On August 25, a tweet flashed on the website of CNN-IBN. It was widely shared on social media. Within no time, the tweet disappeared. The buzz within the media was that although the mentioned cabinet minister did make the comment, it was an off-the-record one. Hence, it was removed from the channel’s website. But everyone realised that this was not a simple case of a genuine mistake, or a blunder, by a journalist.

The tweet was about Finance Minister Arun Jaitley’s alleged statement that the One Rank One Pension, or OROP, demand by the defence personnel was neither “financially feasible” nor “sustainable”. Even if it was a wrong tweet, and Jaitley never said it, it reflected the mindset of the current government on the specific issue. The fact remains that this regime cannot implement OROP in a hurry unless it does so in a diluted form or in a phased manner.

It's the economy, stupid

If one looks at the state of the economy, the implementation of OROP in its entirety is unlikely in 2015-'16. It may not see the light of the day even in 2016-'17. Jaitley has recently said that despite the global stock market crash, decline of the rupee, and lower growth predictions for 2015-'16, there was nothing wrong with the Indian economy. In a dig at Reserve Bank of India Governor Raghuram Rajan, Jaitley said that everything, except the rupee, looked up.

However, the three conditions that the regime has put forward to accept OROP indicate that "all is not well" with the economy. The first is to implement OROP from January 2015, and not April 2014, as demanded by the retired defence personnel. Second is to fix the base year as 2011, and not 2014. Finally, the regime doesn’t wish to accept a 3% annual hike in the pensions. These proposals hint at a fiscal squeeze and Jaitley’s inability to spend additional amounts this year.

Back-of-the-envelope calculations show that if OROP is implemented from April 2014, the outgo on increased pensions for two fiscals will be between Rs 16,000 crore and Rs 18,000 crore. Why can’t the government squeeze out such a paltry amount – when compared to outlays on other counts – through additional disinvestment and meagre budget cuts of other ministries? The reason: the finance minister has little financial elbow room this fiscal.

Jaitley is obsessed with two issues: high growth and low fiscal deficit. Without growth, this regime will lose its face, and slip further from its political high. If the deficit spins out of control, there is a threat of a downgrading by global rating agencies. However, as all finance ministers know, in some conditions, high growth and low deficit can seem like an oxymoron. This is quite true of the various choices that Jaitley can exercise over the next few months.

It is now clear that private investments will not kick-start growth immediately. Rating agency CRISIL has estimated that its survey showed 11% decline in private sector’s capital expenditure budgets in 2015-'16. While some of the top businessmen have expressed optimism about on-ground sentiment, “near-term plans for their own companies belied this optimism.” The manufacturing sector fared the worst; infrastructure and energy sectors showed a “small increase in capex.”

Catch 22

Therefore, there is only one choice before Jaitley. As Raman Uberoi, President (Ratings), CRISIL, said, “The message coming through is crystal clear: as things stand today, there is only one way to kick-start the all-important investment cycle, and that is through public investment. The onus is on the government to do the initial heavy lifting.”

Jaitley realises this conundrum. In March 2015, he said that he didn’t expect the private sector to quickly fund infrastructure projects. “This is the first responsibility of the government particularly when you are trying to get out of a slowdown phase, we are quite conscious of that,” he had said. In Budget 2015, he aimed to raise Rs 80,000 crore from cess on roads and railways to finance large projects.

While cess and taxes can be used to invest in a few projects, they are not enough. The only sustainable manner to hike public funding is for the government to increase its revenues, not through additional taxes but due to higher growth rate. A classic Catch 22 scenario!

Another way to up the government spending is through a higher fiscal deficit, i.e. for the government to spend more than what it earns. This is something Jaitley cannot do beyond a point for two reasons. One, he can’t risk a negative reaction from the global rating agencies and, two he has promised that he wants to manage the deficit within his estimates.

There is another headache for the finance minister. The actual fiscal deficit in 2015-'16 may anyway exceed his estimates unless he raises huge sums through disinvestment. The disinvestment target in 2015-'16 is almost Rs 70,000 crore. Until now, only two disinvestments have happened. Given the current turmoil in stock markets, the process may witness a delay. Any shortfall on this count will impact the deficit figures, and impede public spending.

Clearly, unless growth takes off and revenues zoom, and the disinvestment process stays on course, Jaitley has little leeway to increase the overall expenditure. If growth doesn’t happen, even an increase in expenditure of a few thousand crore of rupees can wreak havoc with his deficit plans. This is why the finance minister is likely to delay OROP, or implement it in a diluted form or in a phased manner to reduce the outgo this year.