Home > Archives (2006 on) > 2008 > March 22, 2008 > Union Budget 2008-09: Dominant Impressions

Mainstream, Vol XLVI, No 14

Union Budget 2008-09: Dominant Impressions

Saturday 22 March 2008, by Kamala Prasad

The Union Budget for the financial year

2008-09 saw impressive build-up by the media and the powerful lobbies. Some moderation in the growth rate was played up in a sustained manner not only to protect what various industry sectors have got but to corner additional sops in the Budget. The Budget was expected, therefore, to offer stimulus to revive the sagging sectors. This reality merely certified that the Budget has gainers and losers. Among them, there are social biases in gains and losses. It will take time for the full impact to be realised and felt.

The agricultural crisis had been talked about for almost two years now. What brought to a head was the declining foodgrains production. This has resulted in India seeking import of grains with prospects for this to continue. The Prime Minister had warned in the last meeting of the NDC that food security would be under strain for a decade or so. The radical Left movement has been extending its attraction for the marginalised population. To top it all, the rate of farmers’ suicide has not abated mostly in regions that had lapped up diversification to commercial crops in rain-fed zones. So, a development package to resuscitate agriculture, food production and rural livelihood was very much on the cards. The interest was only in the shape it would take. The debt waiver scheme has immediately brought to the fore trade-offs between relief and growth, investment and consumption; and between rural and the urban sector sops. The issue is: does this really indicate a momentous shift in priority to the rural sector? There can be no immediate answer.

Finally, the class bias in favour of the income tax-paying middle classes in shuffling personal income tax slabs covers important opinion-makers. This puts additional income among the income tax-paying class to boost consumption. The direction to consumption appears in reduced excise duties by two percentage points in general and a little more in respect of small cars and two-wheelers. This discloses a slowdown from slackness in consumption by those who constitute the bulk of the mobile consumer society. The government’s capitalist rationale is that consumption raises demand; demand leads to investment; investment delivers growth rate; and high growth rate accelerates integration with the global economy. So, this is all about boosting liberalisation.

Broadly, then, this appears to be a Budget for uncertain times in contrast to the last one for the good times. The RBI had been warning of global financial imbalances for almost six quarters. The American sub-prime crisis and heightened fear of looming recession in the economy that is almost 22 per cent of the global economy had its impact on the budget. Are we integrating into the global economy faster than the Indian fundamentals warrant? The Prime Minister does not feel so. However, both he and the Finance Minister have articulated that India would not remain unaffected by the looming global financial downturn. Is it merely cyclical or is it structural? The opinion is divided. However, the Budget explicitly takes note of global realities in not engaging in unleashing highly expansionary forces. So, his speech specifically underlines that “2008-09 should be a year of consolidation”.

Back to the Roots

THERE are unmistakable signals in the budget speech that are refreshingly realistic. First, the Indian Plan makes critical contribution to the growth momentum of the economy. So, the public sector has to sustain a higher trajectory of growth. Even the PPP model is designed to invest public resources to sustain private sector profitability. Secondly, the FM has stated, for the first time in the current era of reforms, that “we are determined to become self-sufficient in foodgrains”. This terminology is somewhat of a retreat from the position that shortages would be made good by imports with a larger volume of foreign trade and foreign exchange reserves. Globally tightening supplies and spectre of climate change posing new threats to food security in South Asia, in particular, seem to have brought about this reversion to the roots. Thirdly, the speech states bluntly that “keeping inflation under check is the cornerstone of our policy”. It notes the significance of food inflation in this task by stating that the “management of supply side of food articles is the most crucial task in the ensuing year”. Finally, these reminders lead to the recognition as to why the NCMP had suggested a balance between equity and growth; a positive trade-off between employment and wealth creation; and synergy between modernisation and unskilled manpower utilisation. It is fashionable now to refer to this as inclusive growth. The Budget speech traces this to Jawaharlal Nehru in following these goals as its part. “These goals can only be achieved by a considerable increase in national income and our economic policy must, therefore, aim at plenty and equitable distribution.” The catch lies in the omission that Nehru mentions only “national” income and not private wealth that is inherent in the ideology of economic liberalisation.

Growth with equity sounds attractive. It is equally difficult to realise. This is more in the private sector directed growth under the global capitalist dispensation. Global competition is the excuse for domestic marginalisation and deprivation. Inequality is increasing and the tax regime offers no solutions. Poverty statistics is perpetually under challenge because there is a disconnect between the normative calorie norm that was its foundation and the extrapolated thresholds of income poverty. Budget numbers alone are insufficient to capture the risk to our future generations. They focus only on what the captains of industry and business wish the government to invest in and not how to spread the benefits wide. The Budget has, therefore, hitched on the rural loan waiver scheme to divert attention from harsher realities in fiscal and economic management.

The current food inflation fuelling wholesale and consumer inflation is inherent in the neglect of the core structural elements in the agrarian situation. Indian food security targeted the growth momentum in subsistence farming that covered the bulk of the population. State intervention in marketing was only supplemental since it covered less than 10 per cent of the grain produced. Indian reformers consistently undermined the strategy in the zeal to trust private business interests and food security concerns to match. Any further gap, they assured, would be met by the private global market. The last two years have demolished these foundations. The Budget strategy of debt relief for farmers, and not only the small and marginal nor those engaged in rain-fed farming, is at best a coramin dose. Once again, larger benefits may accrue to the richer farmers in irrigated areas who have heavy debts to repay. It evades possible alternatives to the ideology based relief strategy for the medium and the long term. That is an undertaking demanding political direction to agriculture and food to bring the States on board. The Budget does not disclose any initiative in that direction since the Union coalition, and the Congress party in particular, shows keenness in appropriating all the credit.

