The Budget Dream

In the Indian economic context, the Budget is the word of God. It may fly in the face of accepted principle, it may signal an abrupt switch in policy. But it will be obeyed. As a result, good or bad, it always gives a severe shock to the system. A less abrupt way of unveiling policy changes would be better but we're stuck with this one.

The Budget is a game of incomplete information, giving the insider a serious advantage. There is thus an entire subset of the economy that devotes its time and energy to influencing the budget and second-guessing it. These include private sector lobbyists, major investors, independent economists, and faceless gnomes in government. As a result of their efforts, finance ministers play peekaboo, coyly dropping hints here and there.

 

My dream Budget would slash tax rates while broadening the base by pulling agricultural income into the ambit. I would also widen the concept of infrastructure sectors to include vital areas like environment and pollution control, education, irrigation and food-processing and give huge breaks to any infrastructure project. I would chuck the concept of small-scale sector reservation for the hundreds of sectors where those units don't exist. I would also try to unclog the courts by dropping all civil cases where the government is disputing an amount smaller than the likely cost of continued proceedings.

I would also massively scale down subsidies and abolish most extant ministries. Government and PSU assets could be sold off or leased out, and existing employees paid their salaries or given VRS via judicious investment of the proceeds. None of this will happen of course. It would spark a revolution, which would have the NDA out within six months.

In reality, the FM has to balance many incompatibles. He needs to vastly accelerate the disinvestment programme and that will require sops to keep the market boiling. But if he cuts tax rates to stir the market, the Fiscal Deficit will climb even quicker as revenue drops. If he cuts subsidies, he upsets special interest groups. If he abolishes ministries, the NDA Alliance will break.

Raising revenues is a politically easier option than cutting expenses. Again, expanding the tax base by including agriculture is politically impossible. So presumably tax and excise rates will be raised, or left unchanged. For similar reasons, and also due to domestic lobbying, customs rates will not be lowered.

So logic suggests that Yashwant Sinha is telling the truth when he warns of a "tough" Budget. Too bad that tough is measured in terms of the cost to the common man and the economy rather than to vested interests. A "tough" Budget would negatively impact the stock market and in the long run, it would curb economic growth and drive the government further into an internal debt-trap. But it's the easiest political option.

There is hope, of course. And it lies in the traditional game of bluff and double-bluff that all FMs must play. Mr Sinha has managed expectations quite well recently. He may be publicly warning of a tough Budget to induce relief when he produces only moderate hikes or leaves rates unchanged. Maybe the big FIIs and Indian market operators are gambling on that, which would explain the current optimism.