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Why the Budget won't do anything for you

Palani and Chidambaram are two famous temples of Tamil Nadu. Incidentally, it is also the name of the honourable Finance Minister of India.

By some strange coincidence these two temples symbolise the Indian economy. And that requires some elaboration.

According to Hindu scriptures, Lord Muruga, (Lord Karthik to some of readers) -- after a tiff with his parents -- proceeds to Palani. Being in a foul and unrepentant mood, the Lord refuses to be cajoled back into the family. Accordingly, and as a mark of protest to the perceived injustice meted out to him by his family members, he ends up dressed only in his loincloth at Palani.

To me, in a way, that represents the poor of this country. And by a remarkable coincidence, the Palani temple is managed and controlled by the HR&CE Department of the Government of Tamil Nadu symbolising the need for direct government intervention.

In direct contrast, Chidambaram, another grand temple in Tamil Nadu epitomises the brave new, resplendent, globalised India. It is an India that is keen on taking on the best in the world, not only within India but also outside.

It is this India that seeks lesser intervention -- read liberalisation -- from the government and the stranglehold that it has on the Indian business even seventeen years after the initiation of the new economic policies.

Needless to emphasise, this temple at Chidambaram is one of the few temples that are not within the control of the HR&CE Department of the Tamil Nadu government. And it is here that the Lord is worshiped in both the abstract and absolute forms representing various sectors of the Indian economy.

Both 'Palaniappa' and 'Chidambaram' have diverse expectations from the government and remain a study in contrast.

If Palaniappa wants more of government, Chidambaram wants less of it. If Palaniappa wants increased Budget allocations, Chidambaram wants direct policy interventions. If Palaniappa is not bothered about higher allocations leading to increased fiscal and revenue deficits, Chidambaram is worried about increasing policy deficits.

Put pithily, managing this contradiction is crucial to deliver a 'balanced' Budget -- a task so onerous that not many finance ministers, including the current incumbent, have been able to succeed.

The constraints of the finance minister
Before we proceed further, let us broadly understand the constraints of the finance minister in preparing the Budget. Contrary to the popular belief, finance ministers usually do not have any great elbowroom to play Santa Claus.

Nevertheless this unjustified expectation is caused primarily by the hype created by the media and encouraged implicitly by the finance ministry. This is further accentuated by the fact that the entire budgetary process is accompanied by undue secrecy.

What else would explain the fixation (caused by extreme anxiety?) of virtually the entire country to the template, tepid and tedious Budget Speech of successive finance ministers for well over two hours, that too without any commercial breaks?

Nevertheless, the best-kept secret of the entire budgetary process of the Government of India has been to rob Paul to pay Peter. Sometimes finance ministers have even robbed Paul to pay Paul without any let, fear or sense of guilt!

This Budget will be no exception.

To understand what has been stated above, a brief reflection of the broad budgetary figures (as I expect in Budget 2008-09) is essential. These are laid out in the following table along with the accompanying remarks. Budgetary allocations are crucial for the poor of India who believe that it is this allocation that is going to alleviate them from misery.

To match this expenditure (explained in the table below) of Rs 710,000 crore (Rs 7,100 billion), the net revenue of the government of India including the incremental revenues assumed on account of the change in the tax structure (which are usually a few thousand crore only) can be expected to be only Rs 560,000 crore (Rs 5,600 billion), leaving a gap of 150,000 crore (Rs 1,500 billion).

Expenditure Rs crore Remarks
Interest 175,000

The FM can do very little about that. At best he may not raise the interest ates on government savings and hope that Indians would park their money anyway with the government -- all for a want of an alternative.

Other Non-Plan expenditure (Revenue) and includes the expenditure on health, education,
irrigation
250,000

This is basically the provision made in the Budget to run the Government. Yes, government is a costly exercise. And under this head the government meets the expenditure on account of salaries and wages to its staff including defence personnel, Central Police, grants to states and UTs, deficits on account of postal services, pensions and of course subsidies.

And every expense here is a holy cow with a vested interest lobbying for enhanced outlay for a specific sector.

Non-Plan Capital -- usually defence purchases and not related to direct development 50,000 Again nothing much is within the control of the FM. One small mercy for the FM -- mostly capital expenditure for the defence is not met and to that extent the fiscal deficits are lowered.

