The Hindu Business Line : The politics of Budget-making

For long the Budget has generally been a populist sell-out. The country has suffered because political fortunes in India have had little or nothing to do either with fiscal prudence or economic progress. Either due to the immaturity of the electorate, or because the poor feel that development is of little use to them, the popular mandate has steadily drifted into irresponsible hands, says P. V. Indiresan, discussing some of the proposals.

ANOTHER Budget has been presented and it is to the credit of the Finance Minister, Mr P. Chidambaram, that his presentation went through smoothly except for the interesting proposal to impose a 0.1 per cent tax on cash withdrawals exceeding Rs 10,000 per day.

Since he took over, the Finance Minister has faced more opposition from his purported supporters on the Left than from the official Opposition. Actually, some opposition is a blessing in disguise. Dr William Niskanen, who was involved in budget-making under both Democratic and Republican administrations in the United States, has an interesting theory which may be transcribed as: "Quality of government expenditure is superior when the President is not in control of the Congress."

According to Niskanen, strong opposition groups help good governance by blocking divisive policies. A large majority can ride roughshod over the opposition; powerful opposition makes governments to move more cautiously.

Absence of improved proposals for disinvestment is a cause for disappointment. Yet, if what the late Prime Minister Rajiv Gandhi said is correct, only 18 per cent of the taxes that the Finance Minister collects are used effectively (at least in rural development). Then, 82 per cent of government expenditure is infructuous. That being so, if the government had been left free to disinvest at will, cash-rich, euphoric legislators would probably have forced the government to spend extravagantly rather than wisely.

Talking of better governance, in a recent BBC programme, one of the presenters showed how he got more for an old car by selling it part by part than by selling it whole. That is not uncommon: In economic matters two plus two often adds up to something less than four.

That is a common bane with our governments: Both at the Centre and in the States, our government activities are combined in such a way that the total is less than the sum of the parts. For instance, public enterprise plus ministry is less valuable than the two kept separate from one another. We will be better off unbundling public enterprises from their ministries.

Just as large majorities lead to fiscal misadventures, excessive control leads to administrative mishaps. So long as our enterprises are tied tightly to the ministries, they will have no freedom to manoeuvre. Tight control, either by the ministry, or by the legislature, chokes enterprises at times to death. In other words what our public enterprises need most is more air to breathe; more freedom to act.

Then, public enterprises should be released from the fetters of the three Cs — the Comptroller and Auditor General, the Central Vigilance Commissioner and the Central Bureau of Investigation. They may still be disciplined but in the manner private enterprises are — through the normal laws and legal apparatus of the land. That is, the bureaucracy may not check how enterprises do what they do, but how much they achieve and allocate capital for each enterprise according to the results achieved.

At present, operations of state-run enterprises are rule-bound, not performance-bound. On the other hand, the allocation of (both financial and human) resources is not rule bound; it is entirely within the political discretion of the government.

We need a reform by which the way the government allocates both human and financial resources is rule bound, but the day-to-day operations of public enterprises are performance-bound. In other words, the Budget should allocate Plan funds to state-run enterprises according to transparent rules and not leave that to the arbitrary discretion of the ministries.

Two moves in the current Budget that will improve governance have not received the attention they deserve: Increased resort to cess for specific purposes such as highway construction and healthcare is one. The relatively minor proposal to raise weighted reduction of R&D expenditure to 150 per cent is another. Both moves link government's expenditure and tax relief to performance. From that point of view, it is a pity that the Finance minister did not extend the cess for funding education.

The special allocation of Rs 100 crore to the Indian Institute of Science, Bangalore, is the only novel Budget proposal concerning education. I am personally proud that my Alma Mater has been singled out for such attention. However, as a citizen, I would have preferred a far more incisive approach.

It is estimated that the country releases every year $2-3 billion in foreign exchange to finance our youth studying abroad. As a beneficiary of foreign education myself, I am aware of its value. However, most persons of my age studied abroad at the expense of foreign governments. In later years, many of my students studied abroad but with the cost borne by foreign universities. For large numbers of Indian students to study abroad entirely with Indian money is something new, and is of recent origin.

Fifty years ago, rich countries gave us aid: they educated our students who mostly returned to serve India. Thirty years ago, rich countries paid for the education but retained our talented youth. Now, we are providing rich countries a double benefit: We pay to support Western universities and donate, on top of that, our talented youth too. This is a new turn in brain drain. In yesteryear, rich nations at least paid for the cost of educating our students. Now, we pay the full cost of training competent youth to benefit other, far richer, countries with next to no return for ourselves.

Unimaginative political ideology, poor education policy and even judicial intervention are responsible for this exodus of large numbers of our rich youth to foreign universities.

According to prevailing political ideology, a rich parent can buy education abroad but not in India. That is not merely strange logic; it has the additional demerit that education abroad results in loss of precious foreign exchange. That loss of foreign exchange is enough to establish 10-20 new IITs/ Indian Institutes of Science every year.

The complaint is not that students are going abroad but that they are not providing a commensurate return to the Indian economy. They will, almost all of them, recover the large personal investment they make in their foreign education by settling abroad and use their talents and skills to enrich other countries rather than ours.

I do not advocate any ban or restriction on our students from going abroad but would advocate a tax on the foreign exchange they drain out of our reserves. A 20-30 per cent cess (not tax) on the foreign exchange drawn for studies abroad and restricted in its use to fund our cash starved universities would be both equitable and efficient. That cess will be doubly beneficial: It will enrich our universities; it will also cut down loss of talent.

There are two ways of arguing with the opposition about Budget formation: One: I will give up the tax cut I want if you give up the spending you want. Two: I will take the tax cut I want if you insist on the spending you want. The former is a tight bargain; the latter is a populist sell-out. We have for long years suffered from the latter.

We have suffered because political fortunes in India have had little or nothing to do either with fiscal prudence or with economic progress. Either due to the immaturity of the electorate, or because the poor feel that development is of little use to them, the popular mandate has steadily drifted into irresponsible hands.

As a remedy, I repeat a suggestion I have made earlier: Give legislators a commission in proportion to the taxes collected in their constituency. Many of them are already doing so clandestinely but in the manner of killing the goose that lays gold eggs.

The spate of kidnappings of family members of successful doctors and businesspersons is one such case. The bribes that officials collect on behalf of legislators are another.

A legal, transparent commission paid to each legislator (and a smaller commission to the losing candidate) will have an entirely beneficial effect. Then, legislators, and opposition politicians too, will have a direct interest in seeing their constituency progress. They will also be largely relieved of their current dependence on black-money.

That brings us to the novel Budget proposal to check black-money by imposing a tax on cash withdrawals. If curbing black-money is the intention, it would be far more effective if the validity period of high value currency notes is restricted to two-three months only.

Then, black-money cannot be accumulated over long periods; it will have to be brought out into the open frequently. A currency that is valid for a short duration acts somewhat likes the bikini: It will hide an interesting part but not the whole. It will generate enough black-money to excite but not enough to cause severe damage.

(This is 144th in the Vision 2020 series. The previous article was published on February 21.)

(The author is a former director of IIT Madras. Response may be sent to indresan@vsnl.com)

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