For the last two weeks, a muted debate has been in progress over whether the BJP's first budget is pro- or anti-reform. Although most people are agreed that it is the latter, there is nevertheless some doubt in their minds.
This is because a few are saying that the budget has, in fact, taken reforms forward by accelerating the privatisation of PSUs and allowing domestic firms to get into insurance. The critics, however, point to the niggling little changes in excise and customs duties and say that the 1998-99 budget is like a Congress budget of the 70s and 80s. For this group, the budget is anti-reform by definition.
It seems sensible, therefore, to agree on a single-point definition of reform so that policies can be judged by it. The simplest rule is to say that any set of policies which marks a shift in favour of markets should be regarded as reformist and vice-versa. Only the Left will disagree with this rule but that can't be helped. After all, by definition, reform means getting away from Left-inspired anti-market nonsense.
When you apply this rule to budgets -- or, for that matter, anything that the government does -- a far clearer picture emerges of whether or not a policy is pro-reform. For example, in Yashwant Sinha's budget, consider resource allocation or investment.
It says that an overwhelming proportion of state investment (58 per cent) is to be in agriculture and related areas, mainly irrigation. Ignoring for the moment that there is a clear political strategy behind this, the other fact also remains: where this type of investment is concerned, markets don't work. This means that the policy cannot be judged by the above rule -- which, in turn, means it would be as wrong to call the budget reformist as it would be to call it anti-reform. As for the remaining 42 per cent of the investment, once again, over 70 per cent of this is in areas where markets don't work, namely, infrastructure. So here also the above rule can't be applied and no conclusion is possible.
This doesn't mean that the rule is a bad one. It only means that, one way or another, no conclusion can be reached about reform where the bulk of the investment this year is concerned.
Consider prices and pricing next. The budget has nothing to say about this, except in the case of urea, where it raised the price by Re 1 per kg to cut the subsidy. This, I would think, is pretty reformist, never mind that the MPs protested and the increase was rolled back completely. Indeed, Manmohan Singh had done the same thing with pretty much the same consequences and no one accused of him being anti-reform. Where oil prices are concerned, the budget has followed the process of dismantling the system of administered pricing which, too, is pro-reform, no two views on that. As for other prices, say, power tariffs, there is nothing that the budget can do because it is a state subject.
In the case of privatisation and insurance, these are pro-reform even if the rule of market-friendliness can't be applied immediately because the market hasn't yet developed. In the case of banking specifically and the financial sector, too, the moves are pretty much all right because they are essentially a continuation of the old policies.
Then why has the budget bombed? Why are the FIIs running away? Why is there so much giving in the air? For three important reasons that have nothing to do with reform but wholly with PR.
First, Mr Sinha forgot that after Manmohan Singh's dream debut people expect high drama from a finance minister's first budget. It will be recalled that Palaniappan Chidambaram had also failed to take this into account and been panned for it. His minimum alternate tax drew as much flak as Mr Sinha's excise and customs duty changes have. But Mr Chidambaram more than made up with his second budget. Mr Sinha may not be so lucky.
Second, there is the excise side where Mr Sinha has brought in a whole lot of new slabs for no good reason whatsoever. By complicating matters he has increased the discretionary power of the tax officials. To the extent that reform also means diminishing such power by reducing the number of rules and regulations and increasing transparency, the budget has been seen as anti-reform. But the rule of market-friendliness still can't be applied because, so to speak, the domains are different.
Lastly, the 8 per cent countervailing duty. This, too, was wholly unnecessary -- it has been reduced 4 per cent now -- and only brought the budget a bad name, never mind the protestations that it affected only a third of the imports. That made things even worse because it suggested hypocrisy.
There are three lessons from this for would-be finance ministers:
n It doesn't pay to overlook the fact that the budget is a now as much a media event as a statement of policy. So the debut must be dramatic. The drama, like sub-critical nuclear tests, can be a contained one but it must be there. Towards this end it must contain a clear vision of where the finance minister would like to see the economy, in a global context, in three years.
n There must be at least three major initiatives suggesting market-friendliness. It doesn't matter what these are but they must be there. Mr Sinha would have done better by not only announcing the privatisation of Indian Air-lines upfront but also by setting a closer date for it.
n The budget must be prepared by the official machinery of the finance ministry and not party apparatchiks pushing personal hobby-horses.
