Debating India


State of the fiscal Union

Monday 27 February 2006, by PATNAIK*Ila

How significant are the numbers and policy statements that will bind the finance minister’s budget speech this week? After all, this year the “budget buzz” is almost missing, as no major tax reform is expected. So should one just gloss over this annual parliamentary practice? Not at all.

There is more to the budget than meets the eye. The budget is supposedly about the taxation and expenditure of the government. But, over the years, the budget speech has evolved into a much more important moment. The budget speech specifies to the country a workplan of the government for the coming year. This facilitates decision-making by weak governments, and lends itself to structured monitoring. The speech has become something far more than a narrow tax and spend plan of the government for the year ahead. In the framework of our democracy and its coalition politics, this is a welcome metamorphosis.

The constitutional role of the finance bill is well defined and limited. For the government to tax citizens, or to spend, the “approval” of Parliament is required. This leads to the simple structure of a budget speech which introduces the finance bill, followed by discussion in Parliament, and then a vote. In the early years in Indian Parliament, the budget speech stuck to this straight and narrow.

The significance of budget speeches appears to have begun with Manmohan Singh in the budget speech of July 1991, which announced India’s economic reform. On the one hand, in 1991-1993, the core business of taxation and expenditure involved dramatic changes, since the larger process of economic reform required major changes to income tax, excise, customs duties and expenditure patterns.

All through the 1990s, weak prime ministers grappled with the problem of obtaining coherent policy-making from a fractious bunch of ministers and coalition partners. In this context the budget speech has evolved as a setting for behind-the-scenes negotiations between the PM, FM and cabinet about the major activities of the coming year. It has become a commitment device whereby all ministries are bound by the budget speech promises.

Yashwant Sinha, when he was finance minister, was often criticised when promises of the budget speech were not kept. These would often be tasks for which other ministries were responsible. In response, he started a system of tracking the implementation of every sentence of the speech. After the speech, finance ministry staff were required to strip the speech down to the hard content of every sentence, and track the implementation of that sentence through the year. It has now become a norm to present in Parliament the status of previous year’s promises with every budget document. When Chidambaram presents his budget on February 28, 2006, he will also release the report on the status of implementation of the speech promises of February 28, 2005.

In this way the budget speech has evolved into a workplan for government for the coming year. It performs a key role of making a statement to Parliament about what the state will do for the coming year. This improves the transparency of government. Every sentence is interpreted in a legalistic fashion. Every ministry in government is pressured to deliver on the work that was promised in the budget speech. The typical joint secretary in government has a choice of doing more work than was promised in the budget speech, but he is pushed to at least deliver on the work that was promised in the budget speech.

In earlier years, budget speeches could make a mark by cutting tax rates. But today with much lower rates, the headroom for this has significantly subsided. A finance minister can no longer play to the gallery by lowering rates. The focus has, hence, increasingly shifted to broader issues of economic reform. Hence, we may expect future budget speeches to focus even more on the broader workplan for the year, and even less on taxation.

The budget speech often accurately describes the realm of what is possible, given the government’s political constraints. When labour reform disappeared from the NDA’s budget speeches, it was understood that the NDA government would no longer be pursuing this agenda. Or this year, if a disinvestment target is missing in the budget speech, it will indicates that the UPA government does not expect to come to an agreement with the Left on the issue of disinvestment.

Budget speeches have also evolved as a mechanism for keeping up many kinds of appearances - often populist in essence. Finance ministers probably make a mental list of MPs and try to get a sentence or two that presses the buttons of everyone present in the room. Budget speeches of the UPA are riddled with phrases which please the ?old Congress’ or the CPM variety socialism. Various small schemes that can have little nation-wide long-term impact get announced in this process. This should be seen as the cost of democracy where the cost in terms of the actual spend is not very big, but it gets the government the necessary support to get the budget passed in Parliament.

Another element that shapes the budget speech in India is the pressure by the media for a budget that makes progress on economic reform. The budget speech is judged by hundreds of newspaper and TV commentators, and any finance minister would like to be praised by them. The media cares about somewhat different issues as compared with politicians. There is greater support for economic reforms here, on the core issues of a small state, a greater role for the private sector, flexible markets, and globalisation. Every government seeks to sell to the private sector, to domestic and foreign investors, by showing a positive vision of economic reforms which will incite greater investment in India.

The puzzle for the budget speech, then, consists of cobbling together consensus in cabinet on economic policy, taxation and expenditure. This consensus should make it possible to promise a sufficiently exciting workplan for the coming year, so as to put out a message that India is making progress. Simultaneously, there have to be sentences which pander to specific constituencies and keep the political base satisfied. Purists may hanker after a terse taxation and expenditure speech. But that would be missing out the big picture of the role that the budget speech has now come to play in Indian politics and economic policy formulation. It may the finance minister making the speech, but it is no less than a state of the union address with the backing of the entire cabinet and the prime minister behind it.

See online : The Indian Express

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