Ashima Goyal

A Budget to improve governance

Ashima Goyal | Updated on April 13, 2011

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Even small improvements in systems and institutions can have a significant effect on outcomes. A Budget that focuses on institutional reform can, therefore, address supply-side concerns and anchor inflation expectations.

Given that inflation is the major problem and is driven largely by supply-side bottlenecks, the Budget must make a make a big-bang attack on these issues. Convincing changes will lower inflationary expectations.

It is said inflation is the result of the actions of millions of individuals whom the government cannot control. The government may not be responsible for these actions, but it can influence them. The Finance Ministry controls the purse strings, and therefore can motivate many required changes through a judicious use of funding; make rewards conditional on performance, and create incentives that influence future action.

REDUCING FOOD INFLATION

Elements of an effective anti-inflation strategy include motivating better connectivity for agricultural produce. China removes taxes on transport of agricultural commodities when inflation is high. We should at least remove blocks on movement and marketing of produce, such as octroi and mandi taxes. The Agricultural Produce Marketing Committees (APMCs) confer monopoly power on a handful of traders, largely with political connections. Model APMCs have been designed and implemented in a few States. But even in these the power to allow entry vests with those who benefit from restrictions. No wonder real change is elusive.

Centralised marketing helps government procurement, which is itself in need of serious reform. Even so, the APMC schedule relating to perishables could be altered, to allow alternative forms of marketing. Since the high vegetable and fruit prices consumers pay do not reach the farmer, they are not motivating an adequate supply response. Large farmer cooperatives such as Amul have been able to benefit farmers. Private farm-to-fork retail chains, with efficient supply management, would invest in processing and cold storage, reducing current tragic wastages. India cannot become a modern economy with agriculture organised in the old ways.

PROMOTE COMPETITION

A conscious policy decision should be taken to shift from the earlier focus on preventing speculation and hoarding in agriculture to reducing monopoly rents. Traders have access to black money, so selective credit controls are not a serious deterrent, and cannot be imposed in a much more complex economy. More competition, including from imports, could cut trading margins. The old argument that private parties would fleece farmers no longer holds, since today farmers have much more information from the Internet and other media. It is monopoly procurement, whether Government or private, that fleeces farmers.

Since agriculture is a State subject, the Budget could offer carrots to motivate these changes, including greater efficiencies in the government's own food procurement, stocking and distribution process, and better coordination among the multiple agencies involved. Large government stocks at a time of high food inflation have served to aggravate inflation. To tackle inflation, the Budget must also, of course, make provisions for improvements in infrastructure, and cut critical excise duties in line with the general reform plan.

EXPENDITURE COMPOSITION

Post-Lehman, there were doubts about fiscal capacity, about government's ability to spend, and to consolidate its finances if it did spend. But major countries struggle with expanding deficits after the crisis, while India is one of the first to demonstrate that it can reverse deficits. This gives a good signal to the world, of control and strength, and therefore targets must be adhered to. High growth and revenue buoyancy is a tremendous and enviable strength. But it leads to the temptation to splurge, as we saw towards the end of UPA-I. Mechanisms must be put in place to reduce spending in good times, thus building up credible capacity to spend in bad times.

Attention should be paid to the classification of expenditures. This will improve the composition of government expenditures and lead to a better balance across the types of deficits. Expenditure that creates human capital or has large spillovers that increase future tax revenue should be classified as capital, not current expenditure. Effective expenditure that builds capacity must be increased, even as efficiency and economy in resource use are encouraged through use of Management Information Systems and better accounting.

INSTITUTIONAL REFORM

The Government is often unable to spend even targeted amounts. Even in the last Budget shortfalls continued in most sectoral expenditure targets. A cut in expenditure targets for sectors that did not meet their targets may motivate better planning. It will also reduce the tendency to bloat estimates above feasible expenditure in order to get more funds. Spending should be even through the year, not bunched at the end, as is common.

There is a liquidity squeeze in markets partly because of large government cash balances. Structures should be put in place for better Government cash and inventory management.

Even small improvements in systems and institutions change behaviour and have a cumulative and increasing effect on outcomes. A Budget that puts in better systems will enable a better supply-side response, reduce our governance deficit, and anchor inflation expectations.

(The author is Professor of Economics. IGIDR, Mumbai. >blfeedback@thehindu.co.in)

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Published on February 10, 2011
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