Pretzel logic of the union budget

Updated: Jan 29 2002, 05:30am hrs
At this time of the year, there are seminars. If they are Indian economy-related, the question turns to the slowdown and what the budget can do to revive growth. And one goes round and round in pretzels. Round and round in circles is an old and hackneyed phrase. Besides, a circle has a clear beginning and an end, even if the two happen to be identical. Round and round in pretzels is much better, especially now that pretzels have entered Indian jargon. Pretzels capture the nuance of tying oneself up in knots and choking on reforms. And those who belong to the right generation will be reminded of the rock band Steely Dan. Not just Pretzel Logic, so many of this bands other albums will resonate well in India now. Countdown to Ecstasy for the budget, Katy Lied for last years budget promises or The Royal Scam for UTI.

As a profound observer observed at one such seminar, everything is fine. The numbers are okay. Following pretzel logic, all we mixed up was what number should be where. We wanted a 5 per cent fiscal deficit/GDP ratio and a 10 per cent GDP growth. Instead, we will get a 5 per cent GDP growth and a 10 per cent fiscal deficit ratio. We wanted Rs 10,000 crore through disinvestments and Rs 0 crore through Central Sales Tax, under the assumption that VAT would happen. Instead, we will get Rs 10,000 crore through CST, now that VAT wont happen, and Rs 0 crore through disinvestments. We wanted 0 per cent below the poverty line and 20 per cent growth in exports. Instead, we will have 20 per cent below the poverty line and 0 per cent growth in exports. Such examples can be multiplied.

We want the budget to produce a bag of tricks and revive growth. Bag of tricks is an appropriate expression. After all, the word budget originally meant a bag. And etymologically, it is no doubt significant that the word bulge also has the same root. Extremely significant, given bulging government expenditure. As every finance minister since 1991 has realised, revenue expenditure is exogenously determined and cant be controlled. If you do manage to bring down the fiscal deficit/GDP ratio, you do it by slashing capital expenditure.

Alternatively, you mess around with the GDP denominator. Advance estimates, quick estimates, provisional estimates, final estimates there is quite a bit of fudging to be done. The revenue is also largely exogenous, not just for non-tax revenue, but for tax revenue also. Given all kinds of exemptions, indirect tax revenue is a function of just four or five commodities. If these items do well, indirect tax revenue is buoyant. If these do badly, indirect tax revenue slumps. Despite 1-in-6 schemes and bringing in more services (over and above the present 41) into the tax net, the net increment to revenue is not much. Hence, just as we are stuck in a Hindu rate of growth band of between 5 per cent and 6 per cent, we are also stuck in another Hindu band. The fiscal deficit/GDP ratio is also stuck in the same band of between 5 per cent and 6 per cent. There are no degrees of freedom and, thank god, quantitative and time-bound targets in the Fiscal Management Bill went for a six.

The Keynesians are having a field day. We mustnt make a fetish out of the fiscal deficit. It is important for the government to spend and kick-start the economy. We mustnt forget pump priming. Didnt Keynes say all kinds of things about digging ditches and filling them up We can do one better. Look at all kinds of government schemes we have. On building roads, digging wells. These are roads and wells that have never been built. They only exist on paper. But we have spent money on them. Hence, the budget can have various centrally sponsored schemes in social sectors, like those for widows in Vrindavan and Varanasi, announced for 2001-02. The Pradhan Mantri Gram Sadak Yojana. There is indeed a fiscal stimulus in these schemes the 85 per cent that is swallowed up in administering such schemes, not the 15 per cent that may trickle down to target beneficiaries.

If you have any faith in the quality of our statistics, the Rangarajan report (submitted in August 2001) should disabuse you. Consider the three years when GDP growth crossed 7 per cent and even crossed 8 per cent in one year. Those were years of the Pay Commission, either at the centre or at the states. GDP growth is a real figure, the Pay Commission ought to increase the price of government services and should be netted out from real GDP growth. But we know we are unable to separate a price component from the real growth component. Is it surprising that real GDP growth touched dizzying heights when the Pay Commissions recommendations were implemented

Therefore, we dont look at the Union budget to step up investments in social or physical infrastructure. Social sector infrastructure is in any case a state subject and most of physical infrastructure is also in this category. The Union budget cant increase investments in infrastructure. However, it can incorporate another Pay Commission and as I have just argued, that increases GDP growth. The pump priming idea is fine. But we must appreciate where the pump is and what is being primed. Household financial sector investments are around 13 per cent of GDP. And all of this is pre-empted by the State.

But as every Keynesian will tell you, the failure of the reforms is flagging public sector investments. If this had not happened, there wouldnt have been this gloom and doom. And as every textbook will tell you, when it comes to government, you cannot distinguish between consumption expenditure and investment expenditure. Therefore, we want another Pay Commission from the budget. There are indeed reforms that are necessary power, labour, agriculture, downsizing government to name four the budget for 2001-02 picked on. But as we should have realised earlier, such reforms have nothing to do with the budget. They follow a pretzel logic of their own.