Digging Deeper | Do we need a fresh look at the union budget?

R Mahadevan | Rakesh Sharma

The Annual Budget of the Government of India has, since the beginning, been one of the most looked-forward-to annual events in the economic life of the nation. Every year, the nation has waited with bated breath for the budget speech by the finance minister, with the build-up to it lasting days of discussion in the media. One of the highlights for many years was the talk that Nani Palkhiwala gave on the budget every year, attended by thousands and circulated among millions more.

The budget is in essence a vision and mission statement for the next financial year. For the economic and business community, the measures that the budget puts forward gives them a sense of how things are going to be in the coming year.This tells them how their activities are going to be impacted, and hence how they should proceed further taking these into consideration. For the common man, the most important part of the exercise has naturally been the change in the income tax slabs and rates and the change in tax saving concessions. Plus, the change in various tariffs – excise, customs, sales tax – that will affect the retail prices of everything from grocery to air-conditioners to air tickets to international holidays.

Not train tickets, though! That fell within the purview of the Railway Budget, what with the railways being such a massive organization, and one of the pan-India networks that affected millions of citizens on a daily basis – suburban commuters, daily medium distance commuters, and other regular and irregular travellers. A 5% increase in fares – especially passenger fares – could make the nation go apoplectic! Of course, the railway budget has been done away with now.

The national budget is something that addresses the various aspects of finance and how it affects the condition of the citizens and of the nation as a whole. Let’s look at a few of the important areas that the budget looks into.

One of the most important things, especially in a country like India, with its wide disparities and shortages and uncertainties, is allocation of resources. The budget allocates fiscal resources according to need, and the budget sets the tone for the direction in which the government of the day takes this. When this is done at one go rather than piecemeal, the policies can be put in place systematically and the money allotted properly so that the policies can be implemented according to plan. When implemented right, it ensures that resources are utilized to maximum effect and benefit, and also in a timely manner. The annual budget also provides a one-point reference, and gives an idea of the direction the nation has taken and the likely shape of things to come.

Taxation is another important part of the budgeting exercise. Taking the current scenario and prospective needs into account, the budget decides the levels of taxation for the next one year. Spending, savings, prices, all these are impacted by the tax rates, and when the rates are set at the budget, it gives people, corporates and organizations the information to plan their next year.

Where growth needs to be encouraged, taxes are lowered, and where inflation needs to be curtailed, interest rates are increased so that people feel impelled to spend less and save more. This is true in the case of business enterprises, too.

Again, certain sectors are taxed less for a given time to encourage that sector to grow. Similarly, regional or sectoral growth is encouraged by giving tax holidays for the setting up of new units and generate employment.

In a country like India resource allocation has to be well planned so that adequate resources reach the millions of disadvantaged sections of society. The budget statement and allocation ensures that this can happen in the most effective manner. In a sense, the budget makes it possible to simultaneously take a 30,000-foot view of the nation while telescoping the government’s vision towards the areas that need to addressed separately and minutely. At one go, it tries to address issues regarding social and economic backwardness and iniquity so that the nation moves towards more uniformity and citizens are assured of their basic needs on a continuous basis.

So, what happens if there is no budget exercise like the one that is slated to take place this year on July 5? Wouldn’t all these things still happen, sometimes simply because they must and life must go on?

Indeed, that is true. Whether there is a Union Budget or not, things would still happen. Economic activity would go on, and so would life as it always does at an individual level. But in the context of the nation and also in the context of the disadvantaged sections of society, it wouldn’t happen in the best way possible. In an ad hoc situation, there can be a great deal of chaos.

Yes, there are many situations that cannot be foreseen. Take the instance of a cyclone, floods, or other such natural calamities. The consequences would be unforeseen, and sometimes dire, requiring immediate action and spending that cannot be accounted for in advance, or wait for the next annual allocation. Something like this would require a contingency fund to be set aside.

In a constantly changing situation and with political pressures acting as they always do, processes would get skewed. Influence peddling is likely to increase and economic disparity and unfairness are likely to increase, as they are wont to when things are left well alone to their own devices.

But, are there any scenarios where a budget might be mostly redundant? A scenario in which an annual exercise at the Union Budget wouldn’t have the kind of impact that it has had and one might expect it to have?

Of course. In a constantly evolving economy in a nation that is constantly on the move, where the rate of progress is being accelerated, an annual budget might not have as much of an impact. This is because an allocation towards a certain goal might not hold after a few months as a result of a change in circumstances. There might be so many changes in direction and degree that needs keep changing, and consequently, allocations. In such a case, money set aside for one thing often ends up attending to a different need. Or, allocations would have to be generalized to such an extent that it becomes just a question of setting money aside, period.

