The union budget: A primer from a non expert.

Because this was en election year only an interim budget was presented by Pranab Mhukharjee this April. Now that a stable government is in place, he is expected to present the final budget.

Like most of the people even I thought that budget and it’s impact on my life is insignificant. Even the tax exemption levels affected me very little. However my opinion has changed over last few months. Thanks to me reading lot many things about economics.

Causes of most of the problems lie essentially in the economic policies of current and past governments. Why am I so poor? Why our roads suck and cities stink ? Why is that a few million children below my age have to sleep without proper food? Many of these question directly depends on economic policies and budget is where those polices manifest themselves.

Economics has two major components. Macro and Micro. While Macro talks about the high level stuff that only experts understand. Such as fiscal policies, currency depreciation (whatever it means) and so on. Where as micro economics is what we do everyday. Why I stopped buying Times of India, stopped watching doordarshan, switched from Airtel to Idea and so on. Budget touches both the aspects of Indian economy someway or other.

“Sir, with these words, I commend the budget to the House.” These words, traditionally said at the end of the finance minister’s (FM’s) budget speech, mark the culmination of perhaps the most complex annual economic exercise in the country. Budget speeches have helped chart the country’s future direction at the macro level (such as when Manmohan Singh allowed 51% foreign direct investment in certain sectors in 1991) to the micro (such as when Morarji Desai specified the number of matchsticks (50) that a matchbox could contain in order to get excise exemptions in 1962).

[Source : Livemint]

Most of my knowledge about Budget is derived from Yeshwant Sinha’s biography. “Confessions of a Swadeshi Reformer”. When India was in economic crisis, when India had to keep its gold with world bank to secure loans, when it was about to go bankrupt this man was the Finance Minister. It was just before Narsimha Rao Government.

India right from Nehru’s days had adopted socialist approach to the economy. The 5 years plans. Planning Commission. Mahalobnis model etc. In these models the most natural principle of economics that “demand-supply” relationship was violated. The Government controlled all the resources by means of license quota raj. Most of the companies from BSNL to Indian Oil to Air India to you name it were owned by government. Even private companies were not given freedom to produce what they want.

For example. Say I was rich enough to start my own company that would manufacture polythene bags. In such a case I had to first put an application to the government that I want to start one. Then government issues me an license. That license would also put and upper and lower limit on production. I will have to take separate licenses to import machinery, to buy land to get electricity etc. I will not have any freedom to decide how much I will produce with which machines and at what price I will sell it. All this is decided by the government officials who sit in the government offices.

The idea (and I don’t find it noble) was that the government officials were in a better position to decide what the society needs and how much. Smart people would indeed quickly notice that this gives immense power to the officials. Hence a license may be issued to produce polythene bags but license to import German Machinery may not be given which would get me on my knees. The officials then give me the license only after I pay a bribe of few crores.

Thus someone like Dhirubhai understood the rules of the game a prospered. Many perished. Among those who perished , the common man was the most important one. The state could not protect the interests of common man and secondly it gave a great boost to corruption.

The concept of “state control” was right from British Days. British wanted to control every aspect of economy so that they could hold everyone at ransom whenever they needed. British went the people like Jawaharlal Nehru decided to continue the system because they too wanted the control in their hand. Its absolute power. They glossed it as some “pro-poor” policies.

That is why when the whole world told us that we should give up this license quota raj, our politicians did not listen. They continued till their ass became sore. It was under Narsimha Rao’s government that they had left with no choice but to bring in reforms. He ordered Manmohan Singh to present a budget full of reforms for which he is being hailed even today. No one asks the simple question “Why was it not done before?”.

It happened in 1991. China had started it’s reforms in 1978. Those 10-12 years made a huge difference to us. China’s per capita income was well below India’s in 1978. Today its thrice ours. Which means china has far less poor, hungry ,dieing people than India. Does that mean that India’s poverty, illiteracy must be blamed on the anti-reforms mentality of our leaders? yes certainly it is.

Budget is prepared by a team of few IAS officers who get unreasonable demands from each department of the government. They are locked up in a room in Delhi where they prepare the budget. Only two men can move out of that building. One is the FM another one is the Finance Secretary. The budget and it’s key points need to be approved by the PM before it is presented to the house.

The budget is not just about one year. Firstly it needs to present year before years closed books. Actual figures of revenue and expenses of last year and projected revenue and expenditure of coming year. We mostly focus on last part.

The trade off between political objectives and economic objectives of a budget are significant. A politically oriented budget would find stuff like Loan Waivers a great idea. Where as for an economist it is essentially a nightmare. Economist would always want less and lesser government control on everything while politicians want absolute control over anything. The time has proven that lesser government intervention helps an industry to grow leaps and bounds. Best example is telecom. As soon as FDI in telecom was allowed we have seen a boom. But on other sectors which see strict government control such as Aviation Infrastructure or the general infrastructure are sick.

If you ask me India’s economy is a tale or sins and redemption. A budget is most of the times either a confession/attempted redemption or it is another sin that tries to hide the previous sins.

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