R Jagannathan: In Budgets, less is more

MICROVIEW

When will finance ministers ever learn? For a man presenting his fourth Union Budget, P Chidambaram appears to have learnt very little from the past. Not only did his Budget contain the usual political drivel on addressing the needs of the "aam aadmi", it also went on to outline all kinds of initiatives and tax changes.

For all that, he goofed up on basics""as the flap over the taxes on cash withdrawal and fringe benefits shows.

Of all people, Chidambaram should know that there are limits to what finance ministers can achieve in any one Budget. I can safely predict that he will fail in most of his important initiatives, including the anti-poverty agenda, not because he is incompetent but because he is human.

Peter Drucker, the management guru, once remarked that no top manager can be effective when he has set himself more than one or two major objectives.

No important objective is ever achieved without concerted efforts and follow-ups at various levels. Any manager who thinks he can juggle with scores of objectives is living in a fool's paradise.

That applies even more to finance ministers, for the environmental variables that can impact the success of a Budget are even more unpredictable. If the revenue side is doing fine, politics may be moving against you.

If politics looks stable, there may be a petroleum time-bomb ticking somewhere. Net-net: finance ministers should focus on achieving one or two very important goals in any year.

They should be spending time making sure that all the supporting cast play their due roles, so that nothing gets in the way of success. Using the Budget to scatter political largesse like confetti is not the best way of achieving focus on important goals.

Chidambaram's Budget speech was stuffed with cliches that are meaningless in practical terms. His actions sometimes betrayed a completely different line of thinking.

For example, he admitted honestly enough that "outlays do not necessarily mean outcomes", but the first half of his speech was almost wholly about outlays. If he were genuinely worried about outcomes, he should have called for a sharp cutback in outlays""not an increase.

If Rajiv Gandhi's observation that only about 15 paise of every rupee reaches the poor is true, finance ministers should be straining every nerve to track the remaining 85 paise so that they can be redirected towards the poor.

If you don't know where your money is going, commonsense tells us that the first thing to do is to stop and check; pouring money faster down the hole is foolish.

Consider another folly""the cash withdrawal tax. His intention, said Chidambaram, was to "trap" taxpayers and not "tax" them. This should be music to the ears of every tax official in the country. In India, it suits the taxman to "trap" individuals and then extract bribes from them for looking the other way.

So, when you give the taxman more reasons to "trap" taxpayers, you increase corruption and black money. This is the exact opposite of what Chidambaram said he intended to achieve. In the Indian scenario it is far better to "tax" than to "trap"""at least till the tax administration is truly transparent.

There is no point trying to clean up the Ganga downstream when the effluent is discharged at source. An important cause for the generation of black money in India is the tax system, the tax administration, and the generally anti-business environment that pervades.

Overall, my personal view is that this is a schizophrenic Budget. Chidambaram has smeared red paint on himself (presumably to score brownie points with the Left) without sacrificing his tax-cutting soul.

Thus, even while cutting corporate taxes, he has tinkered with depreciation rates and introduced a fringe benefits tax. The left hand has taken away what the right hand seemed to be offering. It would have been far more honest to say that the time is not yet right to cut corporate taxes in view of the social goals.

The bottom line is simple: Managing sectoral expectations and trying to please every constituency are impossible for any finance minister. While growth itself is not a zero-sum game in the long run, Budgets are about managing expenses in the short run.

If you give away revenues here, you have to get them back elsewhere. Or you have to cut expenditure. The other alternative is to print notes, and let inflation rip.

The only sensible way to move things in the right direction is to concentrate on one or two initiatives every year""say, improving tax collections, or improving the delivery of net benefits from outlays for anti-poverty schemes""and leave other concerns for later.

Trying to set 20 objectives for one year is not only foolish, but downright irresponsible. This is why Budget 2005-06 will fail. Chidambaram has tried to be too clever by half.

rjagann@business-standard.com