Economists are divided. Industry as always wants more money from the government. But the Reserve Bank of India governor and even the NITI Aayog chairman are clear that any such decision would be dangerous. Which leaves Finance Minister Arun Jaitley with his most difficult choice yet, ahead of his government's third budget expected later this month: Should he stick to his own fiscal consolidation deadlines?

"I can tell you I have been consulting all shades of opinion," Jaitley said at a summit last week. "This is the first time that I have come across people holding sharply divided views and each one has a strong argument in his favour."

After spending the first year and a half complaining about the harsh fiscal deficit (the shortfall between what the government spends and what it earns) that he had inherited from the previous government, Jaitley made the decision in 2015 to relax the targets by a year. As a result, the 2015 budget kept India on the medium-term fiscal deficit target – 3% of the Gross Domestic Product – while giving the government until 2018 to get there.

"With the economy improving, the pressure for accelerated fiscal consolidation too has decreased. In these circumstances, I will complete the journey to a fiscal deficit of 3% in three years, rather than the two years envisaged previously," Jaitley said in last year's budget speech.

The best laid plans

But the year hasn't turned out quite as well as the government was hoping. On the one hand, it was given a massive boon in the form of oil prices becoming a third of what they were a year ago, with the government capitalising by raising excise duties to capture the gains.

That, however, was the only bright spot in a mostly dour year. The rains weren't good, food inflation has shot back up, exports continue to disappoint, India Inc hasn't experienced the resurgence it was hoping for and demand continues to slump across the world.

On the home front, Jaitley was unable to get the Goods and Services Tax legislation through Parliament, with the task potentially getting tougher after electoral setbacks in Delhi and Bihar. And the government was also given a much bigger salary bill thanks to the recommendations of the 7th Pay Commission, which called for a 23.5% hike for most government servants.

Hard knock life

This makes life much harder for the finance ministry. At least until the last budget, the government could say that the economy is about to start booming again. Repeating those claims would be silly this year.

One good sign, as pointed out by the Mid-Year Economic Review, is that the government seems to have gotten better at estimating revenues, a year after it got the first-half prediction off by a whopping 16%. This is true despite a huge shortfall in disinvestment/privatisation targets and the unsettling sign of nominal GDP growth being lower than the real GDP.

Moreover, oil prices are not expected to drop much further and the global economy is unlikely to throw India any more pleasant surprises. Budget 2016 will have to realistically estimate the growth of the economy, a sore topic in the finance ministry in a year where its optimistic figures have been heavily criticised, as well as how the the government's bottom line will look by the end of the year.

Jaitley's options

That leaves Jaitley with three choices, which he sketched out last week:

  • Go off the path: "There is an argument being given that in the current economic situation public investment holds the key," Jaitley said, essentially repeating the claim from a year ago that the government will have to drive India's economy for the time being, while straying off the fiscal path. Chief Economic Adviser Arvind Subramanian made a similar pitch in the Mid-Year Economic Review. 
  • Stick to the fiscal plan: "The alternate argument is also equally important with regard to credibility of government. One year you deviated from the target, will you do it again and particularly if oil prices are one-third of what they were? If you still can't meet the target, when will you do that?" Jaitley asked. This was the argument put forth by Reserve Bank of India Governor Raghuram Rajan as well as the NITI Aayog, the government's think tank. 
  • Get rid of the path: "There is also another argument that in a fast moving situation globally, whether it is necessary to fix a target beforehand," PTI reported Jaitley saying. This would be too much of a wildcard for Jaitley to throw at global economy watchers, especially after years of linking India's credibility to its fiscal consolidation path. 

Debt for our children

Jaitley has always claimed to believe in fiscal prudence being paramount not just for India's credibility, but also on principle. In his very first budget speech, he insisted that India "cannot leave behind a legacy of debt for our future generations. We cannot go on spending today which would be financed by taxation at a future date."

Yet for the second year in a row, his finance ministry is flirting with going off the fiscal consolidation path. This comes after a miserable year, where something like 60% of the government's in-take was spent just servicing debt. It also comes in the same year that India's salary bills will balloon because of the Pay Commission and One Rank One Pension.

And finally, this is the midway budget of Prime Minister Narendra Modi's five-year tenure. Considering murmurs about massive new food subsidies from the government for this budget, the likelihood of difficult measures being introduced in Budget 2017 (ahead of Uttar Pradesh elections) or Budget 2018 (a year before the Lok Sabha polls) seems remote.

There's one more reason this fiscal decision is crucial for Arun Jaitley. After calls for him to be shifted to another ministry because of poor stewardship of the economy, any decisions that don't go down well with local and global watchers could mean this isn't just Jaitley's most difficult budget but also his last.