The Budget Agenda – making India competitive

As the first budget of the new government, the market is looking for the government to set the agenda for the next few years. High fiscal deficit will restrict maneuverability with regard to tax reduction. The popular mandate, as interpreted by the ruling party, is one of continuity of fiscal policy with a bend to offering direct assistance to farmers and the fiscally weak. This limits the ability to reduce expenditure.

The agenda therefore has to focus on improvement in efficiency of expenditure and better tax collection. Besides, steps are needed to reduce of size of government, and bureaucracy to speed growth. Some steps I would look for are:

1. Financial Reporting – remove the obfuscation. The Fiscal Responsibility and Budget Management (FRBM) Act was expected to form the blue print for India to the path of fiscal prudence. Instead, it has led to the government resorting to a policy of smoke and mirrors to hide its inability to manage the budget. Obvious ones include the non-inclusion of fuel subsidy in the budget deficit. The more pernicious ones are reduction of state transfers – with states being asked to approach the market. While this reduces the apparent expenditure of the Central government, it does not actually reflect better fiscal management. What is needed is to:
a) Move to a system of accrual accounting instead of cash accounting. This will help focus policy debate on not only the immediate term issues, but the longer term ones of ballooning pension liabilities, and debt servicing.
b) Reflect all governmental revenues and liabilities through the budget – all non-budgetary items to be avoided – to prepare a true and fair picture of the state of government finances
c) Prepare accounts that are consolidated – which represent the accounts of the state governments as well as the centre
d) A key area of reform has to be to measure all salaries paid by the government and its agencies and by public sector companies on a cost-to-company basis. This will likely throw up interesting information especially when measured against productive output!

2. Establishment of efficiency parameters – for the most part, the budgetary focus is on revenue and expenditure and not on measuring the efficiency of use of the money spent. Most government departments do have review mechanisms. However, these are not transparent – a case in point is the inability of the Ministry of Human Resources to explain where the money collected (as a cess) for secondary education actually goes. Besides, rarely is the measurement of delivery of efficient service a goal. As part of smaller government, the government needs to move out of providing services itself and instead set up monitoring agencies that set out goals and monitor results while using private enterprise to deliver.

3. Privatization – not disinvestment – This debate seems to have been set-back by the present government. While it continues to desire selling off bits of public owned companies, the approach is essentially episodic in nature. Efficiency of operations can only increase if there is a change of ownership that leads to a change of management style. Arguing that 51% stake would allow better performance is not demonstrable. On the contrary, the use of oil marketing company balance sheets to offer fuel subsidy, that of banks to write off loans and the “donation” by Gujarat state owned companies (where the government is in a minority) suggest that government ownership in any amount detracts from the commercial nature of business.

4. Economic friction in the form of ill conceived taxes (FBT, dividend tax, cash withdrawal) and the discretionary nature of multiple tax rates have crept in the taxation system over the past few years. While the nineties had established a clear road map of tax reforms, the previous UPA tenure marked the reversal of the trend towards simplification and instead returned ad hocism in tax matters. This needs immediate rectification. Another key area remains the implementation of GST – where the time frame of implementation does not seem feasible given the lack of preparedness of the government. Another key area of friction is the restriction on capital flows. The present FII registration requirements serve little purpose. In fact, with limited control over foreign institutions, government has less knowledge of who is the final investor than if it were to allow the normal “know your client” requirements of brokers to work in the case of foreign clients. We need to now drop “I” from “FII”

5. Land and labour reform remain glaring unfinished agenda for faster economic growth. While labour reforms are contentious, land reforms need not be so. Clarity in land titles, and land use planning are two areas that, if sorted out, can reduce corruption significantly.

The Judicial sector needs serious attention. The pile up of unresolved legal cases renders the system incapable of being used. While this is not an agenda for the budget, this has to be one of the key areas of focus for the government if they are serious about increasing the economic growth of India on a sustainable basis.