governance, political economy, institutional development and economic regulation

FM Jaitley presented a soft budget with a hard Fiscal Deficit target. Such miracles can only happen if supported by “tricks”.  One such trick could be to fund the increased expenditure, over 2013-14, of around Rs 100,000 crores (Rs 10,000 billion) through a fast track resolution of the Rs  400,000 crores in tax arbitration. This is possible. But the extent thereof is likely to be low. These cases are locked up in various courts and it would require a gargantuan effort of the judiciary and the executive pulling together, like a set of paired bulls, the likes of which are not seen any mor, even in Bollywood masalas.

The other option is increased collection efficiency. Tricky again given that there is less than nine months of effective time to gear up the tax administration and get the best people in place.

Disinvestment is always an easy one but with the markets already riding high, the likelihood is of tapering-off of the exuberance over the next six months. Babus find it difficult to sell shares in a falling market. First, the market knocks prices down even further with increased supply of PSU stock. Second, CAG and CVC ex-post facto scrutiny of such transactions make babus defensive in their approach. No one wants to go to Tihar for selling the family silver cheap.

There is no talk of privatization at all, which is a pity since that is what could unlock financial value; add to growth through improved efficiencies and generate decent capital gains for government. But then that is an old story. The BJP even in its previous innings (2004) had gone cold to privatsation once powerful vested interests in oil started opposing the sale oil companies.

On the expenditure side, the FM has himself succumbed to the “Mujra” of the “social spending” lot and loosened his purse strings. Possibly, as the effect wears off, he will tighten the availability of cash to all the various “schemes” he has announced.

But the real question is why should the central government be in the business of setting up hospitals or universities in the first place? Is this not an area where individual state governments should take the lead? Why is the FM irrigating farmers’ fields? What will the Chief Ministers do if every subject under the Sun has to be managed from the center? Why is the center keen to impose a cookie cutter template of “smart” cities on 100 existing towns in different states? The urbanization and the rural development lobby should shift base to state capitals. That is where all these subjects should right fully be dealt.

This budget just proves that the time is ripe for decongesting Delhi. Disband all the social sector departments in the central government or squeeze then into a Research Body called the Social Policy Authority (SPA) with the mandate to fund policy research on how states can manage social policy better.

The central government needs to concern itself only with Finance; Defence; Security, including Human Rights and minority inclusion; External Affairs, including External Finance, Investment and Trade; Banking; Infrastructure; River Development; Natural Resource Development and Environment. In these areas it should both make policy and implement it on the ground.

In all other areas the association of the central government should only be facilitating; policy research; access to grant finance-external and domestic, from specialized agencies constituted for the purpose. For example NABARD could be reconstituted and revitalized on a PPP basis. The EXIM should be resuscitated to lead on financing EPZs, Ports, and transport linkages. Similarly in Human Development the government should constitute a Development Financing Institution to fund hospitals and schools in the States.  

Till Delhi is squeezed into becoming efficient, it will continue to be the sponge absorbing the bulk of the tax money and frittering it away on isolated projects in fire-fighting mode.

To his credit Mr. Jaitley is new to the job and more importantly does not have a “team” around him. His FY 2015 budget is just a “holding” tactic; a cause no harm approach. We hope he will spend the next nine months developing a team and putting flesh to the expansive vision on which we all voted for him.

My bet is that he shall do this. Even he looked pained at the shallowness of his endeavor today. His motivation to do better is clear; his sincerity above doubt. But even the previous PM had these qualities in plenty. These are not enough for a government which came to power on the basis of actions not words.

 

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