360 degree: Modi's Make or Break' Budget

On Monday, when finance minister Arun Jaitley reads out his third, and the Narendra Modi government’s mid-term, Budget, it will be at a time when the Indian economy is subject to contradictory conditions — a sluggish global economy hurting exports, but low oil and commodity prices keeping the import bill in check; low inflation, only to be neutralised by banks stressed by non-performing loans; an opportunity for industry to push ‘make for India’, only to be negated by their inability to expand production and falling consumer demand. In these circumstances, are there any tricks in Jaitley’s bag that could spur growth?

It’s that time of the year again!

The end of February 2016 is around the corner and it is time for yet another budget. It will be the 68th budget presented to the Indian Parliament, to be brought into effect on the first day of April. Article 112 of the Indian Constitution enjoins that “The President shall in respect of every financial year cause to be laid before both the Houses of Parliament a statement of the estimated receipts and expenditure of the Government of India for that year, and referred to as the annual financial statement.”

This Article stipulates very clearly what is required in the budget. It is simply a ways and means statement. The ways in which the government plans to incur expenditures and the ways in which it plans to provide for the proposed expenditures. When the budget is passed, it becomes law and the government is bound to fulfil all its provisions. It seldom does. But since we never get a statement of accounts, we never are able to really relate the government’s performance to its promise. It takes many more months for that to happen, but by then it is too late to judge them. More importantly, editors and anchors have no stomach for it either.

Every democratically-elected government, and most other regimes, have a budget. It is, after all, a plan for the year ahead. But in few countries is there hoopla about the budget like there is in India. In the USA, the President is required to submit the budget request to Congress no earlier than the first Monday of January and no later than the first Monday of February each year. Congress deliberates over it, haggles for changes, and insists on changes if it so wishes, for it to become law on the following October 1.

In India, the budget comes into effect on what is popularly also referred to as All Fools Day. There is little time for serious deliberation or introspection, though the survival of the government depends on its passage. Little serious deliberation is also allowed by increasingly boisterous behaviour in the House. Last year, the houses of Parliament actually spent a small fraction of the time allocated for the Finance Bill. Yet, there is a great deal of interest in the budget all around. It’s rooted in our tradition.

There was a time when the budget was of considerable interest to businessmen and politicians in the pay of businessmen. Those were the days of a tightly controlled centrally planned economy, where the caprices of the budget makers determined the fate of businesses.

In the 1980s, the two warring textile majors, Bombay Dyeing and Reliance Industries, chose two different routes to make polyester. Bombay Dyeing chose dimethyl terephthalate (DMT) and Reliance preferred purified terephthalic acid (PTA). This had grievous consequences for Bombay Dyeing. The DMT process was somewhat more expensive but the tax regime imposed on it more or less broke Bombay Dyeing’s back. In 2010 Reliance, in a somewhat filmi ending to the Ambani-Wadia feud, bought up Bombay Dyeing’s polyester business. That one technology choice effectively drove Bombay Dyeing out of the textiles business, of which it was once the marquee name. There are so many stories such as this. Budgets were a make or break event for many, if not most.

But with the dismantling of the Industrial Licensing Policy of 1951 in 1991, and the increasing resort to long-term tax regimes, where it was envisaged that rates will be stable if not reducing, the ability of the Central government to make or break businesses was by and large transferred to the marketplace. These changes took time to happen.

Till 1975, central excise was mostly used to tax raw materials and intermediate goods, and not final consumer goods. But in 1975, it was extended to cover all goods. This structure gave government even more arbitrary powers to favour or harm industries. Customs duty was still a relatively small source of revenue and the government relied more on excise duties to raise revenues. The consequence of this was a maze of taxes and tariffs. In 1985-86 the then Finance Minister V.P. Singh introduced the Long Term Fiscal Policy, stressing the need to reduce tariffs, have fewer rates and to eventually reduce quantitative restrictions on imports.

Till then, it was the heyday of ‘liaison officers’. Every company, big or small, retained the services of a lobbyist to push its case or impede a competitor’s story in the corridors of power. Much money also passed hands and the wheels of government were kept greased. The budget therefore was a time when the results of their efforts and expenditures would be seen. This was the big day for companies, their politician patrons and the business sections of the newspapers and pink papers.