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Budget: Say no to business as usual

Budget: Say no to business as usual
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First Published: Sun, Feb 20 2011. 08 25 PM IST
Updated: Sun, Feb 20 2011. 08 25 PM IST
Last week, at a panel discussion hosted by Mint in Mumbai in the run-up to the Union budget, a person from the audience opined that, given the present circumstances, part B (the section that deals with the taxation proposals/changes) be done away with such that the entire focus be brought to bear upon the first, but now often overlooked, part of the finance minister’s speech. A radical thought? But, is it so?
Coincidentally, a chance encounter a few days earlier with a serving government official who was crucially linked to the seminal budget of 1991 focused on the fact that some of the macroeconomic fundamentals—an out of line fiscal deficit and a burgeoning current account deficit on the balance of payments—underlying the present budget were startlingly similar to the crisis years of the early 1990s. Yet, the solution, he said, has to be different.
Taking the two conversations together suggests that the business-as-usual approach to the Union budget exercise has to be junked. Both individuals were in their own way flagging the altered circumstances of the Union budget and implying a radical rethink of perspective underlying budget-making that is a little over six decades old.
The size of the Indian economy today is about $1.7 trillion (Rs 76.84 trillion); it is credited to be among the fastest-growing economies in the world with an emerging middle-class population size that exceeds the entire population of the US; and, also the El Dorado for future foreign investments. It is now safe to classify India as a middle-income economy, which at the same time, however, struggles to fix basic development issues associated with rampant poverty. The rapid growth has ensured that revenue increase is on auto pilot and now the tax structure has to be structurally tweaked to reflect the new economic maturity.
The big focus now has to shift to part A of the budget speech, or the section that details government expenditure and policy pronouncements, among other things. Not only does government spending continue to be significant, it has, thanks to the shift to an entitlement regime effected by the Congress-led United Progressive Alliance (UPA), become a significant statement on political economy. It is apparent that the days of relentless mark-up in government expenditures are over. Just like Indian corporates have figured, there is a growing realization that there have to be better efficiencies in government spending.
This, however, requires some uncomfortable decisions— reordering expenditure patterns, growth versus environment and so on—for which you need a transparent political discussion. And the best place to do this is in Parliament (though the winter session suggests our parliamentarians think otherwise) and the budget provides a wonderful opportunity. At present, the debate that ensues after the presentation of the budget inevitably concentrates on the changes on the revenue side; expenditure proposals, often without debate, get Lok Sabha approval in the span of less than 15 minutes with a simply “the Ayes have it. The Ayes have it”.
Interestingly, the budget process was not conceived thus, but has gradually evolved into the present structure. The first Union budget, the eighth consecutive with a deficit, presented in 1947 by finance minister R.K. Shanmukham Chetty, happened in the troubled context of the partition of India and in an economy yet to recover from the aftermath of World War II. It focused entirely on these trying circumstances.
It was only later that changes in tax rates started to make their presence felt and the focus started shifting gradually. The first serious effort in this direction was by finance minister T.T. Krishnamachari 10 years later. The budget was peppered with a series of piecemeal changes—to quote a quaint reference: “The existing duties be raised so as to permit of sale of match boxes at 6 N.P. (naya paise) and 4 N.P. per match box of 60’s and 40’s respectively. The gain to revenues in full year by these increases is estimated at Rs 6.2 crores”—in indirect taxes, but was still very much an add-on to the main speech.
Interestingly, it was Jawaharlal Nehru presenting the budget in the following year who introduced part B as a formal addition to the annual ritual. Ever since, it has become a regular fixture and over the years has come to dominate the speech. In fact, very often the success or failure of a budget has come to be regarded, particularly in the media, as the dexterity the finance minister has demonstrated. The first real structural change was effected by Yashwant Sinha, when he moved the clock back on the budget from the customary 5pm to noon.
Going forward, the stage is set for more radical change. The new economy certainly needs a new handling. At the same time, the two seminal changes, the Direct Tax Code and the single Goods and Services Tax, promise to rewrite the budget process in an unprecedented way. While the former is already with the Parliamentary committee, on the latter the UPA is remiss on dropping the ball—though, it has made a belated effort and given us hope that change may be on the way. Once these two elements are in place, the need for a part B would cease to exist as the rates will be less prone to yearly changes.
So, the big question, a week away from the Union budget, is whether the UPA will seize the opportunity and relive the 1991 moment.
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at capitalcalculus@livemint.com
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First Published: Sun, Feb 20 2011. 08 25 PM IST