Union-State Partnership

THE political direction of the Budget lacks in incentives for a more meaningful partnership between the Central coalition and the States under different ruling parties. There are three indications of growing distance between the two. Firstly, the Union Government’s love for “special packages” to favoured States as gift persists. One recent event was relief package for districts in a few States faced with farmers’ suicides. Secondly, the Budget is getting cluttered with schemes that show it in competition with States. It is not known if a structured dialogue with States had taken place to evolve long term sustainable strategies to reverse rural distress. Even the Radhakrishnan Committee, the Budget notes, did not favour debt waiver. The announcement shows all elements of being prepared in a hurry. Thirdly, the Budget sets up new institutional mechanisms for specific investment ventures without first clarifying administrative burdens being created for the States. This Budget adds a few more such as water resources finance corporation; a window within the RIDF for rural roads; a non-profit corporation for skill development mission etc. Finally, the Budget provides grants for individual ventures as if there is a financial window beyond the constitutional scheme of sharing of financial resources. In overall terms, a synergy between the Union and the States for implementing the budgetary schemes is not evident.
The special scheme for the Muslim minority in selected districts and States has already raised a controversy with political and ideological overtones. If this had come up as part of, for instance, a broadening framework of Backward Region Grant Fund to handle regional and social economic disparity, it might have escaped the risk of Centre-State disconnect. The new scheme of scholarships/fellowships, worthwhile as they are, might have delivered quick and solid outcome if the States had been party in them. As is known, the one lakh scholarships announced in the last Budget are still to get off the ground. Instances can be multiplied showing that the Union Budget is diverting attention from the core concerns in financial housekeeping to other objectives. This is what brings a critique of the manner of putting up ad hoc schemes even after more than five decades of planning. Why criticise the past legacy then if consolidation and a new system of management are not to be put in place?

In this connection, is it not an irony that the Budget allocates a specific fund for “monitoring and evaluation”, almost admitting this has been lacking so far. “I think,” notes the budget speech, “we do not pay enough attention to outcomes as we do to outlays or to physical targets as we do to financial targets or to quality as we do to quantity….. the intended outcome is to generate and monitor scheme- and State-wise releases for about 1000 central Plan and centrally sponsored schemes in 2008-09.” Two years ago, the Finance Minister announced with fanfare the scheme of presenting an outcome Budget but it is almost forgotten now. Won’t adding to the Union Government bureaucracy a third-tier of institution, over and above the State Government and the subject matter Ministries/departments, merely make the task more complex? If this is a step in the direction of reform of Plan-administration, then it should as well find a place in a scheme of overall reform of Plan and financial administration, both at the Central and State levels.

It is natural for the States to suspect that the Union Government is trying to create another mechanism for engaging in an unmerited blame-game against the States. There is much wrong with the States in implementation as it is with the Union Government. The shortcomings in the State administration of funds and schemes would have got much credibility if a Budget document incorporating the timeliness of Central releases had also been promised. This is not so. “The hub of the problem,” notes the speech, “lies in implementation and implementation largely is in the hands of the State governments.” Is this the whole truth? Let one look at the progress of infrastructure projects implemented by the Central Government and authorities directly under it. Practically every sector has to report shortfall in implementation even in the core energy, national highway and similar projects. The malaise goes deeper and policy and budgeting reforms come to the fore. The Budget is silent on that. In the absence of a comprehensive focus, the reflection on the States will merely increase their vulnerability to poor performance and its reporting.

Budgetary Performance Management

PART of the problem lies in far-too-much dominance of the economic consultants and economists to the exclusion of other stakeholders. In the government sector, the income tax code promised in the last Budget is yet to appear. Off-Budget expenditure impacting real fiscal and revenue deficits are now proposed to be referred to the Finance Commission that hardly has a mandate under the Constitution to look into such an extraneous matter. Tardy financial approval procedures in the Union Government were brought to notice with the Industry State Minister reminding the FM about its adverse consequences for Budget performance. And yet, the speech has several proposals that are allocated funds when even the outlines of the schemes are not there. The government is open to endorsing public criticism of the public bureaucracy but the response is in merely constituting committees/ commissions to delay decision-making at the policy level. A managerial framework for Budget-performance monitoring and evaluation for timely reform is sorely lacking.

Serious gaps in capacity and expertise in the bureaucracy to cope with new changes and challenges are self-evident. In the last five years and even before no attempt was made to undertake a capacity study and design schemes to upgrade bureaucratic output and prepare the framework to lay down guidelines for outcome grading. Outcome is a joint responsibility of the policy- maker and the implementor and there lies a disconnect between the political executive and the civil/technical service personnel. Even worse is the case of new systems under new sets of conditions and challenges. So, there is no trace of a new culture of governance and administration for new times. We merely wait for reports from an Administrative Reforms Commission. All this is not and cannot be part of the Budget exercise; nor is then the kind of deficient enumeration of plethora of schemes that should suit a municipal or a district panchayat Budget. Rather than bemoaning the shortcomings, would it not have been worthwhile to explore innovative ways to use the instruments available for Budget implementation to make relevant shifts in procedures and changes in decision-making powers?

The author, a distinguished administrator, is a former Chief Secretary of Bihar (now retired).

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