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Editorial: Building a new budget

Published by The Straits Times, Singapore on 2004-06-21

It is an axiom of democratic politics that a new government gets only one chance to make a good first impression with its first budget. That's stating the obvious, of course, but first budgets have a way of putting enormous pressure on government functionaries who must attend to every last detail--and request. Everybody wants something: the foreign affairs folks want more representations abroad; the social development department wants more funds for rural projects; the agriculture ministry wants more subsidies for poor farmers; more money is always needed for schools and health-care facilities. Thus, it's also another axiom of budgetary politics that budgets keep getting larger each year. What doesn't necessarily grow is the revenue pie, especially in a country like India where the tax base is relatively narrow, foreign direct investment is a puny US$3 billion annually, and deficit spending each year by federal and state governments is already almost 10 percent of the gross domestic product of US$600 billion.

Nevertheless, the newly elected Congress-led government of Prime Minister Manmohan Singh of India has outlined ambitious objectives for the ruling 13-party coalition that calls itself the United Progressive Alliance. In a document titled the "National Common Minimum Programme" that Dr Singh and the Congress leader, Mrs Sonia Gandhi, mostly cobbled together, the rate of annual economic growth is to increase from the current 6.5 percent to between seven and eight percent. Millions of new jobs are to be created, not only to accommodate the 45 million people currently looking for work but also the 35 million people - many of them college graduates - who will thicken India's current labour force of 250 million over the next four years. The document also promises more investment for strengthening the infrastructure, expanding agricultural output, and increasing irrigation.

No wonder Finance Minister Palaniappan Chidambaram looks a tad dyspeptic these days. He has just about two weeks left in which to come up with a miracle budget. One miracle will have to do with generating more resources: more taxes, perhaps, on transportation, cigarettes, restaurants, entertainment, automobiles, mobile phones, liquor, tourism? A value-added tax on services? These will all be highly unpopular measures. Another miracle concerns both increasing subsidies and reducing them. The UPA's Left supporters - whose 70 legislators are critical for the UPA's political stability in the Lok Sabha, the 545-member lower house of Parliament - have vigourously opposed revisions in prices that would bring down subsidies for items such as kerosene, cooking oil and some agricultural items. At the same time, the Singh-Gandhi document suggests that more subsidies would be in order for "the poor and truly needy, like small and marginal farmers, farm labour, and the urban poor."

And still another miracle that Mr Chidambaram is going to have to bring out is convincing India's 29 states to be less profligate, and to devote more of their own indigenous resources to sustainable economic development. Under the peculiar exigencies of the Indian system, things like shelter, potable water, sanitation, education, health, and law and order, are the responsibilities of the state, not the federal government. It's been famously demonstrated that barely 25 percent of federal subsidies actually reach the intended recipients - the poor. The vast majority of New Delhi's funds tend to benefit India's already affluent middle class (estimated at around 300 million people) and to special interests.

One more miracle needs to be apparent in the forthcoming budget: how to balance the natural instinct of Prime Minister Singh and Finance Minister Chidambaram to spur economic development through greater liberalisation, with the demands of India's Leftist parties that the Singh government retreat from market forces that they claim benefit only privileged classes of India's population of 1.1 billion. Budgets, to be sure, are notoriously susceptible to political amendments and special-interest adjustments. But if India is to accelerate its economic growth, it needs to reassure current and potential foreign investors that the government won't backpedal on reforms.

Budgets, as the old political saw goes, ain't fun.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist


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