The Hindu Business Line : A practical, managerial effort

Budget 2006 is exciting because it discards many shibboleths and debunks myths about savings, subsidies, supply-led growth and planned capital expenditure. Instead, it celebrates consumption by ordinary citizens. It deifies demand. It boldly regards demand as the principal driver of our good times. This will trigger a wave of jobs, incomes, consumption and more tax revenues, say G. RAMACHANDRAN and R. VIJAY SHANKAR.

Government Budgets may be classified into four broad groups. They are the accountant's budget, the taxman's, the economist's and the manager's. An accountant's budget is the most common, especially among developing countries.

By contrast, a manager's budget is the least common. And, it is very forceful. Empirical evidence from Australia and Britain shows that manager's budgets are forceful because they simultaneously achieve growth and fiscal objectives.

The Finance Minister, Mr P. Chidambaram, has presented a managerial budget. If there is a justification and an audience for discussing the Union Budget 2006 ten days later, they stem from this. It stands out without being loud and flashy.

It possesses many of the staid features of the other three classes of budgets. And, it possesses a clutch of exciting features that the other three classes of budgets would dread to consider.

Four principal attributes characterise the Budget. First, it stretches the good times of ordinary people by not ruffling their consumption and savings.

It stabilises their practices and preferences. Second, it has chosen to contain deficit by expanding the market for `luxury goods' that trigger economic proliferation.

Third, it gives a big push to the consumption of low-end branded goods that trigger economic penetration. Fourth, it has set the stage and the direction for meeting the requirements of the Fiscal Responsibility and Budget Management Act. It has set the stage for better times.

EXPLOITS MOMENTUM

Gross domestic product (GDP) comprises three parts: Private final consumption expenditure (PFCE), government final consumption expenditure (GFCE) and savings. The impact of PFCE on GDP growth in India is about 96 on a scale 1 to 100. By contrast, the impact of savings is about 3. Quite unsurprisingly, the impact of GFCE on GDP growth is about 1 on this scale of 1 to 100.

A good managerial budget works with and; it discards the or. It should serve multiple purposes that appear to be mutually exclusive. Budget 2006 does this quite earnestly.

It regards fiscal discipline as the result of growth in PFCE. It rides the growth train and abets growth. It is on course, thereby, to achieving fiscal discipline.

NO TRADE-OFF

Some globally active credit rating firms have suggested that the Finance Minister had faced a trade-off between growth and fiscal discipline. They have commented that Budget 2006 has preferred fiscal discipline to growth. They have it wrong.

There cannot be a trade-off that pits growth against fiscal robustness, especially in developing economies. Such a trade-off is both cruel and iniquitous to the poor. Fiscal infirmity is often the result of grand spending by government on itself and loads of largesse delivered to rich households and businesses. Therefore, there should be no trade-off of growth for discipline. The government is not a taxpayer. It can do little to improve the tax-GDP ratio. The private sector pays all the taxes and creates almost all the new jobs. The private sector includes the vast unorganised segment that is involved in farming, processing, manufacturing and services. A vibrant and profitable private sector will boost the tax-GDP ratio. This will compress the fiscal deficit.

The managerial and has been waiting to be exploited. By giving a push to PFCE, the country's chief financial officer (CFO) has served two seemingly mutually exclusive objectives. The CFO knows where the jobs, incomes and the taxes come from. Raising the PFCE is a good thing. The tax-GDP ratio will then rise handsomely. Public investments aimed at more diffuse growth and equitable development can then be made on a large scale in the future without undermining fiscal integrity.

CELEBRATES CONSUMPTION

Budget 2006 is exciting because it discards many shibboleths and debunks many myths about savings, subsidies, supply-led growth and planned capital expenditure. Instead, it celebrates consumption by ordinary citizens. It deifies demand. It boldly regards demand as the principal driver of our good times.

Demand and consumption by ordinary citizens have for long been regarded as the economy's villains by the impractical, and as the ridiculous by the unrealistic.

The nation paid the price through tardy growth and bulging deficits. Tardy growth and unmanageable deficits go hand in hand. Handsome growth and well-managed deficits — that could later become fiscal surpluses — go hand in hand. Budget 2006 reflects a deep understanding of the impact of the microeconomics of India on the present and future macroeconomic situation. It acknowledges the centrality of demand.

Demand has now become sublime. It acknowledges the centrality of consumption at low and stable prices to the growth of the economy. It acknowledges the centrality of consumption to fiscal robustness. The deep cuts effected in the context of many visible Customs and excise duties reflect the new ethos.

EXPLOITS ELASTICITY

Budget 2006 has triggered economic penetration and proliferation. Consider the sizeable cut in the excise duty on small cars. Cars have for long been wrongly regarded luxuries.

Some activists see the small car as the cause of congestion on the roads. But the small car produces enormous economic utility to families with limited means. It produces the bulk of the profits at the car-making companies. It earns excise duties in shiploads for the government. There is more. The small car brings in truckloads of toll on the tollways. It makes tollways profitable.

And, because the small car has become more affordable, it will trigger a new wave of car ownership in semi-urban locales. It has triggered the birth of a network of services, with deep penetration and widespread proliferation. Thereby, jobs, incomes, consumption and more tax revenues have been triggered off.

That is how Budget 2006 plans to cut fiscal deficit target for 2006-07 to 3.8 per cent of GDP from 4.1 per cent for the current fiscal year.

That is why we did not hear of any cuts in government's payroll and pensions. We did not hear of any cuts in subsidies. There are no big-ticket investments. And, above all, we did not hear of any big-ticket reforms.

(G. Ramachandran is a financial analyst. R. Vijay Shankar is Director of SSN School of Management and Computer Applications. Feedback may be sent to indiagrow@yahoo.com and pari@thehindu.co.in)