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Friday, February 27, 2015

Exciting voyage - This budget is being projected as a landmark one

By Swapan Dasgupta

Like most politicians of the time, Atal Bihari Vajpayee wasn't entirely comfortable with economic issues. A leader whose judgments were forged by instinct and observation, Vajpayee was always a little ill at ease during the seasonal discussions on the Union budget. Indulgent Bharatiya Janata Party workers - themselves equally impatient with the intricacies of economic decision-making - used to smirk over their leader's predictable responses to the budget during the time he was in opposition. Vajpayee's standard responses were that the budget was either "inflationary" or "anti-people". In the times he preferred a more lyrical response, Vajpayee's response was equally predictable: sarkar garib ke pet me lath mara(the government has kicked poor people in the belly).

Over the years, and particularly after Manmohan Singh's landmark budget of 1991, the terms of the debate on the budget have shifted. The earlier bouts of hoarding of cigarettes and other "essential" items have given way to a measure of predictability. Arbitrary fluctuations in excise duties - dependent sometimes on the whims of the finance minister - have yielded to expectations of larger policy announcements. Yes, the middle class still looks to a few sops such as more relief for home mortgages and enhanced tax-free premiums for medical insurance, but the scale of expectations has lessened considerably over the years.

What, however, hasn't kept pace with the changes is the rhetoric of the political class. While an increasing number of active and semi-retired politicians are these days called upon to write instant but informed op-eds assessing the budget, the great majority of the members of parliament react to the finance bill in exactly the same way as they did in the 1970s and 1980s. Along with the "anti-poor" and even "pro-corporate" labels attached to the exercise by seemingly indignant MPs, the garib ke pet me lath expression can even be heard.

Among informed corporate organizations and the commentariat, the packaging of expectations has changed somewhat. With the election of a BJP-led government and a prime minister unequivocally committed to rapid economic development, the terms 'tectonic shift' and 'bid idea Budget' have also made an appearance. A perfunctory perusal of the pre-budget churning in the popular media suggests a spectacular level of hype. On Saturday, the finance minister, Arun Jaitley, is expected by both friends and foes to leave the distinctive mark of the Narendra Modi government on the way India thinks on economic issues. If Jaitley's dreary presentation of the July 2014 budget was treated as a rushed job by a government barely two months in office, this year's exercise is being projected as a landmark budget. One report by a major player in the financial markets has even gone to the extent of proclaiming it as the most important budget speech since 1991.

At one level, Jaitley should be tickled by the flattery and the hopes reposed in his wise judgment. However, he should have reasons to be concerned about the plethora of unreal expectations. Whereas the middle class, somewhat satisfied by the falling rate of inflation and the dip in petroleum prices, now looks for greater incentives to spend more money on themselves and their families, the corporate bodies and investors want the government to kick-start the process of enhanced capital expenditure.

None of these expectations are per se unreal or unduly ideological. However, the mental approach to Jaitley's second budget was crystallized before last Tuesday's government announcement of its acceptance of the 14th Finance Commission report on Centre-state revenue sharing.

The significance of the new terms of revenue sharing can hardly be underestimated. As opposed to the 13th Finance Commission that earmarked 32 per cent of the proceeds from the divisible tax pool for the states, the Y.V. Reddy-chaired 14th Commission has suggested a staggering 10 per cent hike. According to a report in Business Standard: "This means in 2015-16 states will receive Rs 5.79 lakh crore of the Centre's expected gross tax receipts of Rs 15.67 lakh crore. The share of states will rise 51.55 per cent compared to the 2014-15 estimate of Rs 3.82 lakh crore."

At a time when the overlordship of the Planning Commission has been consigned to history, the implications of the new federal arrangement are awesome. For a start, this marks the formal end of the Nehruvian vision of a federal arrangement with a decisive tilt in favour of the Centre. From 2015, it would be more accurate to see in India a near-equal partnership between the Centre and the states. In the economic context, the Centre is now the first among equals.

By implication, this means that the overriding importance hitherto attached to the Union budget will have to be significantly modified. At a time when capital expenditure in the private sector has been sluggish, the pressure on the Union budget to trigger the much-needed investments in infrastructure upgradation will, of course, remain. But the expectations have to be tempered with the realization that nearly half the revenues of the Centre will now belong to the states. In real terms, the scope for initiatives from Delhi has shrunk. Whether this will now lead to a corresponding shrinkage in the size of the Central government remains to be seen. There is a compelling case for despatching a large number of bureaucrats on deputation from their states to Delhi back to their parent cadre.

According to the projections by the Finance Commission, the total grants to the states will nearly double from the next fiscal year. The most spectacular gainers will be Andhra Pradesh, Assam, Jammu and Kashmir, Himachal Pradesh, Maharashtra, Mizoram, Nagaland and West Bengal; the states of Gujarat, Rajasthan and Uttar Pradesh won't do too badly either. Coupled with enhanced royalty payments for mining that will mainly accrue to Odisha, Chhattisgarh and Jharkhand, we are likely to witness a significant shift in the economic centre of gravity.

First, state budgets will acquire an unprecedented degree of importance. Second, the term 'competitive federalism' is certain to acquire a real meaning as states compete with each other to be more competitive. Third, flushed with funds, the quality of governance will become a new urgency for the states. How the bonanza in resources is utilized will become the stuff of politics. This is more so because the determination of local priorities, the architecture of local programmes and their implementation has been left almost entirely to the states, without any diktat from Yojana Bhavan. Whether a state government spends resources on building infrastructure or doles and the upkeep of local clubs will be a matter for the state entirely. Along with additional resources, the state governments have been additionally empowered politically. Hopefully this will, in the long term, shift the focus from victimhood and identity to delivery. Finally, it is more than likely that the onus of creating and financing India's creaking welfare net will also devolve on the states. Apart from ending the one-size-fits-all culture that the Sonia Gandhi-led national advisory council imposed on India, it could contribute to greater transparency - although the chances of greater profligacy in the short term cannot be ruled out.

It is unlikely that the full impact of the shifts created by the new federal arrangement will be felt in this week's budget. It may be Jaitley's misfortune that his finance bill will be judged within old parameters at a time when many of the earlier assumptions have become totally invalid. However, that may be a small price to pay for the initiation of a new and exciting voyage that the country is about to embark on.

The Telegraph, February 27, 2015


Priya Pandit said...

Found the article very informative and exciting. If we can shift the onus of development and delivery to a smaller and therefore more manageable unit, it is likely to succeed. The size of our population and country makes it very difficult for Central Government initiates or policy to percolate down quickly. besides, the state government will be able to tweak budget expenditure to suit local issues and a spirit of healthy competition amongst states will help the man on the street. However, one cannot put it past govts to pass populist measures like promising 'free' this and that based on the AAP model in Delhi.

srinivasan said...

But it's an exciting wait,in the the
context of what appears to be a genuine and determined effort to introduce 'competitive federalism'-R Srinivasan