Modi’s ‘Make or Break’ Budget

The end of February 2016 is around the corner and it is time for yet another budget. It will be the 68th budget presented to the Indian Parliament, to be brought into effect on the first day of April. Article 112 of the Indian Constitution enjoins that “The President shall in respect of every financial year cause to be laid before both the Houses of Parliament a statement of the estimated receipts and expenditure of the Government of India for that year, and referred to as the annual financial statement.”

This Article stipulates very clearly what is required in the budget. It is simply a ways and means statement. The ways in which the government plans to incur expenditures and the ways in which it plans to provide for the proposed expenditures. When the budget is passed, it becomes law and the government is bound to fulfill all its provisions. It seldom does. But since we never get a statement of accounts, we never are able to really relate the government’s performance to its promise. It takes many more months for that to happen, but by then it is too late to judge them. More importantly, editors and anchors have no stomach for it either.

Every democratically-elected government, and most other regimes, have a budget. It is, after all, a plan for the year ahead. But in few countries is there hoopla about the budget like there is in India. In the USA, the President is required to submit the budget request to Congress no earlier than the first Monday of January and no later than the first Monday of February each year. Congress deliberates over it, haggles for changes, and insists on changes if it so wishes, for it to become law on the following October 1.

In India, the budget comes into effect on what is popularly also referred to as All Fools Day. There is little time for serious deliberation or introspection, though the survival of the government depends on its passage. Little serious deliberation is also allowed by increasingly boisterous behaviour in the House. Last year, the houses of parliament actually spent a small fraction of the time allocated for the Finance Bill. Yet, there is a great deal of interest in the budget all around. It’s rooted in our tradition.

There was a time when the budget was of considerable interest to businessmen and politicians in the pay of businessmen. Those were the days of a tightly controlled centrally planned economy, where the caprices of the budget makers determined the fate of businesses.

In the 1980s, the two warring textile majors, Bombay Dyeing and Reliance Industries, chose two different routes to make polyester. Bombay Dyeing chose dimethyl terephthalate (DMT) and Reliance preferred purified terephthalic acid (PTA). This had grievous consequences for Bombay Dyeing. The DMT process was somewhat more expensive but the tax regime imposed on it more or less broke Bombay Dyeing’s back. In 2010 Reliance, in a somewhat filmi ending to the Ambani-Wadia feud, bought up Bombay Dyeing’s polyester business. That one technology choice effectively drove Bombay Dyeing out of the textiles business, of which it was once the marquee name. There are so many stories such as this. Budgets were a make or break event for many, if not most.

But with the dismantling of the Industrial Licensing Policy of 1951 in 1991, and the increasing resort to long-term tax regimes, where it was envisaged that rates will be stable if not reducing, the ability of the central government to make or break businesses was by and large transferred to the marketplace. These changes took time to happen.

Till 1975, central excise was mostly used to tax raw materials and intermediate goods, and not final consumer goods. But in 1975, it was extended to cover all goods. This structure gave government even more arbitrary powers to favour or harm industries. Customs duty was still a relatively small source of revenue and the government relied more on excise duties to raise revenues. The consequence of this was a maze of taxes and tariffs. In 1985-86 the then Finance Minister V.P. Singh introduced the Long Term Fiscal Policy, stressing the need to reduce tariffs, have fewer rates and to eventually reduce quantitative restrictions on imports.

Till then, it was the heyday of ‘liaison officers’. Every company, big or small, retained the services of a lobbyist to push its case or impede a competitor’s story in the corridors of power. Much money also passed hands and the wheels of government were kept greased. The budget therefore was a time when the results of their efforts and expenditures would be seen. This was the big day for companies, their politician patrons and the business sections of the newspapers and pink papers.

In those days, as we sometimes still do, there used to be a profusion of large advertisements in the newspapers pleading for customs and excise duty concessions or protections. Newspapers loved this season. Then television came along and built this occasion into a media mega-event and promised advertisers lots of eyeballs. But beyond this, the budgets achieve little these days. They don't make or beak fortunes anymore.

Caught in the excitement, we miss one essential reality. That is that there is very little scope in a budget to offer any substantial directional change, unless it is an administrative policy change. Like the scrapping of the Industrial Licensing Act, which arrogated to the Central Government the powers to micromanage all economic activity in the country. The budget is pretty well set each year by the acts of the previous years. The tax revenues are limited by the projected nominal GDP growth since the rates do not allow much tinkering.

Since the Plans are usually cast well ahead, money has to be set aside for them. Governments try to keep plan commitments as otherwise growth suffers. Plan expenditures are usually about a third of total expenditures.

Non-plan expenditure patterns are a bit more fixed. They are mostly commitments you cannot run away from. Interest payment is always the biggest expenditure, accounting for about a third of the budget. Defence is the next biggest item taking away about 18 per cent. Subsidies take away about 15%, grants to state governments 7%, Pensions 6%, Police 4%, etc. Clearly, there is little scope for any major directional changes.

The debate then mostly hinges on the quality of assumptions made. Governments tend to be generous with assumptions, knowing very well that they will not be required to report on the achievement of the budget to Parliament. For instance, last year, the Finance Minister indicated that nominal GDP, which is the currency of the real world, would be 12.3%. The actual performance during the year undershot that by more than half to achieve only 5.2%. So tax revenues are short of target. Which means, expenditures had to be cut.

In 2014-15, the first year of the Modi government, the mismatch of budget estimates and revised estimates was over Rs 1.10 lakh crores. The plan expenditure proposed was Rs 5.75 lakh crores, but the government actually ended up spending Rs 4.68 lakh crores. Instead of the upward spiral promised, we caught a downdraught. Consequently, growth suffered. It will almost certainly be in the same ballpark range this year. But we won’t know that for sometime from now. By then, it will be past the expiry date for political bashing. More likely, by then, we would have moved on to something else. As we are doing in the opening days of the budget session now!

(Mohan Guruswamy is president, Centre for Policy Alternatives, New Delhi)