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Budget 2008: Politics over economics
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March 01, 2008 10:41 IST

This Budget asks and answers some rather big questions. Begin by asking the man in the street, and he will say that he is happy with Chidambaram's Budget. And so the finance minister has dared politicians to criticise the farm loan waiver, and he might as well dare others to criticise the income tax cuts, if they care to.

In other words, he knows that he has touched a popular nerve in both city and country. The second big question to ask, therefore, is whether economics can hope to prevail over populism, or whether political considerations always trump good economics.

Certainly the UPA government's fifth and final Budget gives unequivocal answers: it is a political Budget from start to finish. And so a government led by economists and economic reformers has ended up bowing to political considerations and implementing over five years programmes that they may not believe in, but which they have to introduce and then find reasons to support.

When a government led by such notables writes off Rs 60,000 crore (Rs 600 billion) of bank money, or 3 per cent of all bank loans, it is as well to remember the harsh words hurled at Devi Lal when he did the same; but since he was an unlettered kulak, he could be safely abused.

The truth is that while farmers have been in distress, writing off loans makes every farmer who repaid his loan feel like a fool. What does that do to credit discipline? Also, the write-off does not end rural indebtedness because farmers owe more money to moneylenders.

And if they got into financial trouble because farming does not pay enough, then the debt write-off is only a palliative and does not solve the underlying problem. So farmers who borrow again (if the banks are willing to lend) will also get into trouble again. But these are the questions that economists ask. There is also a question that lawyers might ask: how does the government tell the client of a private bank not to repay a loan, unless the government makes it up to the bank? And surely, the government is not about to start paying up to ICICI [Get Quote] and HDFC [Get Quote] and all the others, is it?

The triumph of politics shows also in the national rural employment guarantee programme, which has been extended to all 596 rural districts, even though Rahul Gandhi who first demanded this realises now that the programme is not being implemented well.

Another indicator of the soft state is the increase in the income tax floor from Rs 1.1 lakh to Rs 1.5 lakh (it is still higher for women and senior citizens). But even in the United States of America, people start paying tax at a lower income level of $3,400 (Rs 1.36 lakh), while in China the tax floor is $1,400 (Rs 56,000).

India is poorer than both those countries, so why do people with higher income in a poorer country get away without paying income tax? The answer is that the government wants the urban, middle-class vote.

The fifth indicator of politics trumping economics is the government's refusal to raise petrol, diesel and cooking gas prices to reflect their real cost. So the oil marketing companies have lost over Rs 70,000 crore (Rs 700 billion) on this account in the past one year.

The way the government does its accounting, some of these figures do not show up in the Budget, even though the government will finally have to pick up the bill. If you add up the oil subsidy, the fertiliser subsidy, the extent of the loan write-offs that have to be made good and the money that has to be provided for the Pay Commission award, the total is huge.

That brings up another big question: should the Fiscal Responsibility and Budget Management (FRBM) Act be scrapped? For this law seems to be having the perverse effect of making the government hide more and more of its expenditure and not show it in the Budget. The finance minister can then claim that he is meeting FRBM targets, when in truth he is not. Scrapping the law might encourage more honest budgeting.

The last big question is whether governments can be trusted to be responsible with money. Note that taxpayers have paid up an average of 22 per cent more tax each year through the five Budgets of the UPA government-that is a lot, when nominal GDP has been growing by barely 13 per cent.

The tax-to-GDP ratio has therefore moved up many notches, but the deficit has not come down by as much. That is because the government keeps spending more and who is to ask whether such spending is done wisely or well? More evidence of politics trumping economics?


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