Gamble pays off, time to fix the basics now

Rarely does anyone get applauded so much for doing exactly what he is supposed to (and had committed to do), as Finance Minister Pranab Mukherjee was on February 26. But then, what he was supposed to do was no mean task. Last year, when he bet all the resources at his disposal (borrowed and generated) on what is called a contra-cyclical expansionary fiscal policy and then waited to see if the stimulus did protect the economy from the global meltdown, he could have landed in a fiscal no-man's land. That is, a situation in which he had spent it all, lowered the taxes and yet growth had not revived. That this didn't happen is not just the Finance Minister's luck. One has to give credit to the 75-year-old, one of the oldest political strategists in the country, for using a combination of strategy, risk and luck to deliver on his promises-almost.

Former RBI Governor Bimal Jalan agrees that last year's budget worked by and large in helping growth. But, he does not see it as a gamble: It was "a judicious mix of cuts in taxes and duties that anyway tend to be high in India". Also, Mukherjee got some help from the spending boost given by the Pay Commission arrears and the farm loan waivers, which do not strictly count as stimulus yet acted as automatic stabilisers. That his bet of going for broke to reverse the downturn has turned out to be largely a safe one was known even before Mukherjee presented Budget 2010.

Which means what the country was expecting now from him was what is expected of a pilot who has just successfully taken off in bad weather-take the economy to a steady high-altitude growth path. In terms of budgetary specifics, that meant withdrawing just the right number of stimulus measures and putting clear deadlines for restoring order to government finances. Right now, it seems that the Finance Minister has been able to achieve both. Of course, he had the tailwind of the 13th Finance Commission (TFC) and the prospective implementation of the Goods & Services Tax (GST) to help him (see pg 48 and 52), but he has added his own weight to the forward momentum.

Examples: The commitment to bring total public debt to 68 per cent of GDP (from 84 per cent now), resolve to keep petroleum subsidies transparent and clearly stating that delivery of public services is the biggest battle for the future.

His budget assumptions aren't bold: Growth in tax collections for 2010-11 is projected at 14.8 per cent, which is only slightly higher than nominal GDP growth of 12.5 per cent assumed for the budgetmaking exercise. The budget strategy, though, is to recover at least part of the tax revenues sacrificed last year for stimulating the economy and to check expenditure. On the tax side, his agenda seems easier. India's biggest tax reforms- the introduction of the GST and a new Direct Tax Code-would happen with or without him. Even the explicit commitment to implement all major recommendations of the TFC could have been given by any finance minister.

What no one else could have done without opposition is to resist expenditure growth. The slowest growth in public expenditure at 8.5 per cent in five years with modest outlay hikes for the flagship MGNREGS (2.5 per cent) and Bharat Nirman (6 per cent) is nothing short of an aggressive reform. So, he has been able to combine stimulus with sanity.

Not only is the big-bang aam aadmi spending absent in Budget 2010-11, the speech dedicated more time and words to measures for improving delivery and accountability of public services than most budget speeches in the past have. So the strategy seems to be: Don't spend much more, but fix delivery. All finance ministers search for the Holy Grail that will give more bang out of the public spending buck; Mukherjee has placed a higher bet in finding it (see charts...Order, Order).

Transparency is one way to ensure accountability in spending. Mukherjee announced that the government will begin subsidising fertilisers through direct transfers to farmers. He extended the smart carddriven insurance scheme for unorganised workers to MGNREGS wage earners. He gave out details on the Independent Evaluation Office chaired by the Planning Commisson Deputy Chairperson for measuring outcomes of public delivery. The first Unique Identification Number (UID) will be issued this year by the UID Authority, which will also now play a role in the financial inclusion of the unbanked regions for which Mukherjee announced the setting up of separate funds.

The UIDAI's head, Nandan Nilekani, will now also head a Technology Advisory Group for Unique Projects (TAGUP) aimed at digitalising and simplifying the government's own record-keeping as well as the various interfaces with tax payers. The TAGUP, a last minute inclusion in the Budget, includes an Expenditure Information Exchange. This is an idea from Nilekani to draw information from the UID networks on the flow of cash transfers and subsidies and public services down each level of government to the final intended user. Apart from commitments to improve subsidy targeting and fiscal rectitude, the Budget has other examples of good economics in concepts like "polluter pays", "predictability of policy" on Foreign Direct Investments (FDI), more competition in the banking and financial sector, and disinvestment. The disinvestment target is an all-time high of Rs 40,000 crore.

The possible spoilers: Expenditure on subsidies could shoot up if crude prices surge. Second, the government may not get the Rs 36,000 crore it hopes to rake in from the telecom auctions in FY 2011. According to a Citibank report, a more optimistic assumption for 3G revenues would be Rs 25,000-30,000 crore. Third, the disinvestment target is vulnerable to stock market conditions.

In fact, last year, Mukherjee's gamble would have paid off much better but for a combination of these very factors. According to M. Govinda Rao, Director, National Institute of Public Finance and Policy, and member of the Prime Minister's Economic Advisory Council, "the last Budget's plan to contain fiscal deficit did not go fully as intended". Since the telecom 3G auctions did not happen, the money did not come and the government had to cut back on capital expenditure in 2009-10 while revenue expenditure rose.

Though Mukherjee has budgeted for higher Plan capital expenditure at 2.16 per cent of GDP, Rao warns of a repeat-together with the risk of high oil prices. Mukherjee knows that not all calculations play out as planned. Perhaps this why he said in his Budget speech: "With some luck, I hope to breach the 10 per cent mark in not-toodistant future." A mind as sharp as his would know that luck favours hard work. That is what implementing this budget, with its agenda for reforming public delivery and accountability, needs.

(4) HOWEVER, HE WILL HAVE TO:

• Monitor the timelines of the groundwork for implementation of GST and Direct Tax Code by 2011.
• Push harder for reforms in pricing of petroleum products, fertiliser, disinvestment and infrastructure.
• Watch out for a lessthan-projected growth in revenues from customs and excise duties.
• Hope and pray that the monsoons and global economy don't throw spanner in the works.