Put differently fiscal orthodoxy is attained not by limiting revenue and wasteful expenditure but by curtailing capital expenditures, especially that of defence. In the process aren't we compromising on the national security?
Plan Revenue 200,000

This is where FM's try to be innovative and end up with giving us old wine in the old bottle.

Usually this contains the social sector spending of health, education and other related fields. But what is forgotten here is that the FM can only hope to allocate money. Getting the bang for the buck is entirely in the hands of his colleagues, more specifically the bureaucracy.

Quite often in the past the FM has conceded that outlays do not naturally and automatically translate into outcomes. And to paraphrase the FM himself, let me state that unless the leaking taps are fixed; there is no point in applying more water pressure.

Plan Capital 35,000

It is the most crucial aspect of the Budget. By the time this is addressed, the FM's usually do not have the money, energy or the inclination to deal with this crucial subject. Significant step-ups in the allocation for the Plan capital are crucial to determine the growth of India's future. And who cares about the future when the elections are merely a few months away?

No wonder, it is with these meagre allocations that the FM has to visualise a developed India. If central government Budgets were a fiction, this is eminently possible!

TOTAL 710,000  

This represents the proposed borrowings of the government for the next year, technically called as the fiscal deficit.

Readers may well calculate the incalculable harm to the economy should the government continue to borrow at these levels year after year. On the one hand, while the government debt would swell substantially, on the other the quantum of money available in the domestic economy for investment purposes is to that extent restricted.

What is crucial and remains virtually un-debated by analysts and economists is that the borrowing of the government of India is barely sufficient to meet the interest outflows.

Further, given the pattern of expenditure and pressures on the government's finances, the finance minister may finally end up providing a mere 5 per cent (yes, a mere 5 per cent representing approximately Rs 35,000 crore -- (Rs 350 billion) towards Plan Capital.

It is this expenditure that is of relevance to the common man for it is using this expenditure that the finance minister proposes to take India forward. Naturally, this meagre allocation of resources to the Plan Capital robs the Budget of their potency.

Increased outlays on the revenue account have no meaning without substantial increase in governance as much as budgets have no meaning for every Indian till Plan Capital Expenditure is substantially stepped up.

On both counts the Budget will fail us.
What is further worrying analysts is that the United Progressive Alliance government may well accept the recommendations of the 6th Pay Commission. Experts have pointed out to the fact that this has the potency to detonate the fiscal position of the government of India as well that of the states.

It is expected that the pay package to our bureaucracy and with it to the public sector unit staff, government-owned banks and state government employees could well be in the region of Rs 100,000 crore (Rs 1,000 billion).

And all these money for getting third-rate governance!

And consequently the larger malaise would remain unattended

Now coming to the expectations of the global India (that which I earlier explained as 'Chidambaram'). These are not restricted merely to allocations. Nor are these even about fiscal deficits. What Indian Inc is worried about is the carry over of policy deficits built up over the past several years that are beginning to plague the Indian economy.

Divestment, liberalisation of labour laws, controlling subsidies, lack of primary and secondary education leading to shortage of skilled personnel, increasing foreign direct investment flow in certain crucial sectors of the economy, stepping up expenditure on infrastructure, effectuating the public-private-partnership model, providing counter-cyclical policies to deal with the global slowdown, in general, and the American recession, in particular, stability in tax laws, and irksome provisions in tax laws (to paraphrase Australian cricketer Mathew Hayden -- that obnoxious weed called Fringe Benefit Tax, for instance) that seek to hinder business rather than enhance revenue for the government are some of the legitimate expectations of India Inc.

Experts, analysts, economists and commentators have been filling every space available in the media for the past several weeks suggesting what the finance minister should do and what he should not do. Their prescription does not warrant a repetition once again here.

But it does not take a seer to guess that the Budget would skip, skirt, duck or even trivialise most or, perhaps, all of these well-intended suggestions, partly because of resource constraints -- as explained above -- and partly because of political constraints.

And as a correction to all financial, policy and intellectual deficits, we may be privileged to be treated to an exotic Kural written by the great Tamil savant Thrivalluvar approximately 2,500 years ago.

Of course, one need not also mention the Budget would be presented in Queen's English and read out in the best of dictions.

Happy Budget 2008-09!

Published at: http://www.rediff.com/money/2008/feb/28budget2.htm

Last modified on Sunday, 07 July 2013 07:36

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