Once upon a time, when the biggest investor in the country would announce its investment and expenditure outlays every year, it would determine the national growth trajectory and set the market sentiment.

And why not? The sheer weight of numbers gave the Union Budget the clout that it had. Public investment was the single biggest investment in the country—double of private corporate and household investment put together.

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In this phase, lasting right until the mid 1980s, there was little policy angle to the budget, even though policy controls proliferated in the economy. At best, the budget made granted exemptions to indicate policy preference.

Then came a time when, more than numbers, what gave the Union Budget its deserved primacy over other government documents was its policy announcements. Starting in the latter part of the 1980s, the budget took it upon itself to announce all major economic policy changes, even though many of these could have found other forums.

This was a time of big bang changes. Within the space of four budgets, the economic regime and the nature of economic management of the country shifted radically. Strangely, the budget itself continued to operate within the framework of a closed economy with a pre-reform mindset. Indeed, it has been so till date.

Over time, the big bang budgets of the 1990s nibbled away at the very core of the budget—its numbers. The reversal is startling:

Among other things, the rate of public investment (ratio of public sector gross capital formation to gross domestic product, or GDP) has come down from 12% in the pre-reform era to around 6% in the post-reform era. On a net basis, it is down from 8% to 4%.

Against this, the rate of private corporate investment (as a percentage of GDP) is up from 3% in the pre-reform period to 15% after reforms. On a net basis, it is up from 2.5% to 12%. The rate of investment of the household sector has increased from 6% to 15%.

By 2004-05, far from being the dominant investor, the public sector’s share of gross fixed capital formation was 22.5%—a full 1,000 basis points lower than private corporate fixed investments at 32.5%.

By 2006-07, the share of private corporate fixed investments was 40% higher than the fixed capital formation of the household sector. Meanwhile, the share of public sector fixed investment languished at 20%.

It might be argued that even a 20% share in capital expenditure is significant. The total capital expenditure last year was budgeted to be around Rs1.5 trillion. Of this, Rs92,000 crore is on the non-Plan side, which does not add any capacity in the economy—it works more to defray past loans as well as forward fresh loans to the state governments et al. Here, the budget’s role is that of a debt syndicator.

The actual capacity creating capital expenditure, or capital formation, is about Rs58,000 crore. To put this in perspective, this is just Rs5,000 per capita investment.

At the same time, the budget has also ceased to be a policy document. Most macroeconomic reforms have been announced separately and are at various stages of implementation. What needs to be done is by now well known. More reform action is now required from the state government budgets, which few people track.

What all this means is that fiscal policy has ceased to be the major lever of control. Instead, it is now monetary policy that has become the more powerful policy instrument.

If the budget no longer has the numerical muscle and the policy power to impose a “hard budget" constraint on the economy, the real challenge for the finance minister is how to reinvent it and make it relevant for today’s economy. The public expenditure policy underlying the budget has to be in line with the new realities of the Indian economy, be it in terms of new instruments of allocations, new sectors, or new growth centres.

In this context, what may well be needed is not a “hard" and “interventionist" budget of yesteryears, but a “soft" and “enabling" one. The word soft here doesn’t refer to a budget with sops; rather, one relevant to the creation and utilization of soft, and more specifically market, infrastructure. It should be a budget that doesn’t do, but enables doing by various economic agents.

The same approach is relevant for controlling inflation. Prices are not formed in the credit or money market, but in the commodity. Instead of distorting fiscal and monetary policy, the budget would do well to pay attention to commodity markets and to take steps to enable better distribution. On its part, monetary policy needs to strengthen the transmission mechanism of monetary policy actions rather than just raise rates repeatedly.

Haseeb A. Drabu is an economist, and writes on monetary and macroeconomic matters from the perspective of policy and practice. Comment at haseeb@livemint.com