Which type of budget speech is this?

Financial Express, 7 July 2009

The budget speech of July 2009 offered little by way of a vision for economic reforms or concrete movement on economic reforms. The inference we draw from this depends on the role of the budget speech in the functioning of government.

There are three kinds of budget speeches. The first is the typical budget speech from India of the 1980s. The finance minister would talk about how he proposed to obtain tax revenues and how he proposed to spend them. In India of the 1980s, the tax system was a dreadful mess. Finance ministers enthusiastically engaged in `industrial policy', or the activity of choosing which industries are "good" and deserve encouragement as opposed to the industries which are "not good" and deserve discouragement. Budget speeches were clogged with minutae of government interference through discretionary tax policy, such as a five percentage point increase in the customs duty on set top boxes or saying that venture capitalists only get tax pass-through if they invest in nanotechnology.

The second kind of budget speech is found in OECD countries. These countries have understood that industrial policy is a bad idea; that governments have no idea about which industries are "good" or which industries are "bad", so the only thing that tax policy can do is to be even handed in the treatment of all industries. Further, these countries have understood that changes in tax rates are a bad idea because they confound the planning of the private sector. Hence, changes in tax rates happen only rarely. The normal budget speech involves no changes to tax rates. The focus is more on the expenditure side, where the challenge is always about how to produce better public goods for a lower price. Good governments try to get the most bang for the buck, of high quality public goods while keeping the ratio of expenditure to GDP as small as possible.

The third kind of budget speech was invented by Manmohan Singh in 1991. The Manmohan Singh budget speech of 1991 painted a vision of medium-term economic strategy of India. It announced that India was turning away from autarky and socialism. We were going to remove entry barriers, hack away at the thicket of capital controls and restrictions against trade, and unleash the power of markets to obtain high growth.

At the time, purists argued that the budget speech must not talk about larger economic reforms. But this was a master stroke. The budget speech is a most watched event, particularly in the new world of television. It was an ideal platform to communicate a new vision of India to a very large audience. The most important audience was the private sector at home and abroad. When they saw this speech, they decided that India was no longer a moribund backwater. Investment in India rose, and that made all the difference.

With this, the budget speech turned into a platform for communication of India's economic strategy to the private sector. Every finance minister hopes that the domestic and foreign private sector will respect what the government is upto, feel that India is on the move, and sign up for a substantial scale of investment in India.

The budget speech was additionally turned into a management tool by Yashwant Sinha. Every sentence of the budget speech is put into a spreadsheet, responsibility for implementation is assigned, and quarterly reports are produced about progress of implementation. Through this, the budget speech has become the workplan of government for the year. What gets announced in the budget speech tends to get done. Few things get done in the year other than what is announced in the budget speech.

Which brings us to Pranab Mukherjee's budget speech. Which of these three kinds of budget speeches is it? It is certainly not an OECD style budget speech, for it repeatedly engages in industrial policy. At one point, the minister was almost proud of a big number for the expenditure of government.

It was not a Manmohan Singh style budget speech for there was no vision of medium-term economic reforms in India. In an unprecedented business cycle slowdown, after a remarkable election victory, the budget speech was an opportunity to show a medium-term program of how India would make progress towards becoming a mature market economy. If the private sector was impressed with this vision, that could have given an upsurge in investment, which is the only way to avert a business cycle downturn. This attempt was not made.

The budget speech did not utilise the dimension of a work plan, in the spirit of Yashwant Sinha, for there is very little in there by way of the specific work that will be done in the year.

There are, hence, two possibilities. One possibility is that the budget speech is the plan: that there is no plan for undertaking economic reforms. Or, that we have slipped back to a 1980s budget speech, where the business of economic reform will be relatively decoupled from the budget speech. The next 45 days will tell us which of these two possibilities we are living in.

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