R Jagannathan: Time to downsize Budgets

MICROVIEW

The more the number of Budgets one sees, the less important they seem to be in terms of economic impact. Ironically, even though their overall relevance has dwindled, the hype and hoopla surrounding Budgets has magnified several-fold.

Budgets today are extraordinary media events, almost the financial equivalent of Ms India contests, complete with juries pronouncing their verdicts.

If it were not for the huge media build-up in the weeks preceding and following the Budget, annual Budgets would have been downsized long ago. Most print and TV journalists spend weeks planning for the Budget, as if it were a life and death issue.

I don't think I am giving away any trade secrets by disclosing that Business Standard's own blueprint to cover the Budget this year was bulky enough to run a close second to P Chidambaram's Budget documents.

There are two reasons why Budgets are increasingly irrelevant. One is the market economy, which handles huge chunks of the resource allocation job autonomously.

The other, more important, reason is that finance ministers have almost no role to play in that part of the Budget that is most crucial: spending.

This is almost entirely the work of other ministries and state governments, and also the area where governance is worst. Net result: Budgets are now only about raising revenues, not effective spending.

If the purpose of government is to ensure that resources go to the areas where they are most needed, two things must happen: the focus must shift to the spending ministries (both at the Centre and states) and effective ways of monitoring them; and two, the role of the finance ministry, and the use of the Budget as a resource-raising vehicle, must be downsized.

The spotlight must shift away from Budget-making to budgeted spending by the ministries; the finance ministry must come into the picture only when other ministries want to raise more resources, or when large-scale, economy-wide course corrections have to be made. This can be done anytime, and doesn't need a Budget every year in February (or July, for that matter).

The right way to go about Budget reforms is to shift the onus of resource raising onto the ministries managing the spending (railways, HRD, health and family welfare, et al). It is they who must present their Budgets to Parliament, not the finance minister.

For every rupee they want to spend over and above what they are already getting, they need to go through three steps: first, find ways to raise resources internally by cutting costs or improving revenues through user charges or any other means; second, they must demonstrate that the resources actually reaching the needy are increasing as a proportion of the total Budget (currently, less than half the allocated money is said to reach the people it is meant for); and three, they must also explain why the purpose for which the money is sought cannot be achieved by other means.

Example: Can universal education be achieved faster by roping in NGOs and corporates with appropriate incentives or is increased spending on government schools the only answer? Since most of the spending happens at Central ministries and states, the Union finance minister himself has no useful role to play till these reforms happen.

What happens today is that ministries add up their wish-lists and present it to the finance minister. The latter tots up all the expenditure, axes some of it, works out expected revenues, and then fills the gap through additional taxes and borrowing.

This is an insane way of running the Budget. Nobody in his right mind would try to fill a bucket with holes, but that's what finance ministers have been doing year after year. In the process, they have ignored two sets of customers "" taxpayers and the beneficiaries of government spending.

If newspapers "" which also have two sets of customers, readers and advertisers "" were to treat either of them shabbily, they would go out of business. Governments may not go out of business, but a reality check would show that their customers are in fact deserting them: taxpayers seek to avoid tax by fair means or foul, and beneficiaries of spending are patronising other centres of power, including criminal gangs and mafia dons.

If governance has to make a comeback, finance ministers need to forget about presenting "dream" Budgets and focus instead on staying accountable to their customers. They must work behind the scenes to improve the efficacy of spending and explain to taxpayers how their money is being spent better.

This is much harder work than raising turnover tax or imposing cesses to fund education. Education may indeed need resources, but these should be raised when are really needed and not before you even know where the previous money poured into education has gone.

Sure, finance ministers need to present Budgets, but these should be accounting exercises. They ought to be spending more time figuring out where the money is going, not where it is going to come from.

rjagann@business-standard.com