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Monday, Dec 23, 2002

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Constraints in the Budget process

S. Venkitaramanan

The Finance Minister's dilemma in Budget-framing is clear. He has to choose the right mix of policies — raising taxes in a way that will not hurt incentives, and encouraging expenditure which has a multiplier effect on investment. The nation looks forward to a Budget that reflects not only the transparency objective, but also the call of the Prime Minister to take measures to spur the growth of the economy.

THE latest buzz on the Budget exercise is that the Finance Minister, Mr Jaswant Singh, has decided to discontinue the practice of pre-Budget consultations with such diverse groups as industrialists, economists and farming interests.

The argument advanced in favour of this decision is reportedly that the Finance Minister has already made the Budget process quite transparent, what with the mid-year review and the reports of the Kelkar Task Force on direct and indirect taxes. Traditionalists may, however, feel that the practice of face-to-face consultations — initiated, incidentally, by the statesman C. Subramaniam — did serve a useful purpose and should have continued.

It is, however, a fact that the meetings had been reduced to mere formalities over the years with each participant trying to score a point and seeking publicity. Being invited to the group meeting became just a cache of prestige.

The meetings also suffered from the way they were organised. Some participants said their piece and often left before the Finance Minister responded. It is reported that Mr Yashwant Sinha converted the meetings to fairly free exchange of views, although a Finance Minister is naturally handicapped for reasons of Budget secrecy.

I recall that of the group meetings I was privileged to attend, those in which Rajiv Gandhi and Mr V. P. Singh took part during their tenure in charge of Finance, were most impressive. Rajiv Gandhi was truly interested in the views of the various listeners and was responsive.

V. P. Singh took copious notes and insisted that the points raised by participants were given due weight in the Budget process. Quite often, the suggestions made were not properly minuted. The mandarins of Finance were often bored listeners, having heard all this many times before. But, almost all the contributions suffered from a lack of touch with the basic reality that the Finance Minister was not so much short of ideas as of resources.

As it happens, the Finance Ministry is inevitably at the centre of the Budget action. At the outset, it brings together the estimates of expenditure and receipts from various departments and Ministries. As part of the process, it makes a brief outline exercise, which estimates the likely order of shortfall in resources that is on the cards.

The Finance Minister briefs the Prime Minister about the likely contours of the Budget outcome and arrives at a determination of what order of tax effort is needed. It is essentially this duo — the Prime Minister and the Finance Minister — who are involved in this critical exercise. None of the other Ministers gets close to the exercise.

The order of magnitude of tax efforts, which would be tolerated politically, is determined quite early in the game. It is then that the Planning Commission gets the "go ahead" to finalise its Annual Plan outlay.

There is quite a bit of creative tension between the Planners and the Finance Ministry at this stage of the game — the Planners shooting off their wish- list of projects and the Finance Ministry preferring a more realistic outlay. One instance I recall is that when Dr Manmohan Singh was Deputy Chairman of the Planning Commission, and Mr V. P. Singh the Finance Minister, this conflict reached a deadlock.

The then Prime Minister, Rajiv Gandhi, to whom the divergence of views was referred for a decision, resorted to the conventional way-out - a Committee under the Chairmanship of senior Minister, Mr P.V. Narasimha Rao and consisting of both Dr Manmohan Singh and Mr V. P. Singh. Mr V. P. Singh argued the case for fiscal prudence and Dr Manmohan Singh for a bolder plan. Mr P. V. Narasimha Rao characteristically, left the decision to the Prime Minister.

He said that, ultimately, it was the Prime Minister's privilege to decide. The debate was taken to the latter's chambers and I still recall vividly Rajiv Gandhi trying to accommodate both points of view. His inclination was in favour of a larger Plan, but at that stage, he was also in sympathy with Mr V. P. Singh's logic.

