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How to judge the Budget

July 05, 2004

Recent history suggests that the two conditions required to produce a blockbuster of a Budget are that the economy is in deep crisis and the government is in the first of a five-year term.

Of course, I am guilty of making this inference on the basis of one observation, 1991, but looking back over the last 13 years, the logic of the simultaneous occurrence of both conditions seems compelling. We have had three first-year Budgets since then -- 1996, from Mr Chidambaram and 1998 and 2000, from Mr Yashwant Sinha.

Among the various Budgets that these two gentlemen presented -- besides these, Mr Chidambaram in 1997 and Mr Sinha in 1999, 2001 and 2002 -- their first year forays were the ones that provoked the most criticism.

Apparently, without the spectre of crisis looming over North Block, the pressure to keep too many constituencies happy in the first year of a new government was just too compelling.

To take the historical precedents further, both the 1996 and 1998 Budgets were presented around this time of year. Both finance ministers went on to present widely appreciated Budgets six or seven months later.

In February 1997, Mr Chidambaram made a decisive break from the oppressive direct tax regime that he had inherited. In 1999, Mr Sinha introduced significant tax breaks for housing loans, which contributed to the housing-led construction boom, which has been a major driver of the industrial recovery we have seen over the last couple of years.

Well, there is clearly no macroeconomic crisis in sight today. In terms of expectations from the Budget to be announced this week, this definitely takes it out of the league of 1991. The big opportunity is simply not there.

Not that there aren't any crises in sight; unemployment, public services and so on are very much on the radar screen as issues that the government must tackle quickly and effectively.

But, they simply do not appear to have the explosive power of a balance of payments crisis, for example, the kind that Dr Manmohan Singh used to great effect in 1991 and the next one or two Budgets. Crises of the kind that are now looming are simply not amenable to big bang solutions.

They require fundamental changes, which will take time to both implement and extract results from. In short, they are better suited to persistence and attrition rather than dramatics.

In the absence of macroeconomic crisis, the conditions that prevailed in 1996 and 1998, viz, the need to satisfy a wide variety of constituencies at one go, will also unquestionably influence this Budget.

The most appropriate way to judge it, then, is in terms of how effectively it finds a balance between the possibly conflicting objectives of these constituencies with the minimum possible compromise on "rational" indicators of fiscal health like the fiscal deficit, the widening of the revenue base, the control of expenditure not directly contributing to development and so on.

Apart from the nitty-gritty of the fiscal numbers, it should also be judged on its ability to resist the pressure to roll back on reform measures that are broadly consistent with the roadmap that was laid out in 1991.

There are three broad constituencies that the finance minister has to satisfy. Investors, both domestic and foreign, have been terribly skittish since the formation of the government.

The minister's direct efforts to assuage them has not, apparently, fully dealt with their concerns and the Budget will be a real test of the credibility of this government with the investor community.

The amorphous aggregate referred to as aam aadmi in the election campaign is clearly a "constituency" that the government will have to put a high priority on. The problem here is essentially one of heterogeneity. It may work well in a campaign, but to operationalise it in the Budget means doing several different things to satisfy a diverse set of interests.

The third interest is the organised labour/public sector/bureaucracy constituency that is vital support base for the Left. It has become visibly assertive after the transition of power and, regardless of the merit that one may give its positions, the fact remains that support for this government from the Left will be threatened if this constituency is antagonised.

Although I am often accused of overdoing cricket metaphors, I think this is a situation where they are entirely appropriate. The requirements of balancing multiple and heterogeneous interests in a situation where a crisis is not looming clearly call for playing it safe. Dr Manmohan Singh's first Budget was clearly a Sehwag-like one, going for broke.

Mr Chidambaram's and Mr Sinha's first Budgets were more Chopra-like, but unfortunately both snicked one to the slips in the early overs. What Mr Chidambaram needs to do this time is very much in the Chopra mould, but making sure that he avoids the early edges.

First-year Budgets are unquestionably an opportunity for setting in motion programmes that have relatively long gestation periods, but start paying off in time for the next election campaign.

This Budget, therefore, must be judged by whether it articulates a vision for the five years that the government presumably hopes to be in office for.

The Common Minimum Programme may have provided a wish list, but it is the Budget speech which will indicate the willingness of government to commit resources to making things happen. A good Budget speech will provide an unambiguous sense of the priorities that the government places on different elements of the CMP.

However, vision is not enough. Long-gestation programmes have to be complemented with short-term initiatives, which provide an assurance that the government is on the ball. Here, Mr Chidambaram can take advantage of the fact that there are only seven months left in the fiscal year, which means that even short-gestation initiatives will probably not show results by the time the next Budget is presented. February 2005 is close enough for it to provide an appropriate opportunity for doing the fiscal things that a first-year Budget needs to.

In short, I would be quite happy if this Budget were to be a play-safe, unambitious one. Investors will be appeased until next year if reforms are not rolled back in any tangible way. The various categories of aam aadmi will be satisfied for the moment if there are a large number of small initiatives, which make things a little easier.

And, the organised interests will accept, for the time being, the status quo on provident fund interest rates and related indicators. This is a time for singles and twos; the fours and sixes can come in February 2005, when the coalition has learned to live with itself.

(The writer is chief economist, Crisil. The views expressed are personal)

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