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Business Commentary/Dilip Thakore

Caught in a steel trap

Now that the dust, din, press analyses and telethons kicked up by the central government's annual ritual has settled, this is a good time to make a dispassionate assessment of the Union Budget for fiscal 1999-2000.

For the great majority of citizens, the traditional mould in which the Union Budget is cast makes for bewildering reading of a mix of numbers, policy rationalisations, and usually unrealistic expectations.

The Budget format is deliberately meant to obfuscate rather than enlighten. Common sense dictates that the central government's expenditure should match its income; and that expenditure should be reflected in terms of assets created, incremental output, and/or additional services provided to the citizenry.

But that's not the format of the Union or state governments' Budget formulation and presentation exercises.

The government can and does spend more than its income, but there is precious little data in the Budget to indicate how many assets or facilities were created by the collecting and spending efforts of the previous year. Therefore, to make sense of the annual Budget presentation exercise and the gabfest that follows, it is important to appreciate that the Union Budget has two major facets.

At one level, it is an annual 'rendering of accounts' in which Parliament and the citizenry is informed how the money collected by government by way of taxes was spent last year, how much is proposed to be collected in the forthcoming year (fiscal 1999-2000 in this instance), and how it will be spent. Therefore, one major objective of the Union Budget is to advertise the quality of the government's housekeeping and to project itself as a good and faithful steward of the citizenry.

The other major facet is policy-related. The presentation of the Union Budget is traditionally an opportunity for an incumbent government to make public its understanding of the major problems of the economy and to begin the process of addressing these problems in the societal interest. Begin the process, because it is impossible for a single Union Budget to resolve the major problems of the economy which are inherited by an incumbent finance minister and which is the huge baggage of many mistakes and wrong turns taken in the past.

Therefore, much of the hype, hoopla and great expectations generated by the annual Union Budget presentation exercise are unwarranted. There is an inherent limitation in the Budget formulation and presentation process.

But within this limited framework it is possible -- and it is necessary in the public interest -- to analyse and make an assessment of each Union (and state government) Budget.

The accounts rendered by the Bharatiya Janata Party government during its stewardship of the economy in the year past are unimpressive. Tax revenue collected was Rs 73.2 billion less than budgeted. 'Borrowings and other liabilities' were Rs 127.12 billion more than budgeted. The Union government's non-plan expenditure (operational expenses) was Rs 139.85 billion above budget. In short, in the past year (1998-99) the BJP-led coalition government failed to collect the tax revenues it predicted, it borrowed heavily, and it failed to control its operational expenses. As a consequence, its investment in asset creation (plan expenditure) was Rs 32.71 billion less than budgeted.

The most damning statistic of all, its fiscal deficit (aggregate revenue minus total expenditure) in 1998-99 was a massive Rs1037.37 billion -- Rs127.12 billion higher than budgeted. Most damning because it is now commonly accepted that a high fiscal deficit (equivalent to 5.8 per cent of the national income) is the prime cause of price inflation, which hits the poorest people the hardest.

In his Budget presentation speech, Finance Minister Yashwant Sinha attributed the shortfall in tax revenues to "low industrial growth". But the low industrial growth recorded in 1998-99 wasn't an act of god. On the contrary, against all expectations, the country experienced its tenth good monsoon in a row. The low industrial growth was a direct consequence of the BJP-led government's numerous acts of omission and commission.

First among these was the foolish decision to advertise India as an overt nuclear power by triggering the Pokhran II nuclear tests which dried up the flow of foreign investment into the country.

Second was the glaring failure of the government to come down on Hindu extremists from within the BJP-affiliated fundamentalist groups which were attacking minorities and their places of worship; this adversely affected the domestic investment climate.

Thirdly there was the general drift, indecision and instability that is the hallmark of the BJP-led government; this increased the government's expenses while cutting its income.

Little wonder industrial growth was low. And even agriculture growth was high only because the previous year's base was negative. In fiscal 1998-99 the best seem to lack all conviction while the worst were full of passionate intensity. Therefore for accounts rendered or good housekeeping, the Union Budget at best deserves a rating of 2.5 on a scorecard of 10.

But for its ability to identify the basic infirmities of the Indian economy and moving to heal them, the BJP-led government, and the Union finance minister in particular, deserve high marks.

I have often argued that post-Independence India's mass illiteracy-low growth-mass poverty vicious cycle is rooted in the consistent neglect of elementary education, a conspicuous failure to develop technology-intensive agro-industries, and inadequate attention to the housing industry. All these hitherto neglected sectors of the economy have received concentrated attention and moral and material help in the Union Budget of 1999-2000.

To give a boost to the nation's hobbling primary education drive, the finance minister has proposed the implementation of the Education Guarantee Scheme -- a brilliant mix of government funding and village panchayat (council) supervision of schools which has proved very effective in Madhya Pradesh -- at the national level.

To kickstart agro-industry, the Union Budget has outlined a National Programme for Rural Industrialisation "with the mission to set up 100 rural clusters every year to give a boost to rural industrialisation".

And to give a fillip to the criminally neglected housing industry, mortgage payments up to Rs 75,000 per annum have been made income-tax-deductible while the income of housing finance companies will be taxed on the basis of receipts rather than accruals as hitherto. These proposals (as also a non-Budget proposal to permit foreign companies to invest in housing construction) will give this employment and income-generating industry a tremendous boost.

If tightly administered and implemented, these schemes, which address the soft underbelly of the Indian economy, could at last set it on the fast track to growth and development. But the big question is whether this unstable government, pre-occupied with date-expired issues such as religious and caste revivalism, can act on and administer these plans. If the mess it has made with its bold plans to privatise the bleeding public sector is any indication, highly unlikely.

That's the tragedy of the Indian economy: the bureaucratic steel frame that is relied upon to implement plans of great pith and potential is in fact a steel trap from which there is no escape.

Dilip Thakore

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