The State of the Fiscal Union

 

Indian Express, 27 February 2006

 

- Ila Patnaik

We are in `budget season' once again. This year the "budget buzz" is
almost missing as no major tax reform is being expected. However,
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 institution. The budget speech specifies a work plan of the
government for the coming year to the public. 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 coming year. 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 India, there was little else in the budget speech.

The significance of budget speeches appears to have begun with
Manmohan Singh in the budget speech of July 1991 which announced
India's economic reforms. On 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, the FM and cabinet about the major activities of the coming
year. It has become a commitment device whereby all ministries are
bound by the promises in the budget speech.

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 last year's
promises with every budget document. When Mr. Chidambaram presents his
budget on 28 February 2006, he will also release the report on the
status of implementation of the speech promises of 28 February 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 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 atleast 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 goverment 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 CPI(M) 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
politicans. 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.