India's fiscal policy over the past five years has much to commend it

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Nirmala Sitharaman will soon present the final budget of the second government led by Narendra Modi. It will be an interim budget, primarily prepared to keep the wheels of administration moving till a new government takes charge after the national elections. Interim budgets are usually simple accounting exercises, but they can sometimes be used to either cut taxes or increase spending commitments to win brownie points with specific voter groups, as was the case in the interim budget presented in February 2019.

This is a good time to look back at the five years of fiscal policy steered by India’s finance minister, which included dealing with the consequences of the massive economic shock from the covid pandemic. Three salient points stand out. First, the budgets over the past five years have fewer accounting tricks that try to hide the true fiscal costs of items such as bank recapitalization, fuel subsidies and food subsidies.

Second, fiscal policy did reasonably well in terms of avoiding the twin pitfalls of mindless austerity and needless profligacy, especially in the aftermath of the pandemic. This has helped India avoid the balance-of-payments crises that hit many economies in the region as well as the bursts of high inflation that most rich countries had to deal with. Third, the actual process of budget-making has been realistic in terms of the assumptions made of both nominal GDP growth and tax elasticity that are the building blocks.