| Low on lustre
The budget speech was a great success. The finance bill was an utter disaster. Paraphrasing Oscar Wilde, that's one way to describe the budget for 2005-06. This hype over budget day, created largely by the media, is unwarranted. Government policy has an impact on all our lives, especially when, in a transitory phase of reforms, stability has not been imparted to tax policy.
However, that impact is on all 365 days, on a 24x7 basis. There is nothing that great about February 28 so that the entire country should go on a picnic over what, etymologically, is nothing more than papers that come out of a bag. P. Chidambaram produced a lacklustre budget in 1996-97, followed by what was described as a dream budget in 1997-98. The budget of 2004-05 was also lacklustre, and one could have pleaded inadequate time for budget preparation then. There were thus expectations of a big-bang dream budget in 2005-06, although we should recognize that dreams only occur when we are sleeping. Once we wake up, more often than not, the dream turns out to be a nightmare. But there were expectations of a reformist budget, given that Chidambaram belongs to the original Brahma-Vishnu-Maheshwara of reforms. That image may not be a very good one though, because it suggests that one of the three will destroy reforms.
The image of 2004-05 was 'Main Hoon Na', suggesting that as long as Chidambaram was around, reforms were safe. However, the image of 2005-06 is 'Hum Hain Na', like the ICICI ad. The transition from the singular to the plural is significant, because there is the constraint of the common minimum programme, which has now become like the Bible. Everyone swears by it, and do notice that an anagram of CMP is CPM. Here is a quote from a budget speech. 'Honourable Members will have many opportunities this afternoon to test my commitment and they will find that the CMP has provided the foundation and set the agenda for this Budget.'
That is not a quote from 2005-06. It is actually a quote from the 1996-97 budget speech. There is nothing new under the sun. The CMP constrains what a finance minister can do. However, one should be careful in using the CMP as an excuse. Because if constraints are appropriately defined, every silly policy can be interpreted as sensible. Having said this, a budget is nothing more than an annual financial statement of the Central government's revenue and expenditure. But in practice, every budget has four components ' a macro-review of the economy, policy announcements, statements on expenditure and taxes. Since expenditure is largely determined exogenously by the Planning Commission and finance commission, among other things, a budget should focus on taxes. The macro-review is set out in Economic Survey.
Constitutionally, there is no requirement for a survey. The constitutional requirement that the finance minister should describe the economy has become the survey. It might be argued that the survey is essentially restricted to North Block and is thus an economic statement of what should be done. But because the budget has to take into account other pressures, it is a political statement of what can be done. Historically, the survey's descriptions and the budget's descriptions, particularly on the reform agenda, have sometimes varied. This year, the two are closer together. There is good news on the macro-economy, although barring inflation control, there is little the United Progressive Alliance government can claim credit for. Most of the good news is because of the economy's resilience and growth momentum. However, two questions remain. First, what can be done to ensure that 8-per-cent-plus gross domestic product growth is sustained' (The 2002-07 tenth plan's target is 8 per cent, although the CMP mentions 7 to 8 per cent.) Second, what can be done to ensure that growth becomes more equitable and broad-based' In simple terms, the latter is indeed the CMP's agenda. For both, implementing the reforms agenda becomes important. There will be reasonable agreement on the reforms agenda ' agriculture and the rural sector (public investments, credit, insurance, rural infrastructure, land markets), infrastructure (power, drinking water, irrigation water), tax reform, legal issues (including entry/exit mentioned by the survey), small-scale industry, fiscal consolidation and revamping of government finances, public sector units and foreign direct investment (highlighted by the survey).
However, how many of these are under the purview of the Centre' To the extent that they are under the purview of the Centre, how many are under the purview of North Block alone' And to the extent expenditure is needed, how much has to be done by the government'
The 2005-06 budget is like a Keynesian budget, Keynes having become equated with state intervention. Keynes is supposed to have said that people should be employed to dig ditches (holes), even if there is no need for these. Because there is no need for these, they can be covered up later. But in the process, because people are employed, there will be a growth stimulus and some employment. Actually, Keynes said nothing of the kind. The quote from his book, General Theory of Employment, Interest and Money (1936), on digging holes is completely different. The digging holes idea is more an interpretation of what Keynes might have said.
However, there is something that Keynes did actually say. This is relevant for the budget's advocacy of government expenditure and the fringe benefit tax and withdrawal fine. 'Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.'
Take government expenditure. The survey argues that government expenditure in physical infrastructure is inefficient, non-transparent and non-accountable, and thus argues for private sector involvement. But, in the same breath, it argues for government expenditure in social infrastructure, without explaining how it has been demonstrated that government expenditure in social infrastructure will be efficient and how there is market failure in the social sectors when there is none in the physical sectors. Nor is an important distinction made between government financing and government provisioning. The two are quite distinct. Indeed, we have improved on what Keynes said. In countless government files, there are roads and wells that have not even been dug and schools that have not even been built. They only exist on paper.
Whenever such government schemes are announced through the budget, most people applaud. This year is no different, although what has been allocated is a bit of a joke. Take one example. There is a target of bringing 3 million hectares of land under micro-irrigation by 2007. The budgetary allocation is Rs 400 crore. The Planning Commission's estimate is that for two years, Rs 10,500 crore will be needed. This is just one example. Notwithstanding such grand schemes, the 2005-06 has increased overall expenditure by only 1.69 per cent. Certainly, lip-service is also paid to the idea of delinking outlays from outcomes. The backward regions grant fund decentralizes expenditure to 170 backward districts and involves panchayati raj institutions. The Bharat Nirman idea has physical targets.
Central subsidy for agro-marketing infrastructure, grading and standardization is linked to the repeal of the APMC Acts. NGOs, self-help groups and civil society are involved in micro-finance, micro-insurance and knowledge centres. One reason for there being no greater expenditure is the Fiscal Responsibility and Budget Management Act, which requires 0 per cent revenue deficit/GDP ratio in 2008-09 and 3 per cent fiscal deficit/GDP ratio. In 2005-06, the estimates are of a 4.2 per cent fiscal deficit ratio and a 2.2 per cent revenue deficit ratio.
Even if one ignores the fact that the projected 30.06 per cent increase in personal income tax revenue and the 33.66 per cent projected increase in corporate tax revenue are impossible, the deficit targets for 2005-06 imply that the 2008-09 targets have gone for a six. That apart, there is fudging of the 2005-06 numbers. Let's ignore the details. But the fiscal deficit/ GDP ratio in 2005-06 is more like 5.5 per cent. That leaves the tax proposals, which have been discussed ad nauseam by everyone. And the policy announcements. Thankfully, this budget has few big-bang policy announcements. Those are best done outside the budget.
What happened to the Industrial Relations Act announced by Yashwant Sinha with a lot of fanfare' What happened to recommendations of the expenditure reforms commission, also announced by Yashwant Sinha with a lot of fanfare' Indeed, if you scrutinize this year's budget, you fill find that the number of Central government employees is expected to increase from March 2005 to March 2006, including 14,527 in the railways. In this year's budget, FDI (mining, trade, pensions), de-reservation of 108 SSI items, subsidy (food, fertilizer, petroleum) are only mentioned. No announcements. Nor is there any credit for disinvestment receipts which, in any case, will go into a separate fund for restructuring PSUs. Why offer Rs 14,040 crore of equity support and Rs 3,554 crore of loan support to PSUs through the budget'
This wasn't a dream. But because of the fringe benefit tax and the banking transaction tax, you might wish that it had been a dream.