The Hindu Business Line : Economy's managerial plan: A fair, breakeven play

The Budget's brushstrokes are simple and practical. It applies the principles of managerial breakeven of revenues from governance against the costs. Its policies are aimed at plucking the low-hanging fruits. Thereby, the Budget plans to rapidly overwhelm the stubbornly high costs of governance, say G. RAMACHANDRAN and R. VIJAY SHANKAR.

It is now a widely accepted principle of governance that cutting fiscal deficit is good for governments and their citizens. Profitable governance cuts deficits; it expands welfare. But profitable governance needs a profit plan. Budgets may be regarded as the relevant profit plans.

India's profit plan for 2006-07 is a managerial masterpiece. Its brushstrokes are sober, simple and practical. It applies the principles of managerial breakeven of revenues from governance against the costs of governance. Its policies are aimed at plucking the low-hanging fruits. Thereby, it plans to rapidly overwhelm the stubbornly high costs of governance.

The deep cut effected in excise duty on small cars is a fine example of how low-hanging fruits may be plucked.

But this has attracted unfavourable criticism. It has been hastily interpreted as a favour to the rich. The critics have overlooked the potential gains to the poor from hastening India's move towards profitable governance.

BURDEN OF DEFICITS

Unprofitable governance generates revenue deficits. It unconscionably whittles down investments in social infrastructure.

As a result, it deprives citizens of public goods. Education, health, morale and confidence are in short supply when governance is a loss-making activity.

Unprofitable governance saps the welfare of citizens. It deprives them of social security and reliable access to speedy and impartial justice. Equitable access to economic and social opportunities evaporates.

However, the impact of unprofitable governance is not uniform. Loss-making governance is harsh on the poor and the socially disabled.

The rich and the able migrate in search of social security and economic opportunities. When they migrate, tax revenues fall.

Deficits get larger and tougher to fund. An unending spiral of poverty and pessimism follows.

LIGHTENING THE BURDEN

India's success in warding off such a dismal spiral is reassuring. It is the result of democracy, Parliament and budgetary outlays on social infrastructure. But there is enormous room and scope for improvement in governance, taxes and tax administration. Good education, health, high morale and confidence will follow from enhanced social outlays.

India needs to move quickly away from crushing deficits towards profits from good governance. This move will expand social security. It will make access to economic opportunities more equitable. The question is how long it should or it would take to make this happen.

In an ideal world it should be achieved right away. But in practice, it would take long for India to pull itself out of the dark hole it has dug itself into.

In these circumstances, a good practitioner can make the move happen faster and with fewer bumps. The Finance Minister has done exactly this by plucking as many low-hanging fruits. The road to smaller deficits has been laid.

PROFIT PLANNER AT WORK

Profit planning is the most important managerial task in a business. A business that has planned its profits right has to necessarily have its volumes, unit prices, fixed costs and variable costs planned right. Raising volumes and unit prices will, in general, push up profits. Cutting fixed costs and unit variable costs will in general boost profits.

The acumen — how, when and where — pertinent to each of these four determinants of profit distinguish profitable businesses from sinking businesses. Consider unit prices. Raising prices will in general boost profits. However, it is difficult to ignore the fact that India's telecommunications companies are turning in sizeable profits after slashing unit prices.

So, profit planning is not a simple exercise in arithmetic. It is not straightforward because each of the four determinants of profit has a relationship with the other three. For example, a cut in prices could push up volumes considerably. Total revenues could rise handsomely after a generous cut in prices.

Moreover, a business can become profitable by generating high revenues without having to bother too much about fixed and variable costs. Some businesses can also remain profitable by continuing to trigger high revenues without having to get down to the difficult tasks of cutting fixed and variable costs.

THINK BREAKEVEN

Governance is a business. Government is in the business of providing governance. That is why it collects taxes. There is no charity; there are no free lunches.

Tax rates are the price the government implicitly sets for its services. Aggregate taxes are its revenues. Revenues may be grown by raising taxable output as well as by raising tax rates.

Profits from governance are the surplus of revenues over costs. Profits may be grown by raising revenues as well as by cutting costs. And, costs may be cut by cutting fixed costs as well as by lowering variable costs.

Fixed costs of government are those that remain unaltered at all levels of taxable output. Variable costs are those that vary with taxable output. They rise when taxable output rises. They fall when taxable output falls. But they may also fall when government improves its efficiency and productivity.

Almost all costs of governance in India are fixed costs. India is an apt example of a business beset by high fixed costs. It cannot cut these fixed costs. At the same time, there is little that the business can gain by becoming more efficient and productive.

To earn a decent profit, this business can raise taxable output by being friendly, responsible and persuasive. It can also raise tax rates. But raising tax rates could shrink volumes and taxable output. So, the government has chosen to lower some excise and Customs duties. It has left personal and corporate income-tax rates untouched. It has raised the service tax rate with the hope that taxable output will not shrink.

The cuts in excise and Customs duties have the potential to expand the market for a range of goods. This will expand consumption and taxable output. It will also expand aggregate contribution to government. This is the quickest and least risky method for overwhelming the high fixed costs. The Government has learnt quite a bit from the telecommunications companies, and has put the learning to practice.

(G. Ramachandran is a financial analyst. R. Vijay Shankar is Director of SSN School of Management and Computer Applications. Feedback may be sent to indiagrow@yahoo.com and pari@thehindu.co.in)