Needed: A boring Budget

The Budget should be judged on delivering boring principles - realism, fiscal prudence, fewer schemes and more governance

In two days, the Finance Minister will present her Budget for 2020-21.  I wrote last month (Business Standard, December 19, 2019) of the speech I’d like to hear.  In these last six weeks, the economy has matched the sky above Delhi — dull, dark and polluted.  This Budget should be judged on principles that bring clarity, light and cleanliness.
 
Realism and transparency

Illustration by Binay Sinha

There has been concern over the true budget deficit.   The only thing worse than a bad number is not knowing how bad the number is (some say the true deficit is 4.7 per cent, others peg it at 5.5 per cent, the only thing all agree on is that it is not the official 3.3 per cent).  This Budget should transparently acknowledge the true deficit, including the off-budget items. It should, equally, be realistic about revenue and expenditure. The Budget presented last July assumed nominal growth of 12 per cent this year; just six months later, the actual number is projected to be 7.5 per cent. Our target of being a $5 trillion economy by 2024 is worthy, but achieving it requires annual real growth of over 9 per cent (and nominal growth of over 13 per cent), for the remaining four years. If we do all the right things, we could perhaps see a rebound in growth in 2021, but the budget estimate for 2020 must reflect what we can realistically project today. 
 
Using off-budget tools to meet the targeted budget deficit is well-known. The problem is facilitated by the government using cash-based accounting. Every Indian company and an increasing number of governments worldwide use accrual — the essential principle is to match the recognition of revenue with its associated expense. So when a company books a sale, one simultaneously books all the expenses associated with that sale. Cash accounting requires no such discipline. The government receives an interim dividend from the Reserve Bank of India (RBI) or ONGC, Indian Oil and other public sector units (PSUs) — it counts as revenue. Bharat Petroleum Corporation Limited and Indian Oil buy each other’s shares from the government — it’s disinvestment revenue. Instead of the government financing the food subsidy, the Food Corporation of India (FCI) borrows from the market to pay farmers for their produce and the government need only recognise the expenditure when it pays FCI. It draws on the National Small Savings Fund to finance a fifth of the deficit — and does not need to recognise the liability in the Budget. The government delays the payment of dues to private companies — it counts as next year’s expenditure for work completed this year. The Union government delays paying the states their share of goods and services tax dues; it reduces the central budget deficit, increases those of the states, and leads to the states in turn delaying their payments to control their deficits. These games were not invented by this government, but it demonstrates unusual skill at them. The net consequence is less liquidity in the economy. And the best PSUs are left with less money to invest in growth. The Union government reportedly owes some Rs 300,000 crore to enterprises and the states — clearing those dues would be an immediate stimulus like no other.
 
Over the last three years, all Indian companies have had to implement a new accounting standard, IndAS. More rigour has been brought in on the timing of revenue recognition, asset measurement, and bad debt provision. It is time IndAS, the Indian Accounting Standard, also applied to the Indian government.
 
Fiscal prudence
 
The first rule of government — all governments, for all countries — is Do No Harm. Having done no harm, we can then start to think of how to do some good.  What are the signs of doing no harm? Given the real budget deficit, we must start with fiscal prudence — restraining spending and enhancing revenue. Tax cuts (corporate and personal), increases in tax thresholds, farm-loan waivers, and direct-income transfers (however worthy) would today all be as imprudent as they are popular. To stimulate our moribund economy, the government has already announced a massive infrastructure push — an investment of Rs 100 trillion over the next four years, with the government share at about Rs 40 trillion (the private sector and foreign investment are expected to make up the balance).  This is indeed a good way to stimulate the economy, with a higher multiplier effect than tax cuts or income transfers. Building rural roads, say, creates essential infrastructure while directly putting money into the rural economy through local employment. But even this worthy investment must be financed without increasing the fiscal deficit. How does the government raise Rs 40 trillion?  The obvious way is through a massive privatisation programme — calling for the full privatisation of the state oil companies, public sector banks, insurance companies and other viable PSUs.  Much opposition can be expected. But this government has great political capital — it needs to use the prime minister’s outstanding communication capability to spread the right message in the national interest.
 
Fewer schemes, more reform
 
As we listen to the Budget on Saturday, we should be looking for the call of more governance and less government being put into practice. We know what government is. Wikipedia defines governance as “the process of decision-making and the process by which decisions are implemented (or not implemented)”.  Are decisions being made after deliberation, input from independent institutions, and building of consensus? Does successful implementation depend on the play of market forces and incentives? Or are we relying on bureaucratic choices to make decisions, and discretion and penalties to force implementation?  Does the Budget see the role of the government as making policy or launching new schemes, however worthy their objectives may be? If we hear of powers being given to bureaucrats, of penalties for deviations, of myriad new schemes, we should see in those signs of more government. If we hear of the removal of bureaucratic discretion, decriminalisation of offences, the strengthening of the independence of institutions, and the deliberation of new policies, we should be encouraged by these signs of more governance. 
 
Fiscal prudence, following the right accounting standards, including off-budget items, paying ones bills, being realistic about growth prospects and avoiding grand new schemes will not set our pulses racing with excitement. But a boring Budget is exactly what the country needs.
 
The writer is Co-Chairman Forbes Marshall, Past President CII, Chairman of Centre for Technology Innovation and Economic Research and Ananta Aspen Centre;  ndforbes@forbesmarshall.com