception -- mainly because of her impish grin when she scores a debating point -- Ms Sitharaman was not the youngest finance minister at age 60 in 2019. That honour belongs to Rajiv Gandhi in 1987 (along with being the PM) at age 43. The second youngest was Pranab Mukherjee at age 47 in 1982, followed by P. Chidambaram at age 51 in 1996.

Every FM yearns for a legacy to be remembered by. This requires substantive action beyond getting there early or hanging in there for long. Ms Sitharaman’s first term under Prime Minister Narendra Modi was diligent, free of adverse outcomes but studiously correct as a sipahi (soldier) of the PM -- with apologies to Rajeev Chandrashekhar of the BJP, who claims that privilege.

If I were Nirmala Sitharaman, I would use my time till 2029 to build a legacy – beyond the implementation of 300-day rolling plans or the subsequent high decibel political outreach around relatively mundane outcomes, which generally accompany such budgetary provisions.

The finance ministry flies solo in three significant areas. First, defining the fiscal stance of the government -- the fiscal deficit, debt levels and the share of private and public investment at play in the economy. Second, developing an action plan to achieve the associated fiscal and investment metrics. If private investment must increase, relative to public resources, what is the vision for the supporting financial services -- banking, financial institutions, stock markets and insurance services?

Third, the tax policy of the government, which determines who pays for government interventions. All three are highly political decisions.

The FM plays a prime role in aligning government tax revenue to the volume of government expenditure to keep fiscal deficit and debt within norms. At present, public debt is 50 per cent higher and the fiscal deficit more than 25 per cent higher than the norm. Keeping them within the norms means shaping financial outlays towards efficiency enhancing, productive spending, while saying no to political grandstanding based on debt. In short, the FM must draw measurable red lines around the expenditure expectations of her Cabinet colleagues.

Cynics would say such foundational decisions are taken by the Prime Minister’s close-knit circle of advisers. Also, how can an FM, who is in Parliament at the behest of the party (via the indirect election route to the Rajya Sabha, as opposed to getting directly elected to the Lok Sabha) do otherwise but play ball with top-down political directives?

The FM can take heart from previous FMs, also in Parliament via the indirect Rajya Sabha route. Arun Jaitley will be remembered for accepting the challenge of living within a low FD target of 4.1 per cent of GDP in 2014-15, down from 4.5 per cent, the previous fiscal, where P. Chidambaram had left it, and for reducing it further to 3.5 per cent by 2017-18. Successfully shepherding the GST regime -- an inherited, albeit much needed, hot potato from the Congress government, was another achievement, but failing to oppose demonetisation – which was a political misadventure -- was not. Dr Manmohan Singh (as PM) braved the wrath of his own party and Left party allies for pushing through the civil nuclear deal with the United States in 2006, paving the way for the close alliances India enjoys today.

Similar opportunities await Ms Sitharaman. Consider, for example, the need for a forward-looking tax policy. Her diligent oversight and evident probity -- she did not fight the 2024 Lok Sabha elections because she could not afford the expenses required to win -- have ensured a smart uptick in Central government tax receipts.

From 6.8 per cent of current GDP in 2019-20, these increased to 9.6 per cent in 2023-24, vastly different from 2019-20 when they reduced from 7.6 per cent in 2014-15. But the underlying tax structure remains distorted, porous, and shallow.

Tax reform requires shunning high nominal rates as substitutes for poor assessment and collection capabilities. Low tax rates, minus exemptions, are preferrable to high nominal rates with lots of exemptions, designed to let favoured taxpayers escape the tax, whilst others get their backs broken. Consider that, thanks to “clever” tax planning, less than 0.6 million families (0.2 per cent of all families) declared a taxable annual income of more than Rs 5 million in 2022-23.

High import tax rates seem necessary to “protect” domestic industry because the RBI keeps the rupee artificially expensive and domestic interest rates high, to forestall an outflow of foreign portfolio investment from the stock market. Keeping the stock market at elevated levels is now a performance metric of the government, much to the glee of the middle class. But an expensive rupee makes exports expensive and uncompetitive whilst incentivising imports, widening the trade deficit, which then needs to be plugged in by higher taxes on imports and more incentives for inflows of foreign investment to plug the adverse external account (trade plus financial flows) -- pulling the economy into a circular, downward trending vortex.

High domestic lending rates, and high domestic bank lending margins compensate for losses from imprudent lending practices at low rates, often under government schemes but serve to constrain domestic investment, counteracted by “viability gap financing subsidies” for the big corporates and interest subsidies for small business.

A five-year macro-economic plan can lead us out of this circular, un-strategic, economic trap. Mandate a Fiscal and Financial Commission (FFC) to integrate the entire financial sector. Chaired by the FM with state government FMs as members working on a consensual basis, it can subsume the GST Council and the quinquennial Finance Commission, whose mandate is already diminished by the comprehensive GST framework. Inter-state allocation of grants could be determined quinquennially but monitored and fine-tuned annually.

Integrating high-level fiscal and financial decision-making under one roof would be a visible ode to Prime Minister Modi’s languishing mantra of co-operative federalism. If I were Ms Sitharaman, I would step, a bit out of line, to hit a six.