The Hindu Business Line : The fine art of Budget-making

THE Finance Minister, Mr P. Chidambaram, had to do a hurried job of presenting this year's Budget on July 8, 2004, as he was called on to do so within a short period of his assuming office as Finance Minister. Obviously, he has plenty of experience in Budget-making from his previous stints in North Block. But the compulsions of coalition politics and the mandate of the National Common Minimum Programme (NCMP) made his task all the more demanding.

Mr Chidambaram has cleared the decks for the all-important day by presenting the FRBM review of Central finances as well as the report on subsidies. There is also the prospect of a widening fiscal gap with the tax revenues not being as buoyant as expected and expenditure commitments on the rise.

He has indicated the prospects of opening the privatisation window, though how far he will succeed in convincing his coalition partners remains to be seen. The Finance Minister has decided to stick to the earlier tradition of meeting with representatives of business and agriculture as well as economists to get their views on the Budget. He is aware that even a well-informed Finance Minister has a lot to learn by interacting on a structured basis with representatives of different sections of the people. This is all to the good and promises a healthy and desirable openness to ideas and suggestions.

At the time the Budget is made, the North Block is the target of a flood of suggestions, and ideas, some of them half-baked, most of them well-intentioned. The Finance Minister is also under pressure from various lobbies which seek either tax concessions or, in some cases, imposition of a protectionist Customs duty. Advocates of large capital projects also abound. Ministries and Ministers rush in with their requests for higher allocations.

The Finance Minister has to find a way to sift among these ideas and schemes and provide for them as best as he may. Fortunately, he has a safety valve — the Planning Commission — insofar as expenditure proposals are concerned. The planners have to approve the overall Plan size and the specific allocations for schemes before they can be accommodated in the Budget. The procedure differs insofar as non-Plan schemes are concerned, particularly Defence, where it is a matter of direct negotiation between the Defence Ministry and the Finance Ministry, albeit finally arbitrated by the Finance Minister.

The Finance Minister has a difficult task on hand — to keep up the various commitments made in the NCMP as well as meet the new demands posed by Ministries such as Defence. Consider, for instance, that the Defence Budget has risen in the last two years from Rs 59,000 crore to Rs 77,000 crore.

The threat perception of our Defence forces and the lobbying power of armaments suppliers combine to make the Defence Ministry pitch its demands high. It is unfortunate in this context that the peace process with Pakistan is still going slow. The Defence hawks have the upper hand.

I remember in this context a debate, which took place at the bureaucratic level in the 1980s, when a redoubtable Defence Secretary who went on to earn well-deserved laurels in peace-time occupations, announced that he would not be responsible for the Defence of India if his demand for an exorbitant outlay was not met in full.

I countered on behalf of the Ministry of Finance that if that were conceded, there would be no country to defend in the ensuing fiscal chaos. I recall that the then Prime Minister did endorse a more moderate approach and tempered the ambitions of the Defence Ministry.

The problem for Mr Chidambaram has been further complicated by additional commitments, such as the Employment Guarantee Programme as also the cheap petro-products supply scheme, endorsed by the UPA Government. In addition, the Finance Minister has to provide for the impact of the Twelfth Finance Commission recommendations.

Since the Finance Commission was privileged to have Dr C. Rangarajan as its Chairman, I am sure its recommendations would have kept in mind the overall fiscal crisis facing the Centre, even while catering to the needs of States. But the Commission could not have afforded to ignore such matters as large grants and revenue allocations to the backward States. The Finance Minister has the unenviable task of dovetailing the Commission's recommendations with his promises in the July Budget for larger allocations to backward States.

One of the ticklish issues the Finance Minister has to resolve in presenting the Budget is how to deal with the Planners' suggestion to use part of the country's forex reserves for infrastructure projects. The Prime Minister is also reported to have endorsed this view.

A variety of views have been put forward in this context, ranging from straightforward debunking of the proposal by Dr Raghuram Rajan, Economic Counsellor and Director (Research), IMF, to qualified acceptance by some economists. Almost all professional economists seem to regard the proposal as a disguised package of incurring further monetised deficit — as it would involve the RBI's selling forex and lending equivalent rupees to Government — a step prohibited by the FRBM Act.

The Finance Minister himself says that he is not averse to it so long as the forex is used for import requirements. This approach, however, does not solve the basic problem of shortage of rupee resources sought to be addressed by the Planners.

The Reserve Bank of India, itself a body owned by Government, has a forex reserve of $130 billion (plus). It has been argued that most of this is built up of short-term debt flows and it would be unwise to depend on such flows for long-term investment. But this argument can be met if we analyse the contribution made by the current account surplus.

Of the reserves, a sum of at least $20 billion has been contributed by surpluses in current account during the last two years alone. They do not constitute volatile or short-term components. Of these non-volatile resources, the RBI can place $20 billion — amounting to nearly Rs 80,000 crore — in a special purpose vehicle (SPV) as equity. The SPV can, in turn, invest in the share capital of PSUs and private undertakings investing in infrastructure, which can borrow from the banking sector.

The SPV can receive reasonable returns, provided the utilities implement projects efficiently and charge tariffs to cover costs and earn profits. This conditionality should be part of Mr Chidambaram's grand bargain with the State Governments and the PSUs as well as the private utilities.

Undoubtedly, we need an innovative approach to break the impasse on infrastructure. It is definitely more sensible to invest our own forex reserves in equity or debt in infrastructure projects than to go abegging for FDI. Anyway, FDI for infrastructure projects has been difficult to access, given the Dabhol debacle and our hesitations.

The markets, as well as the country as a whole, are waiting expectantly for the Budget. FII flows have been triggered by Budgets before. The retail investor is also looking forward to the Budget for suitable incentives.

Whether the Finance Minister can afford to give the investor more sops, keeping in view his fiscal deficit targets and the additional NCMP commitments is doubtful. The least that one expects is that he will not rock the boat by market-unfriendly measures, as happened on the last occasion when the Budget upset investor sentiment with the securities transaction tax, without capturing significant additional revenues.

Much depends on the general message that the Budget sends, such as encouragement of FDI in sectors now closed to it. A forward step in respect of retail, for instance, may do a lot more to economic growth in real terms as well as to market sentiment, than tax sops.

The Finance Minister has multiple constituencies to please. He has to keep in mind the stock market. He has to please the different task-masters — including the foreign institutional investors, who look to the Budget for signals.

Above all, he has as well to meet the expectations of his coalition partners, who have different and divergent aspirations. It is, indeed, impossible for a Finance Minister to please all. But the best we can expect is for a Budget that hurts the least and manages to send a positive policy message of India on the move.

Budget-making is after all an art and Mr Chidambaram is quite an experienced artist. One hopes that by deft strokes, he will indicate that India is on the growth path and receptive to investment.

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