The figure work that Mr Rajiv Gandhi doodled to justify his final decision was taken by one of the participants as a keepsake. I recall this only to stress that the Budget process is very much an exercise in power-play between the different advocates in Government — chief among the friendly adversaries being the Finance Minister and the Deputy Chairman, Planning Commission, and the Prime Minister the inevitable arbiter.

The decisions in respect of tax measures are more unilateral than those in respect of expenditure. There is a charade of an exercise in which different Ministries are consulted as regards their preference in regard to revenue measures. But, it is mostly a dialogue of the deaf — the Revenue Secretary trying to listen to the administrative Secretary's reasoning — but not all there.

It helps when the Finance Minister sometimes combines in himself another portfolio, and this forces special attention. When I was Finance Secretary, I had the privilege of working with Mr V. P. Singh, who was also an ardent Commerce Minister. He presided over the introduction of Section 80-HHC, which virtually exempts export proceeds from income-tax.

The Finance Minister is inevitably under considerable pressure during this phase, not only from his colleagues but also from various industry groups, who lobby for this or that tax relief. Mr Jaswant Singh has struck a blow for good governance by placing the entire taxation menu virtually on the Web. But what the Finance Ministry has lost in terms of secrecy and manoeuvrability it has gained in credibility.

The stage being set for the forthcoming Budget, one would naturally be interested in what one can expect from Mr Jaswant Singh on Budget day. I shall attempt a broad guess. The Budget at a glance for 2002-03 showed a revenue deficit of Rs 95,377 crore. The mid-year review does not show much hope of improving on this figure — expenditure tending to overshoot estimates.

On the current account, Government is spending much more than its revenues. An obvious conclusion from these numbers and the mid-year review is that the forthcoming Budget would surely indicate hefty revenue-raising measures — of course, within the constraints posed by the Vijay Kelkar's report, to the extent it is accepted.

As far as I can see, notwithstanding political compulsions, Mr Jaswant Singh has necessarily to go in for tough measures in respect of tightening expenditure and raising taxes. Whether or not he will do this in accordance with the Kelkar's report, the logic of numbers does dictate a tough Budget, which will disturb many and please few.

The Finance Minister's dilemma is clear. If he enforces a tough fiscal regime, he may risk upsetting incentives to investment and growth, which may adversely impact further increase in revenues. The Finance Minister's task is to choose the right mixture of policies — raising taxes in a way which will not hurt incentives, and encouraging expenditure, which has a multiplier effect on investment. He cannot totally remove exemptions — notwithstanding Kelkar's attack.

Similarly, he has to increase allocations for investment, which have had good impact on various industries, such as steel and cement. The trick is to hit at the right mix of higher investment and appropriate means of financing the investment.

Above all, the Finance Minister has to make his hard choices acceptable to the political leadership. The agenda before him is quite complex. But that is his lot. He has necessarily to sell the political leadership the bitter pill of higher retrenchment and reduction in subsidies, if he has to pilot a Budget that promises higher investment, a higher plan and thus a higher rate of growth. It is ultimately the composition of the mix that matters.

On the successful brew depends the success of the Budget — whether it will be hailed as growth-promoting or as a dampener. Multiple objectives mean there is a need for multiple tools, and no one can grudge the Finance Minister the degrees of freedom he needs. For instance, if need be, he should not hesitate to use tax exemptions to spur investment. But, above all, the revenue proposals as well as expenditure have a vital role to play in the creation of a robust investment climate.

The outcome of the Budget will be eagerly awaited by the public. It is good that the background has been made transparent by the publication of the task force reports and the mid-year review. Here is to hoping that the Budget turns out to be a successful blend of measures — some bitter and some sweet.

Above all, I hope that the FM will continue his good work by explaining in full the logic behind his acceptance or rejection of the proposals put on the table by the mid-year review as well as by the task force on taxation. The nation looks forward to a Budget that reflects not only the transparency objective, but also the call of the Prime Minister to take measures to spur the growth of the economy.

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