Just another budget day

Transparency eliminates need for lobbying. Non-transparency makes lobbying thrive. Media and business press need to create hype about the budget; that’s their bread and butter. But for citizens, had there been transparency, why should the budget be at all important? Sure, we want growth. That leads to jobs. However, what the budget does has little to do with growth. The facilitating environment for growth may require reforms. However, except the very early 1990s, since when has big-bang liberalisation resulted from the budget? If anything, those reforms happened outside the budgetary process. Leave out 1991-92 and 1992-93 and take stock of whether reforms promised in budget speeches occurred or not, particularly if they were reforms outside the financial sector, that sector being special because North Block controls it in many ways. The mapping is an embarrassing catalogue of defaulting on what may be called contractual obligations, which is why finance ministry has now given up the business of action taken reports (ATRs).

The much-vaunted outlay versus outcome exercise is headed the same way. Look at it differently. As citizens, we want public expenditure. Regardless of ideological predilections, most people will want public expenditure on schools, primary health centres, rural roads, electricity, drinking and irrigation water.

But if that’s the case, we should be interested in what state budgets do, not in the Union budget. The state is where the bang for the buck is in these, and this is also true of the outlay versus outcome exercise. If Central flagship schemes hit the iceberg of inadequate administrative capacity for delivery and sink like the Titanic, state governments are culpable.

Most aware citizens, including MPs, recognise high administrative costs of delivery associated with Central social sector schemes, and these administrative costs are a greater siphon than corruption. At least, among this aware set, there will be support for abolition of ministries like health, education, agriculture and rural development and channeling funds (grants or loans) directly to states and local bodies.

To get back to the point, the Central budget is an annual statement of the Central government’s accounts, meaning expenditure and revenue. On expenditure, anything between 85 and 90 per cent is given and can’t be changed in the short run. This is also revenue expenditure, though one shouldn’t drive the point too hard, since what is revenue expenditure for the Centre can be capital expenditure for a state. Those flagship and tug-boat expenditure proposals that MPs applaud in the budget speech aren’t why we are interested in the budget.

It boils down to revenue and that means tax revenue. There is a fiscal cum tax reform agenda, with or without the Vijay Kelkar recommendations. This recognises need for stable rates, with no variations and also accepts that tax policy is not the best instrument for pushing resource allocation in desired directions. Such attempts only lead to distortions. Had we accepted this agenda, we would have lost interest in the budget, since there wouldn’t have been year-to-year variations in rates. Unfortunately, FMs don’t accept this agenda either, perhaps because this agenda requires non-discretion and transparency and a loss in power and clout. Every reformer who is not in power becomes a control freak when in power. It is a myth perpetuated by the liberalisation discourse that reforms have removed discretion in tax rates. This is a proposition that is only partly true. Even in direct taxation (both personal and corporate), there may be some apparent stability in rates, but this is clouded by exemptions, surcharges and cesses. In indirect taxation (including customs), there may be some apparent stability in the Central rate for domestic taxes and the peak rate for manufacturing import duties, but there is plenty of arbitrariness around the Central rate for what goes by the name of VAT and below the peak import duty for customs. There are specific duties and exemptions, and service sector taxation makes the picture murkier, not to speak of things like FBT, dividend distribution tax and securities transaction tax.

One could argue this discretion is because of revenue compulsions. There’s a grain of truth in that argument, and down the years FMs in other countries have taxed all kinds of objects (beards, windows, urine) to raise revenue. But it is also probably true that North Block simply doesn’t want to let go. Quite often, questions are asked about the best FM since 1991 and the answer depends on criteria used to judge FMs. If the tax reform agenda of removing discretion is the yardstick, the two best FMs have been Manmohan Singh and Yashwant Sinha, the former for removing discretion in external indirect taxes and the latter for removing them in domestic indirect taxes. But the best FM since 1991 is yet to come. He/she will have the courage to stand up and completely remove discretion, announce stable rates for the next 20 years and also announce that year’s budget to be the last one. Seventeen years into reforms, we now need a budget to end all budgets. With an FRBM roadmap and a GST from 2010, perhaps it will happen soon.

The writer is a noted economist bdebroy@gmail.com