The Hindu : The budget and economic reform

Online edition of India's National Newspaper
Tuesday, Feb 25, 2003

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The budget and economic reform

THE CONNECTION BETWEEN the budget exercise and economic reform is stronger than what is generally realised. While economic orthodoxy would shun any interpretation of the budget document beyond what it is — a statement of Government receipts and expenditures — a much larger opinion has valid reasons to hold a contrary view. The Finance Minister's budget speech has traditionally highlighted policy issues as well. In the reform era beginning the 1990s that has become more pronounced. Today it is doubtful whether it is possible to segregate the pure fiscal aspects from the several policy statements that accompany the budget papers. Consequently, an awareness has been created that the budget documents and the Finance Minister's speech are an occasion for unveiling economic policy measures, many of them going well beyond their obvious fiscal dimensions. Public interest has therefore been as much on anticipating the new policy stances as on say specific tax proposals or exemption limits. Economic liberalisation can be successful only if there is a wider participation in the economic process including in the decision-making. Demystification of public finance and policy is a salutary goal in a democracy. The budget speech and the documents have rightly come to be regarded as the most complete articulation of the macro-economic policy.

In many ways, there has been a carry over of the reform agenda into the traditional fiscal exercise that the budget has been. For this year the most hotly debated topics on the budget eve all have a reform connotation. Taxation, a traditional arm of the fiscal policy, has been in the news not merely because it is a revenue-raising exercise. The Kelkar proposals are about simplifying the tax structure, doing away with the numerous exemptions and concessions, and toning up the administration — in short, reforming the tax system. Just days before the Union budget, there are contradictory statements as to whether the proposals would be accepted in full or partially or whether they will merely be signposts for a future overhaul of the tax system. Yet, it is clear that the Kelkar committee has well and truly succeeded in incorporating the reform agenda into fiscal dialogues. That has been possible because of its comprehensive vision for direct (including corporate) taxes and indirect taxes and its success in dissemination of the information. The latter has been no mean achievement and its impact is to be measured in an even larger context than what can be visualised on budget-eve. For instance, there is an inevitable pain in the early days of any economic reform that has to be both justified and rationalised. The Kelkar panel's initial proposal on doing away with tax concessions on housing loans was an attempt at removing the subsidy element, which stood in the way of a less expensive housing loan mechanism for all. Although the proposal has been diluted since, it is clear that the economic interests of several sections have been clearly delineated. It should be possible for the Government to target specific interest groups more purposefully, a message very relevant to both the reform agenda and the budget process. Both will have to simultaneously find answers to intractable problems such as the burgeoning fiscal deficit.

The public sector disinvestment process is part of the reform agenda while figuring prominently in the budgetary exercise. Although this year too the financial targets set for it will not be met, the budget will surely step up efforts to garner support for the next phase of the programme in several ways. Moves to spruce up undertakings under Government management will gather pace. The regulatory concerns of the newly opened up infrastructure sectors will be addressed. While those and other objectives of a reform agenda can be met only by simultaneously bringing about legislative changes, it is clear that the budget will be the focal point for many such announcements. The Government can demonstrate its commitment to liberalisation by simplifying the budget exercise even further.

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