The math of the Union budget
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The frenzied anticipation of the Union budget in the Indian media has faded. Now it is time for post-mortems, like this one. This one looks at the mathematics of the budget: its arithmetic, its geometry, and its algebra.
First, the arithmetic. Do the numbers add up? What will be the fiscal deficit? It will be 3.2%, according to the budget. The debate on whether or not the Union finance minister should have stuck to the 3% goal at a time when the economy needs a nudge will continue. With the effects of goods and services tax and demonetization on government’s finances uncertain, the future will tell whether or not the revenue projections are correct.
If arithmetic is the counting of the trees, geometry is the shape of the woods. The finance minister listed 10 thrusts which shape the geometry of the budget. Together, they intend to nudge the economy into a better shape. The need to focus more directly on the creation of more jobs and livelihoods has been accepted. The thrust of the budget is to strengthen the bottom of the pyramid, focusing on the poor and underprivileged, farmers, the rural population, and youth. Small enterprises and labour-intensive sectors will be promoted.
Some companies and economists were disappointed with the budget. They wanted the finance minister to give more incentives to the top and reduce corporate tax rates to attract investment: to pursue the trickle-down model of economic growth. Some were also critical of the attention to small enterprises. They say the government should focus on creating more “good” jobs—such as those in large factories and in the large IT companies.
The trickle-down model of growth has been tarnished around the world. The wealth of those on top has been increasing much faster than benefits to people at the bottom. Inequalities within countries, especially India, are at very high levels. Populism (Donald Trump) and socialism (Bernie Sanders) are on the upsurge, even in the US. Moreover, the era of the large-factory model of formal employment is passing. New, Internet-driven business models and automation are altering shapes of enterprises and patterns of work in the manufacturing and service sectors. India should grab the future, not hold on to the past. The geometry of the budget hopes to nudge changes in the geometry of the Indian economy towards a more inclusive economy for people.
Algebra combines “x”s and “y”s—different types of factors—into one equation. Allocation of budgetary resources is one part of the solution to improve the shape and size of the Indian economy. Effective implementation is the other part that produces outcomes from allocations. Implementation is improved by strengthening institutional capabilities at many levels of the system, bottom to top.
Economists know that institutional capabilities matter, and that the quality of implementation—its speed and precision—improves the productivity of resources. Unlike financial and physical resources, institutional capabilities are not easily quantified. Therefore, they are not included in the arithmetic of budgets.
The finance minister has included “public service” as one of the 10 themes in the geometry of the budget, and also pointed towards stronger institutions in the financial sector. Thus, some “y”s have appeared along with the many “x”s. Nevertheless, a criticism of the budget is that it has done too little to strengthen institutions. For example, there is no reference to the urgency of implementing the comprehensive administrative reforms that were recommended by the Second Administrative Reforms Commission in 2009.
The devil, they say, is always in the detail. The finance minister’s headline explanation of the theme of public service is, “Effective governance and efficiency of service delivery through people’s participation”. Most of the details are about the “efficiency of delivery of (government) services”, with the use of IT, etc. There is too little about “effective governance through people’s participation”. There is great need and great scope for improving the efficiency of delivery of government services with IT. The vigour with which the government, led by the prime minister himself, is focused on this is most welcome.
However, the government must do much more to improve the capabilities of local governance institutions. People participate directly in the governance of their affairs through local institutions. Effective local governance ensures that results are produced on the ground to fulfil the needs of people. The 73rd and 74th amendments to the Constitution, for strengthening the roles of local governance institutions in villages and cities, were passed by Parliament 25 years ago. Since then, there has been no more than lip-service to increasing their capabilities. Central and state governments bypass them, with the excuse that there is an urgency to get results.
Until people’s institutions on the ground are empowered with financial resources, and simultaneously trained to deliver, they will not develop their capabilities. The finance minister should allocate more resources for building the capabilities of local institutions. The amounts required are very small and would hardly change the arithmetic of the budget. However, they will improve the geometry and algebra of the economy, to create an economy for the people with governance by the people.
Arun Maira served in the erstwhile Planning Commission.
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