It is the boring budgets that really tend to stand the test of time.
by R Jagannathan, Firstpost
Has P Chidambaram made his own budget a non-event? Thanks to his recent roadshows abroad that promise a “responsible” budget, and given that many of the real decisions – diesel price hikes, FDI, etc – are already announced, what else can he really tell us on 28 February that we cannot broadly assume?
However, there is now a convergence of interests that believes in hyping up the budget. Everyone is interested in it for selfish reasons. Every finance minister loves it, because he is the hero in this one-act play and the nation holds its collective breath as he (always a ‘he’) speaks. The media loves it, for the budget is another event around which it can build advertising revenues. The taxpayer watches the spectacle since he is hoping to hear some good news for his wallet. And businesses wait for it to ensure that the FM hasn’t slipped in a Mickey Finn when they weren’t looking. They will want to confirm that all the tough talk before the budget (“the rich must pay more”, “we need to widen the tax base,” “our tax-GDP ratio must go up”) is just talk.
Most budgets, however, end up as damp squibs. The few that sent pulses racing ended up as disasters – or led to one anyway. Remember Manmohan Singh’s 1992 budget, which sent the bulls into a feeding frenzy? It culminated in the Harshad Mehta scam. Or take P Chidambaram’s 1997 Dream budget, which opened up an economic nightmare?
It is the boring budgets that really tend to stand the test of time. The NDA’s budgets all failed to impress, but barring the Ketan Parekh scam, all of them ended up pushing reforms and set the pace for fast-paced growth under UPA-1. Chidambaram’s UPA-1 budgets had an easy time since revenues were gushing in, thanks to general economic buoyancy and the global liquidity surge under George Bush. The spectacular bits of Chidambaram’s budgets – the gigantic farm loan waivers, and huge social sector spending – actually set the stage for subsequent fiscal disasters which all landed on Pranab Mukherjee’s hapless plate. Chidambaram got the kudos for fiscal prudence, and Mukherjee the rotten eggs for the huge resultant deficits post-Lehman.
There are several takeouts from these examples.
First, budgets don’t have to be spectacular or exciting to be significant. A budget which makes no changes in tax rates is also a good one because it emphasises stability and encourages normal business expectations from governments.
Second, what is said in the budget may be important, but it is what happens between budgets that is even more vital for the economy. For example, how many times have finance ministers promised disinvestment and banking reform and not delivered on the same? How many times have they promised a Direct Taxes Code or a shift to a goods and services tax (GST) and failed to make progress? It is the hard work of political give-and-take after budget speeches are made that is vital for progress.
Third, budgets are given prime-time for the wrong reasons – the revenue raising measures or reliefs. But the success of any budget should really relate to expenditure, the quality of government spending, and how they are monitored. What is the point in spending over Rs 2,00,000 crore on make-work schemes like the Mahatma Gandhi National Rural Employment Guarantee Act (NREGA) if half the money is going to be siphoned off by unscrupulous middlemen? If the finance minister is the CFO of the government, his primary job should be to see where the money is going, and not just where it is coming from. The latter is the job of marketing and sales. It may be another part of the FM’s job, but it is less important. The FM’s prime brief ought to be this: how can expenses be managed without resort to new taxes?
Fourth, it is not right to judge a budget in one year. The true impact of a new tax or expenditure will be felt only over several years. For example, we know that lower taxes have given us revenue buoyancy, but it would be folly to abandon tax cuts just because they don’t immediately bring in revenue growth in Year One. Similarly, fiscal deficits cannot be tackled in one year. It is the trajectory that matters. Right now, for example, if the FM makes drastic cuts in capital expenditure, the fiscal deficit may look better, but the economic slowdown will worsen. This will lower revenues next year. The FM should be cutting wasteful expenditure, not capital expenditure. The results of mindless cutting will not be known this year, but years later as private profits suffer from a lack of government demand.
Fifth, budgets that try to do less achieve more. Many of the United Front (of which P Chidambaram was a part) and NDA budgets tinkered with this and that, but broadly did not attempt to do too much beyond following the trajectory on lowering rates, both excise and customs. By the time UPA arrived on the scene, the economy was ready for a rebound and the fact that the tax regime was stable helped. In the UPA, Chidambaram tried to introduce new tax ideas – the Fringe Benefits Tax and the Banking Cash Transaction Tax – and both had to be withdrawn when they didn’t work. Trying to be flashy doesn’t work with budgets.
Sixth, genuine reforms have almost nothing to do with the budget – though they do impact the budget numbers. For example, raising diesel or LPG prices has nothing to do with the budget, but they do help bring down the fiscal deficit. Disinvestment is not something that requires a budget announcement, but they bring in revenues. Recapitalising public sector (PSU) banks may need budgetary support, but allowing PSU banks to make IPOs and further equity offers is a better option. But the government can avoid having to recapitalise PSU banks altogether by giving them autonomy and authorising them to find their own resources for growth. Has anyone ever wondered why HDFC Bank has never had to raise capital in the last 10 years, but SBI seems to turning up at the FM’s door every other year for equity infusions? This is because HDFC generates enough internal profits for recapitalising itself. If public sector banks can manage this, bank recapitalisation will not need budgetary support. Reforms needs legislation and other action; budgets are not required for reforms, except on rare occasions.
In the NDA regime, the big reforms happened outside the budget – though they impacted the budget all right in terms of revenues and costs. The budgets were best known for stumbling back and forth (remember Yashwant “rollback” Sinha?), but the big things the Vajpayee government will be remembered for are the privatisation of IBP, VSNL, Balco, Maruti, IPCL, etc, and the golden quadrilateral project – the first major infrastructure effort by any government. They all found mentions in the budget, but their real impact came from being implemented properly.
Seventh, budgets are not a one-day event. They are all the year round. Many of us confuse the budget to mean the speech and documents made available to us on 28 February, or the last working day of February. But the numbers presented on that day are like the balance-sheet – a picture of the exchequer’s health on one particular day. A finance minister who is on top of the situation will focus not on the balance-sheet but the profit-and-loss (P&L) account, which cumulates every day, based on sales earnings and costs. Based on daily P&L trends, CFOs have to figure out how to keep the company (or the economy) in the black. Economic decisions have to be taken by the FM all through the year. If the textile industry is about to lose heavily due to falling demand, they should be given tax reliefs or incentives now, not next February. Disinvestment decisions ought to be taken based on market buoyancy, not yearly targets.
Eighth, the Union budget is an aggregation of several budgets and not one single thing. Every spending department in government makes a budget of its own. What the main budget does is match overall revenues and expenses, so that the bottomline is either positive or not very negative. But the ideal situation is one where most ministries generate the revenues they are seeking to spend by themselves. This means beyond basic government functions like defence, law and order and running the macroeconomy – which are pure spends with little revenue potential – most ministries should be asked to come up with their own revenue plans. Want to subsidise LPG? The oil ministry can propose to fund it through cross-subsidies or by levying a windfall profits tax on those minting money from oil or gasfields. This way, the finance minister does not need to raise taxes in general to fund subsidies.
The broad point: Budget Day isn’t important. Managing the budget after Budget Day is crucial. Finance ministers are about more than just budgets. Their real job begins after the speech is done, and TV anchors are sent off with their exclusive interviews.