If finance ministers were to be judged by their fiscal consolidation efforts, the story of what happened in the past 20 years appears quite interesting. Between 1991 and now, the Union government has seen five finance ministers — Manmohan Singh, Palaniappan Chidambaram in two different stints, Yashwant Sinha, Jaswant Singh and the current incumbent, Pranab Mukherjee.
Manmohan Singh, who took charge of the finance ministry in 1991, is easily the winner in the race for achieving the deepest cut in the fiscal deficit among all of them. Chidambaram is a close contender, but there is some dispute over that, particularly after the sharp spurt in the deficit in his last Budget in 2008-09 and recent revelations in the latest report of the Prime Minister’s Economic Advisory Council. Sinha’s performance was perhaps the worst.
Jaswant Singh had only one Budget in which he brought down the fiscal deficit by a good margin of 1.4 percentage points to 4.5 per cent of GDP. Mukherjee has done well as far as steadily bringing the deficit down is concerned, but this is nothing compared to what Manmohan Singh achieved in his first year as finance minister.
The government’s fiscal deficit in 1990-91, under Madhu Dandavate as finance minister, had ballooned to 8.4 per cent of GDP. Singh in one year, with the help of his first Budget, brought that down to 5.9 per cent. The progress thereafter was slow: the deficit went down to 5.7 per cent in 1992-93 and, indeed, it went up the following year to 6.3 per cent. Singh, however, made amends in the remaining two years of his tenure in North Block. The fiscal deficit came down to 4.6 per cent in 1994-95 and to 4.1 per cent in 1995-96. In other words, during his five years as finance minister, Singh brought down the fiscal deficit from 8.4 per cent to 4.1 per cent — a fall of 4.3 percentage points. No other finance minister achieved that.
In sharp contrast, Yashwant Sinha’s tenure of about five years as finance minister saw the fiscal deficit steadily climb in the first four years and decline marginally in the fifth year. Sinha took charge of the finance ministry in 1998-99 and the previous year, the fiscal deficit was 4.7 per cent of GDP. The fiscal deficit went up to 5.1 per cent in 1998-99, rose to 5.4 per cent and 5.6 per cent in the following two years, rising further to 6.2 per cent in 2001-02, before declining to 5.9 per cent in 2002-03.
In his defence, it could be said that Sinha’s tenure coincided with the crisis in the Asian economies and the nuclear tests that India conducted, both of which had an adverse effect on the economy. In addition, he had to suffer the adverse consequences of steep tax cuts announced by his predecessor Chidambaram, which in view of a downturn in the economy, failed to generate the kind of revenue buoyancy that had been projected. However, there can be no defence to what the numbers show. Sinha took charge when the previous year’s deficit was 4.7 per cent and after presiding over the government finances for five years, he allowed the fiscal deficit to go up to 5.9 per cent.
Mukherjee, too, had a difficult task because he took charge of the ministry after the Great Recession of 2008 had already begun affecting the Indian economy. He had inherited a fiscal deficit of six per cent of GDP in 2008-09 and allowed the fiscal stimulus to continue for one more year, a policy that raised the deficit to 6.4 per cent in 2009-10. Subsequently, however, Mukherjee has reined in government expenditure to end 2010-11 with a fiscal deficit of 5.1 per cent and now he proposes to achieve the more difficult task of reducing it to 4.6 per cent. As of now, the target appears difficult.
Chidambaram had two tenures as finance minister. The surprising thing is that in his first stint, he brought down the fiscal deficit to four per cent in 1996-97, but the following year, when he presented the “dream Budget”, he allowed the fiscal deficit to go up to 4.7 per cent thanks to large doses of tax cuts. In his second tenure, Chidambaram steadily brought down the fiscal deficit from four per cent in 2004-05 to 2.7 per cent in 2007-08, a remarkable achievement. The following year, however, he had to agree to the fiscal stimulus measures because of the global economic downturn and concede a fiscal deficit of six per cent — the sharpest rise in one year since at least 1991.
Thus, in spite of maintaining a low level of fiscal deficit for four consecutive years until 2007-08 (between four and 2.7 per cent), Chidambaram had the misfortune of ending his tenure with the steepest rise in deficit in 2008-09. Worse, the latest report of the PM’s Economic Advisory Council shows that the government’s off-Budget liabilities rose sharply during Chidambaram’s tenure as finance minister. In other words, the actual fiscal deficit for four years between 2005-06 and 2008-09 was higher by margins ranging between 0.6 and 2.2 percentage points of GDP. Previous finance ministers also took advantage of off-Budget liabilities, but Chidambaram was among the biggest beneficiaries.
