Are we back to the 1980s?

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: The budget speech of July 2009 offered little by way of a vision for economic reforms or concrete movement on economic reforms. The inferences 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 FM would talk about how he proposed to earn revenues and how he proposed to spend them. In India of the 1980s, the tax system was a dreadful mess. FMs 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 micro-managing the economy through discretionary tax policy, such as a five percentage point increase in the customs duty on set top boxes or tax pass-through for venture capital investments in nanotechnology projects.

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 in OECD countries 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.