New Delhi: The Congress-led United Progressive Alliance (UPA) demonstrated political acumen by increasing fuel prices last week, ahead of the budget due on Monday. By doing so, finance minister Pranab Mukherjee ensured that his fourth budget is shielded from the political criticism usually associated with such a decision.
It has to be seen if the minister will reveal similar policy acumen, particularly a sensitivity towards fiscal reform, when he unveils the budget. Mukherjee gave glimpses of that acumen when he began the process of rationalizing direct tax rates in his last budget 25 years ago. Based on the signals sent out by the Economic Survey, there is reason to believe he will do an encore.
Smart moves? Pranab Mukherjee at his office on Sunday.
Not many would be aware that he was instrumental in triggering the debate, towards the end of his last tenure as finance minister, about effecting a structural change in fiscal policy, including the then out-of-date tax structure, to bring it in line with the changing needs of an economy that was beginning tentatively to transform itself.
Even fewer would remember that V.P. Singh, who replaced him as finance minister after Rajiv Gandhi took over as the prime minister, then took the process forward and formally articulated the idea in his 1985-86 budget speech.
The common link between the two politicians was then chief economic adviser Bimal Jalan, who went on to write one of the most seminal, but now forgotten, financial documents: The Long-Term Fiscal Policy. It is stunning for its vision and prescience in policy prescriptions, especially when one looks back at it with the advantage of hindsight. To elucidate, it proposed the idea of Modvat (modified value-added tax), the forerunner of VAT and the much-awaited GST, or goods and services tax.
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The document, not easily available today, made three broad arguments. First, it drew a link between growth and poverty eradication. It argued that it was not possible to manage poverty alleviation at the desired pace unless the country grew at a rapid pace.
Second, it made a case for accelerating the process of overhauling the tax structure, a process set in motion by Singh in his 1985-86 budget—the simple objective being to reduce rates, withdraw discretionary exemptions, widen the tax base and dramatically improve compliance.
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Third, it made a strong case for dramatically changing the underlying philosophy of budget-making. It argued that annual tweaks to tax laws should be abandoned. Instead, the rates should be frozen for five years. If any change was indeed required, then it should be put out as a policy proposal for debate as early as September of each year and introduced in the next year’s budget. It essentially made a case for removing the hype and instead focusing the budget on the oft-forgotten principle of expenditure management.
Now, fast forward 24 years.
The Economic Survey 2008-09, the annual document that serves the dual purpose of doing a post-mortem of the previous year and laying down a blueprint for future policy action or reform, was presented to Parliament last week. It revived the linkage between poverty eradication, growth and economic reforms: “(Growth) is critical to generate the revenues needed for meeting social welfare objectives.” The survey further argued that the only way growth could be revived to desired levels was by pursuing second-generation economic reforms. In the process, it provides a clever political justification for reforms. It is a powerful argument that political critics will find difficult to disentangle without running the risk of being projected as anti-poor.
Since it is a document brought out by the finance ministry, it is safe to assume that Mukherjee oversaw it. Add to it the fact that the Congress, as the 15th general election demonstrated, has figured out a formula to package reforms in a way that they are acceptable to the people. So it would be fair to expect the government to press on with the successful template.
Now, the issue is whether the finance minster will pursue the two other objectives of the fiscal policy document set out a quarter of a century ago. One would argue that there is a crying need to do so, and it would be the single biggest reform signal that the finance minister could send.
Mukherjee has the basis to do so. The outline of a direct tax code, which would, among other things, seek to freeze tax rates and simplify tax laws, is, thanks to the efforts of his predecessor, P. Chidambaram, ready. At present, the annual Finance Bill, which details the tweaks to tax laws, sometimes runs over 100 pages. Devoid of the hoopla, with analysts, stock markets and journalists spending a good part of the period preceding the presentation of the budget speculating on the contours of the changes, everybody, including Parliament, can focus on expenditure management.
Under the Constitution, the government cannot spend money without the approval of Parliament. It requires to be voted on; the logic is to allow elected members of Parliament (MPs) to oversee government spending. But few would realize that MPs, thanks largely to decades of fiscal ruin, effectively have the right to influence only about a quarter of the annual spending. The rest of the money is pre-empted by spending on defence, interest payments, and wages and salaries of government personnel.
So clearly, there is the wherewithal and the circumstance to expect some vision statements from Mukherjee. It will be difficult to hazard whether he will do so eventually; after all, budget-making is the prerogative of the finance minister. But there are enough signals to foster optimism. Mukherjee so far has followed the rule-book. He has deliberately dampened expectations; not only has he not played the field, as it were, but he has also periodically reminded us that the economic circumstances are tough and warned us not to expect a recovery till after the third quarter. As a seasoned politician, he knows the drill only too well and there is reason to believe that the budget will be a pleasant surprise. It is our bet that it will eventually be a budget for Bharat.
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics.
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