Brainstorming for the next budget

By S. Swaminathan

The Union budget for 2001-02 is about to peter out with most of its projections turning awry. One more instance of a budget embodying a coherent framework of sectoral initiatives but coming unstuck owing to a patent failure of implementation! Mr. Yashwant Sinha's budget last February was indeed hailed by India Inc. as a new flash of illumination in a sable climate of economic slowdown but what the captains of industry had certainly overlooked was the clear absence, in the budget package, of a stimulus for mass consumption demand. In the event, the reinforcement of a demand recession by investment stagnation proved an intractable obstacle to a semblance of revival. The slowdown in the U.S. economy and the post-September 11 disruptions in the global economic rhythm have only added to the gloomy outlook for the Indian economy. It is against such a demoralising backdrop that Mr. Sinha and his senior colleagues at the Finance Ministry have to search for the leading contours of a new budget exercise.

Fiscal expansionism the magic key?

If, through a large part of the decade of reforms since 1991, the country's successive finance ministers struggled in vain to rein in the excesses of fiscal deficit, there has been a distinct change of mood over the last two years against the all-too- obsessive concern over the level of the fiscal deficit without regard to the slippages in public investment in infrastructure and social sectors.

Superficial though it would seem, a Keynesian advocacy of deficit spending has become somewhat respectable in the policy establishment as against the ``Washington Consensus'' of mechanical fiscal rectitude. Granted that Government spending continues to serve as a prime-mover in the crucial segments of the economy, especially agriculture and in the rural sector, the effectiveness and productivity of such spending, seems to be in inverse proportion to the proximity of the spending agency to the intended beneficiary community.

With all the massive corruption at the State level, public spending seems intriguingly less wasteful at the State level compared to the level of the ``faceless'' Government of India level! The argument for accelerated devolution of funds in favour of local bodies and grassroots organisations appears to be more compelling despite cynical stories about corrupt elements in the new Panchayat Raj institutions!

The challenge for the next budget would, therefore, be, how to raise the level of public expenditure beyond the Rs.4 Lakh crore level, pushing capital expenditure above the Rs.1 Lakh crore threshold and at the same time ensuring that the State governments and their local bodies undertake the spending projects for a more prompt delivery.

All the customary grind of pre-budget consultations may yield little but Mr. Sinha should set aside hoary sensitivities and seek a ``no-holds-barred'' counsel from the chief ministers on what they would expect from the Union Budget for 2002-03. Heresy pure and simple?

Reforms grounded in the States

Mr. Sinha has been prefacing every budget of his with what has proved to be empty rhetoric about the so-called ``Second generation reforms''. Last year he made much play with the reforms in the agricultural sector hinting at a major reform of food procurement through decentralisation and the removal of the anomaly of Central food mountains.

Call it the cruelty of coalition politics, old addiction to food subsidies without the political courage to weed out the well-to- do from the undeserved benefits of food subsidies or what you will, the syndrome shows no sign of weakening. Power sector anomalies continue to mock at the reforms agenda. Endless cajoling of the States and even the promise of financial bail-out have not helped liberate the State governments from the follies (and political temptations) of mismanagement and worse, of power utilities. The fact is that economic reforms have lost ``all ignition''. It is for the States to give them a new lease of life but with financial bankruptcy plaguing them on ``a hand-to- mouth'' basis, where will the States get the wherewithal to put through ``revenue-losing'' reforms? Should not the Union budget address these issues even if this is not part of the ``Conventional Wisdom'' of budget formulation?

Enlarging the tax base

All the lobbies, which do the hectoring about tax reforms to the Finance Minister, only talk about ``tax reliefs''. But then, over a decade of economic reforms, while tax rates have come down drastically, the jungle of tax exemptions (with all the leakages) remains as impenetrable as ever.

There is no way that tax revenues (especially direct tax revenues) can go up commensurate with the economic well-being of people unless tax exemptions premised upon responsible social behaviour are eliminated without ceremony. How much tax revenue is lost to the Government through ``unjust enrichment'' by the corrupt elements in the tax enforcement regime?

Ending window-dressing

Fiscal experts call it ``poor markmanship'', this cultivated habit of overestimating revenues and underestimating/overestimating expenditure in a budget. The practice cannot be ended without the Finance Minister scrupulously eschewing imprecise or tendentious estimates of expenditure, revenue, and even GDP growth forecasts, inflation expectations and so forth. Much as the inclusion of disinvestment estimates in the budget needs to be discontinued, a liberal provision for a social safety net, for providing relief/compensation for workers affected by retrenchment, ought to become an integral feature of the new budget.

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