The budget could also become less meaningful in a situation where most things are settled, and there are relatively fewer variables. In a stable economic climate and where the basic needs of nutrition, health and shelter have been met, things begin to fall into a pattern; further, it becomes easy to identify problems, which would end up being localized. Here, it might be better to have a system of attending to things as and when, because contingencies are likely to be what need the maximum allocation, and contingencies cannot be predicted.

In the case of our country right now, things certainly aren’t settled in any way, but things are moving forward, or are expected and planned to move forward, at a faster pace. Yes, this means increased allocations on various heads, but this might also mean continual recalibrations. For instance, take the railway budget of a couple of decades ago. Allocations would keep changing, fare adjustments would spill over from the budget, and new allotments would be made after the budget was presented, based on political considerations. This meant constant overruns or juggling of available resources, which would end up having the effect of stretched timelines, underachievement of goals and pressure on profits.(Of course, as mentioned earlier, the railway budget no longer exists as a separate entity.)

Or, take a situation where tax rates or interest rates are changed frequently. If this spills outside of a narrow band, the numbers will have to be revisited. We are arguably in a situation like that now. So, it could be a valid discussion, the necessity of a Union Budget.

Or, maybe there is an ideal, or more preferable, path that lies in the middle.

In an interesting article, Andrew Kleine argues that the traditional budgeting process should be dumped for good. Kleine is in a good position to make this statement – he is the author of the book ‘City on the Line: How Baltimore transformed its Budget to Beat the Great Recession and Deliver Outcomes’, and he has been the budget director of the city of Baltimore.His position is that governmental budgeting – or, at least, the traditional way, of doing it – is well past its use-by date. The current process, according to him, has universally been followed in more or less the same way for decades, maybe centuries. The manner in which this is done has been so settled that the incremental changes that happen in the process almost mechanically no longer have the desired result. He terms this “budget inertia”, where things remain where they are except for tweaks here and there, and calls for a change in approach. In a pithy paragraph from this article published on the website, www.governing.com, he writes, <quote> “Revenue shortfalls are answered with across-the-board cuts that protect lower-performing programs, punish programs that deliver results and offend as few people as possible. New initiatives are funded only in the rare event of a surplus, if there's any money left after backfilling prior-year cuts or giving bigger pay raises. Problems remain unsolved, potential untapped and opportunities unseized.”

He refers to the concept of Budgeting for Outcomes, which was detailed in the book ‘The Price of Government’, written by David Osborne and Peter Hutchinson. The argument here is against the traditional practice of the budget being the carrying forward of the previous year’s plan, adjusted for the coming year. Rather than that, the approach suggests creating a budget after looking at the needs afresh – to look at everything from the point of view of “what to keep” rather than “what to cut”, as Kleine puts it. While political expediency can never go out of a mammoth and important exercise as the Budget, Budgeting for Outcomes keeps the focus on results, according to Kleine. He points to the many cities, such as Fort Collins, Redmond and Baltimore, all in the USA, which have benefited from applying the concept to their budgeting.

As an aside.... in 1957, an article was published in the journal, World Politics, about government budgets in a democracy. In it, the author, Anthony Downs, presented the argument that governments generally came out with budgets that were smaller than necessary or ideal. This, according to Downs, was because the electorate did not have enough information about various government policies and decisions. Through a long essay where he looked at various heads such as the process of making a budget in a democracy, a look at the right way and the wrong way to create a budget, how the differences between the private and public sectors affects the preparation of a budget, and of course, the ignorance of the citizenry regarding the political process and decision-making...Downs concluded that the ignorance of the people caused governments to have smaller budgets than ideal, or even necessary. If this were true and the situation today is the same as it was more than half a century ago, it would be interesting to think about whether this is argument for a government budget because it is inadequate in addressing issues, or whether it is an argument against the budget because it will always remain inadequate!

Meanwhile, as we ponder over the need for a Union Budget in the current circumstances, whether the Union Budget is the best way to address the continuing, burgeoning, and constantly changing economic needs of a nation that is on the fast track to progress and increasing self-sufficiency in a world that itself is changing more and more quickly, maybe it is the concept of “budgeting for outcome” that is most ideal.

Do tune in to the Union Budget 2019 that will be presented by Finance Minister Nirmala Sitharaman on July 5. There is a lot to look forward to, and the budget is going to present the picture that we will carry with us for the next year.