The larger virtue of maintaining fiscal credibility should not be unduly diluted by quibbles on the fiscal math, says Sajjid Chinoy.
Barely had markets heaved a sigh of relief that the government - to its credit - had stuck to its fiscal road map and preserved credibility, than the Monday-morning-quarterbacking began.
Not satisfied by the headline deficit reduction, some commentators have questioned the fiscal math: from tax revenue assumptions looking rich, asset sale projections being virtually impossible to attain, the Pay Commission being opaquely under-budgeted, to higher off-balance sheetspending.
All this has been cited as undermining fiscal credibility.
While there is merit to some of these concerns, some of the post-Budget commentary runs the risk of throwing the baby out with the bathwater.
There appears to be an inadequate appreciation of the larger virtue of the government maintaining its fiscal compact.
The clearest manifestation of bond market stress was that spreads of state bond yields jumped from 40 basis points (bps) in October to 100 bps in the days before the Budget, as concerns about fiscal relaxation grew.
After the central government doubled down on fiscal prudence, government and state bonds have rallied more than 20 bps from their pre-Budget highs - tantamount to a rate cut.
Admittedly, markets need more comfort on state finances for yields to fall further. But prudence at the Centre was a necessary, if not sufficient, condition.
Therefore, even as commentator concerns around parts of the Budget have increased, the relief bond market rally has sustained.
Let's consider these concerns, in turn. There is routine reference to how several components of the Budget undermine "fiscal credibility".
At its most fundamental level, credibility is defined as "keeping your word".
Since 2012, when the central government came up with a fiscal road map, the Centre has stuck to the road map in four of the five years, with the glide-path only being relaxed last year.
Furthermore, in each of the last four years, the Centre has either met or beaten budgeted targets.
In none of these years, has government borrowing been more than had been budgeted.
That's a pretty good start for earning credibility, right?
Admittedly, given the cash accounting nature of India's Budget, some expenditures can artificially be pushed to the next year to meet targets.
But, (i) it's not obvious that this practice has worsened in recent years, and (ii) from a bond market's perspective, what's important is that there have been no unpleasant borrowing surprises since 2013.
No wonder then that bond markets have shrugged of post-Budget "fiscal math concerns" because there is confidence that the budgeted deficit will be adhered to.
The second concern relates to the fact that (i) asset sales are driving the entire consolidation, so there is no "real underlying consolidation"; and (ii) that, given the government's track record, budgeted asset sale targets are unattainable. It is undoubtedly true that the projected increase in asset sales is driving the entire consolidation, and therefore the underlying fiscal stance is neutral.
I would argue this is a conscious and prudent choice at this juncture because it results in headline fiscal consolidation (to reduce borrowing and push down yields) without impinging on growth (avoiding pro-cyclicality of fiscal policy).
Scepticism on meeting the asset sale target is understandable, given the patchy track record.
But having undershot the asset sale target so sharply last year, the government was expected to budget very conservatively this year.
The fact that it has gone in exactly the opposite direction - by pursuing an aggressive asset sale target - obviously suggests a change in philosophy, likely reflected in the fact that the newly-christened DIPAM (Department of Investment and Public Asset Management) and NITI Aayog have already met to identify public sector undertakings for strategic sales.
Time will tell if the momentum can be sustained, but let's give the authorities at least a quarter before scepticism turns to cynicism.
Finally, there are buffers on the revenue side.
The budgeted tax buoyancy is less than that realised last year, and the fact that the government captured 90 per cent of the drop in oil prices since December in five excise duty hikes should cause excise collections to be higher than what is budgeted, as long as the duties persist.
So upside surprises to tax revenues could potentially offset some shortfall on asset sales, though the latter will make the underlying fiscal stance tighter than the Budget envisaged.
Furthermore, there has been restraint on the expenditure side, with the expenditure to gross domestic product (GDP) ratio unchanged from last year.
Much is made about the Budget for Bharat, but allocations for the rural economy are the same as a percentage of GDP as that of last year.
Also, a part of the Pay Commission has clearly been pushed to the next year.
All this is admirable restraint. While some bemoan the opaqueness around the Pay Commission allocations, this is understandable given the political-economy involved. The benefits from avoiding protests on that front - like it was the case with the Employees' Provident Fund (EPF) - probably outweighed the costs of some budgetary opaqueness.
Finally, much is made about the planned increases in off-budget sheet spending by the National Highways Authority of India and the Indian Railway Finance Corporation.
Borrowing to create much-needed public infrastructure (with large positive externalities) is qualitatively different from borrowing to consume, as was the concern with the fisc.
And, at a time when private investment is in a funk, infrastructure companies raising funds to build infrastructure should actually be welcome.
This is not to say there are no concerns on the fiscal. The signal sent from completely backtracking on the EPF issue makes it harder to reduce "bounties for the rich" (masterfully documented in the Economic Survey).
Plus, food subsidies could easily overshoot budgeted levels in the event of a normal monsoon. And, state finances are a growing concern.
Finally, this won't be an easy Budget to execute, so all hands will need to be on board.
But, for now, let's give the government its due.
Dogged fiscal consolidation was the harder choice to make this year.
But it was also the right choice in a turbulent global environment.
Markets have recognised that and rewarded the authorities.
Let these larger virtues not be unduly diluted by quibbles.
The author is chief India economist at J P Morgan.
