The Hindu Business Line : Mysteries of Budget-making

While Budget analysts concentrate mainly on the tax proposals, they would do well to linger a while on other aspects, such as the composition of resources raised, including extra budgetary resources of PSUs. Indeed, given the months of meticulous preparation that go into Budget-making, the general neglect of the proposals by Parliamentarians and the lack of serious discussion on them is shocking, says S. Venkitaramanan

MR CHIDAMBARAM WILL have a hard task dispensing bitter medicine along with sweet news on the economy. — Kamal Narang

THE visual media are excelling each other in their pursuit of the golden grail — the message of the Budget that will be unveiled tomorrow. While the viewers' eyes will be riveted on the maestro's performance, punctuated, as it will likely be, with references to the Kural — and walk-outs (?) by friendly foes and declared rivals — the nation tends to forget that the details of the Budget are contained in dense compendia of figures showing detailed estimates of expenditure and receipts, presented to Parliament — and subjected later to almost total and fatal neglect by Parliamentarians.

It is often forgotten that a lot of labour goes into the compilation and printing of the Budget. The Parliament, whose approval is sought, does not devote as much attention as it should to the details, except in its Committee meetings, at the time of consideration of the estimates and during the review by the Public Accounts Committee.

The Budget itself is a culmination of the dedicated work of an army of Government employees scattered across the administration, and the Budget speech the distillation of the results of their labours.

Gross budgetary report

I shall refer in this piece to a few mysteries of Budget-making, which are lost in the din of discussions of the Finance Minister's tax proposals and policy announcements. In this context, I refer to the chorus of demands from various quarters for enhancing "gross budgetary support" (GBS). The Left has reportedly lent its support to this demand. GBS is the amount the Budget provides to public sector undertakings as well as departmental enterprises in addition to their own internal and other resources.

For ordinary departments, the GBS simply refers to the provision made in the Budget. The plea for a large GBS is usually made by the Planning Commission, whose "dharma" is perceived to be to press for a larger Plan, both on capital and revenue account. How, otherwise, is the Commission to meet the demands of various Ministries?

In addition to the size of the GBS, there seems to be a dangerous dilemma before the Finance Minister, although the decision has already been taken and announced. I refer to the promise of another Pay Commission. Whether this new Pay Commission will come with a set of recommendations that will have the same unsettling effects as its predecessor, is not easy to forecast. But given the pressure of coalition politics and the domination of the Left, I cannot see the Commission being less than liberal in its recommendations.

Whether or not it will make the same kind of recommendations as its predecessor on the exchange of higher productivity for labour in return for higher pay, the atmosphere does not seem congenial for enforcing greater discipline in the ranks of Government and PSU employees. The prospect of getting more work out of the employees is not too bright.

It is, however, essential to maintain a sense of proportion in decrying establishment expenditure as the root of all problems of Government. The total outlay on establishments, excluding Railways and Defence, is only Rs 22,000 crore of a total Government expenditure of roughly Rs 400,000 crore, also excluding Defence and Railways (around 5 per cent), which is not too high. In fact, we must consider ourselves lucky that the number has remained fairly steady over the recent years.

Key to greater growth

Of course, there is need to increase productivity of Government establishments, but that is not the only key to greater growth and fiscal responsibility — at any rate, not at current levels of outlays. It is true that the salary burden is heavier for the States at the cutting edge of social responsibility, given their large strength of teachers and security forces, including the police establishment. But that is a different issue.

One important aspect of the Budget to which attention is not drawn in the usual analysis is the figure known as i.e.b.r. (internal and extra budgetary resources) of public sector enterprises. In the 2005-06 Budget, the Plan outlay of Central PSUs came to Rs 2,11,000 crore, out of which i.e.b.r. contributed nearly Rs 100,000 crore. This includes resources raised by bonds and equity offerings of PSUs.

The fact that this figure is high does not reflect adversely on the PSUs. It, in fact, speaks of how wisely they have managed to tap internal resources as well as the bond and equity markets.

I feel that this figure offers the Finance Ministry a great deal of flexibility to adjust the size of the Plan, provided the capital market, including banks and FIs are willing. This demands that PSUs do not renege on their debt service obligations which they, on occasion, do.

Innovative approaches

While Budget analysts concentrate mainly on the tax proposals, they would do well to linger a while on other aspects, such as the composition of resources raised, including extra budgetary resources of PSUs. Indeed, that figure may tell us a great deal about the innovative approach adopted, if any, by the Finance Ministry. I recall how Mr V.P. Singh, operating under the leadership of Rajiv Gandhi, had introduced the Power Finance Corporation and the Rail Finance Corporation to raise bonds to fill the resource gaps of the respective undertakings.

He had also introduced the concept of tax-free bonds at the time. The response was truly impressive. Today, the PFC and IRFC are pillars of Indian infrastructure. I do hope the Finance Minister, Mr P. Chidambaram, also has similar path-breaking new ideas for infrastructure expansion up his sleeves.

Boosting the capital market

Enough has been said in earlier discussions about the need to encourage the capital market. It is particularly appropriate to emphasise this considering the present robust movement in the stock market. The Budget needs to tread warily lest it frighten away the investment impulses, both foreign and domestic.

Above all, it needs to be sensitive to the developments on current account on the BoP front. We are fast becoming a current account deficit economy. While this is partly a reflection of the healthy growth of capital goods imports on our manufacturing, it is also reflective of our heavy petro-products imports and high crude prices.

There is no time left to dilly-dally further on the policy responses to our petro-product doctrine. The Rangarajan Committee has come forward with a package of recommendations, which will hopefully discipline the petro-product market without a splurge of subsidies. The detailed impact of its recommendations on different stake-holders is still awaiting study. But it has set the canvas for the Finance Minister to paint a better picture of overall fiscal strategy, especially as it concerns this critical sector.

Hopefully, the implications of the recommendations, such as rise in petrol, diesel and LPG prices, as proposed by Dr Rangarajan, will find acceptance among Mr Chidambaram's colleagues, both in the Congress and outside.

The Budget will unveil its mysteries on February 28, albeit with all its abracadabra of numbers. Mr Chidambaram has a hard task ahead selling the bitter medicine alongside the spoonful of sugar on the economy. Hopefully, the markets will take kindly to his Budget. Above all, the economy as a whole should attain a higher level of equitable growth on a sustainable basis.