The Hindu Business Line : Vision 2020 -- Can Mr Sinha avoid a Budget disaster?

THIS is the time of the year when final touches are given to the national Budget. Last year's Budget was hailed as one dream. A year after, it is universally regarded as one that failed to deliver. Can a repetition of that disaster be avoided?

The first step for rectifying an error is to accept that an error has occurred. Only then, will it be recognised that that there is, indeed, an error to be rectified. The next step is to take responsibility for committing the error. Only then, can there be a will to rectify that error. Indian governments never accept that they ever make a mistake. Even when they are forced to concede that something has gone wrong, they will invariably ascribe the blame to "systemic faults". That is how they pile errors on errors.

For instance, the Finance Minister, Mr Yashwant Sinha, has pleaded ignorance about the goings on in the UTI. The errors committed in that scam would have had a better chance of being rectified had he accepted responsibility. Now the pressure will be to patch it up somehow. Likewise, we had in the past year the stock market scandal as also the collapse of the co-operative banks. In their cases too, few people believe that the government will sincerely and diligently rectify the causes. Instead, according to newspaper reports, whenever officials tried to catch criminal elements, those officials were forced out.

Because of this history, the Indian government has acquired a reputation for being both corrupt and incompetent. If it had been only corrupt but not incompetent, people would have regretted the state of affairs but accepted the situation. If it had been only incompetent but not corrupt, then too the people would have forgiven the government.

As it is deemed to be both corrupt and incompetent, the economy has gone on strike. The people have opted out: They neither invest nor buy. Such passive resistance is only the first stage of disillusionment. If the government does not mend its ways, there is a real risk that people will become violent, as in Argentina. The Chinese, the Koreans and even the Malaysians are doing better than us only because of better governance. In turn, good governance requires professional management. Successful countries invest in persons of high professional skill. We do the opposite: We make special efforts to promote the less competent on the basis of caste, seniority, political affiliation and the like. Good governance needs not only competent decisions but also decisiveness. We are pathologically opposed to decisiveness. In our system, every official has a red flag, not a green one.

Most experts in India have convinced themselves that pumping more money, particularly into infrastructure, is the remedy for current economic ills. According to recent reports, the Ministry for Rural Development has found that most of its grants amounting to Rs 70,000 crore have been siphoned away.

So long as such corruption prevails, no amount of pump-priming will help. Money pumped into even essential needs such as infrastructure is liable to become infructuous. Therefore, minimising corruption should take precedence over everything else.

In the coming weeks, leading up to the end of the Budget year, every government agency will be splurging unspent budgetary allocations, and almost entirely in irrelevant ways. So, even if there is no corruption, there is waste. Much of that wasted money is grabbed by politicians and their henchmen doing next to no good. Hence, handing over more money to the politicians and to the bureaucracy is liable to make matters worse, not better.

The logical way of strengthening a chain is to locate the weakest link and making it strong. The process may then be repeated until the chain becomes as strong as desired. Infrastructure is, no doubt, a weak link in the economic chain, but not the weakest.

Poor infrastructure is only a symptom; the real weakness lies in our system of governance. Unless and until governance improves, no investment in infrastructure will mend matters.

The government runs on a peculiar mechanism. Everybody agrees it is both corrupt and incompetent. Yet, individually, most officials are honest and competent too. To that extent, the sad state of the economy is, indeed, a systemic fault. However, there are vested interests that profit from those faults. So, they resist any and every move to remedy those faults. Thus, the government illustrates the adage that one rotten apple spoils the whole basket. Its performance is conditioned by a few well-entrenched, corrupt officials; the majority who are honest carry little weight.

According to experienced criminals, it is fatal in India to be accused of only one offence. The way the Indian judicial system operates, it is safest to be involved in a number of them simultaneously — that is the best way to escape conviction in every one of them!

Likewise, there are a number of officials who have been involved in any number of disastrous ventures, and yet, they have gone on from strength to strength. At the same time, others with only one complaint against them have suffered ignominiously.

In presenting his Budget, the Finance Minister would do well to concentrate on improving governance, rather than on tinkering with traditional fiscal measures. Last year, he suggested a few sensible measures but none of them secured political approval.

Hence, he should confine himself to measures within his ambit, which he can enforce on his own.

In particular, he should make a distinction between governance (provided by the Secretariat, and by the establishments of the Ministries of Defence, External Affairs, and Home) on the one hand, and citizen-services (offered by field establishments of the remaining ministries) on the other.

The present system of budgeting and auditing may continue in the former case but for the latter the following reforms should be introduced:

The existing stop-go system with all Budget sanctions terminating on the last day of each fiscal year should be abolished. Funds left over should not lapse on March 31, but rolled over.

However, those savings may be used only on the capital account.

That is, they can be spent only for adding new assets, or for the replacement/renewal of outdated ones.

That way, unplanned and wasteful expenditure incurred in the last weeks of the fiscal year will be put to better use.

Currently, budget allocations are made on an incremental basis — usually 6-8 per cent more than that of the previous year. That provides no incentive for careful use nor does it act as a deterrent against waste.

This mechanical system should be replaced by one based on zero-base budgeting — budget calculated on the basis of specific commitments of what will be delivered in return.

Income derived from user charges should be treated as autonomous income that could be spent on renewal of existing assets without prior sanction of the Finance Ministry.

Procedural audit should be replaced by performance audit. Each Budget head will indicate measurable deliverables and the audit should be based on such committed measures.

To err is human. It is not a crime to commit mistakes but it is incompetence to repeat them again and again. Hence, auditors and vigilance officials should not arrive at conclusions on a case-by-case basis but on the basis of cumulative performance spread over several years.

At present, all government establishments are governed by identically the same rules but in the case of citizen-services, each one has distinct and separate requirements. Hence, such establishments should have the autonomy to frame their own accounting rules.

It is worth noting that working to rule is synonymous with accomplishing nothing. So, auditors should not hold rules sacrosanct but make their assessment on the basis of results.

While secrecy is important in governance functions, they are actually harmful in the case of citizen-services. Hence, the 30-year rule of secrecy should not apply for such services. One year of confidentiality should be more than adequate in their case.

The present system of Plan/Non-Plan division should go. In its place, all citizen services should adopt the commercial practice of having one head for assets/ liabilities, and another for income/expenditure.

As a corollary, each citizen-service should have a depreciation account. The importance of depreciation should not be underestimated. It is only because there is no depreciation account that all assets of government establishments are as poorly maintained as they are.

All these reforms are administrative, not political. They lie entirely within the powers of the Finance Ministry. They are also likely to be welcomed by other departments. So, they are implementable. It is not claimed that these reforms will curb corruption. But they will definitely improve performance and efficiency. That may be a small mercy. Yet, Indian citizens will be thankful to get them.

Dear Finance Minister! If your budget turns sour, the fault could be in the system. Yet, the responsibility is yours — for not reforming that system!

(This is 63rd in the Vision 2020 series. The previous article was published on January 14.)

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