Politics of Budgeting

- Dasu Krishnamoorty

Today in Andhra Pradesh, it is budget day when the finance minister will try to put a gloss on the government's economic mismanagement and squander mania with the help of same old excuses as dwindling central grants and allocations, pay commission diktats, growing salaries etc. It is possible to get the government to change its profligate habits, if, not only the opposition members but also responsible members of the treasury benches take their surveillance role as seriously as the demand to increase their salaries and perks. There are times when it becomes the duty of the opposition to support and of the treasury benches to oppose government programmes. If the performance of governments, irrespective of party labels, is consistently poor it is because the legislators have abjured their commitment to the people.

Budgets have lost even their ritual value after they have begun to repeat themselves, the same goals to achieve, the same means to achieve them and the same explanations for failing to achieve them. Pre-budget discourses are always in the future tense made in the belief that the present tense does not arrive. This time, the Andhra Pradesh government, pretending to be different, offered the budget in a draft form to the general public, economists, academicians and trade and industry bodies. They were all asked to discuss the document called the Annual Fiscal Framework and offer their suggestions. All this exercise was completed in four days before the scheduled presentation of the budget, which is expected to include constructive suggestions from the public.

It is debatable whether a government can publicise budget intentions before it is presented to the legislature. The objective of keeping the contents of the document a secret is to pre-empt mischief by market and speculative forces which tend to take commercial advantage of the knowledge gained from the leak. In 1947, Hugh Dalton, chancellor of the exchequer in Britain, had to resign for a hint he gave to a correspondent minutes before presenting the budget to the house of commons. A Ministry of Finance official says: "The smallest detail of the budget, if leaked, can make you a large amount of money."

This entire novel exercise was undertaken at the behest of the World Bank which made it a pre-condition to sanctioning a structural adjustment loan of Rs. 1,500 crores, nailing the lie of chief minister Chandrababu Naidu that the loan was needed to reduce external borrowings and take remedial measures to reduce debt servicing. This loan will perhaps help the government in meeting its daily working expenditure. There is severe criticism of the manner in which this budget draft was prepared. Why did the government choose the populist route to consult the general public, knowing well that such cavalier ways do not yield results. What happened to the government’s economic advisory council, to well-known economists and to the state planning committee itself? The latter body has not met for more than two years now, implying that the expenditure incurred on the committee is so much a waste of public money.

Unveiling the draft budget and strategy papers for 16 departments, Chandrababu stressed the need to reduce external borrowings and also debt servicing and said that one of the ways to bring down expenditure is by gradually reducing subsidies. This again is a concession made to World Bank economics by withdrawing concessions to the middle and lower level income groups. Power subsidy, misused no doubt with official blessings, will entirely stop by 2005. History validates the assumption that once a subsidy is given it can be withdrawn only at great electoral cost to the government. There is also no sin in subsidising the basic needs of the poorer sections provided the benefits reach them. It is far more virtuous than offering indirect subsidies to the one-way corporate sector in the form of tax concessions, gift or sale of public land at throwaway prices. It makes economic sense to empower a large section of the public through subsidies and the returns to the economy will be substantial.

Let us see the status of fiscal deficit, which is a major indicator of fiscal health. According to the report of the Comptroller and Auditor General of India, the state's fiscal health deteriorated significantly between 1995 and 2000, coinciding with the five-year rule of Chandrababu Naidu. The state had a negative balance of current revenue for four of the five years. This is in contrast to the surplus of Rs. 454 crores a year before Chandrababu Naidu took over. The state's fiscal deficit is 3.5 % of the gross state domestic product (GSDP) compared to the federal deficit of 6%. Today, the deficit is 5% of the GSDP. In 1998-99, the government obtained ways and means advances and overdrafts for 220 days totalling Rs. 4,897 crores and the next year this option was exercised for 291 days and the amount was Rs 7,756 crores, showing an increase of 71 days and Rs. 2,459 crores. As usual, there are promises of bringing down the deficit percentage to 4.5 in 2002-03 and 2 in 2006-07.

The CAG report was critical of the economic slide in the last five years. The state had a negative balance from current revenue in four of the five years, forcing it to borrow to meet its plan expenditure. There was a huge increase in interest payments followed by a rise in the debt/GSDP ratio. Worse is the steep rise in the ratio of outstanding guarantees to revenue receipts to 80 % indicating a high risk exposure. The asset-liability position too has deteriorated. While the revenue expenditure continued to rise, capital expenditure declined by nearly 50% in the five-year period.

Now, the debt situation. The state debt is slated to increase from Rs. 35,246 crores in 2000-01 to Rs.42,565 in 2001-02, which is 28% of the GSDP. Naturally, interest payments will increase from Rs. 4,354 crores to Rs. 5,406 crores. Chandrababu Naidu told Doordarshan that 78% of state's total revenue went to pay salaries and establishments costs which will claim Rs.11,376 crores this year. Last year it was only Rs. 8,780 crores. The Chief Minister promised to cut this spending by nearly Rs. 300 crores this year. He also said that the state was taking loans, adding to the debt burden, for the integrated development of the state, which is not only borrowing but also creating assets. However, in the absence of transparency about agreements signed with investors and the sale of public sector units to the private sector, the claim of asset creation needs scrutiny. Though the Chief Minister asserts that the state was borrowing from the World Bank and foreign financial institutions at less than market interest, this benefit will, however, be more than nullified by the conditionalities attached to such loans.

The Chief Minister returned to the capital this week from a tour of several countries which included the United States, where, besides attending the meeting of the World Economic Forum, he interacted with corporate potentates and political leaders. Chandrababu told newsmen that he would set up an independent agency to facilitate investments by multinational companies in the state. Investment has somehow become a pretext for footloose chief ministers to go abroad and return with promises of free flow of capital. Though every year, this cycle repeats, like history, it does not induce any reflection. All the memorandums of understanding signed with foreign companies do not translate into realities. The Chief Minister says he had brought with him promises of Rs. 500 crores investment in the biotechnology area. Remember the partnership summit held last year when agreements for Rs. 90,000 crores investments were signed. The actual inflow was less than 5% of the commitments.

Despite this litany of complaints some good things are happening. The government stepped up efforts to build human capital, augment infrastructure, decentralise governance, increase investments in canal and groundwater irrigation. The state has become a major destination for investment in information technology. This is not enough to avert an economic disaster and a debt trap. We will only repeat what we had said last year when the budget was presented. "Borrow, if the state must. It can repay if it does not shrink away from enlarging the tax base, increasing the efficiency of tax collection, ensuring maximum productivity of the loan funds, disciplining an export lobby that does not deliver and punishing ministerial waste and ostentation. Above all corruption must go and with it the parallel economy it has created." In short, the state must achieve harmony between revenue and expenditure. Chandrababu Naidu knows how to do it but lacks the political courage it calls for.

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