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Memo to Finance Minister: 10 Most Anticipated Reforms in the Next Budget


Memo to Finance Minister: 10 Most Anticipated Reforms in the Next Budget

Last updated: February 17 2012
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  • Memo to Finance Minister: 10 Most Anticipated Reforms in the Next Budget

    In exactly one month, Pranab Mukherjee will rise to present his budget for 2012-13. The big question, though, is whether he will really “rise” to the occasion.Budget 2012-13 faces so many challenges, that Mukherjee cannot really expect to produce the usual accounting exercise – a tax here, a concession there and some numbers that anyway don’t add up in the end – and hope to get away with it.Between a runaway fiscal deficit, careening subsidies, demands for more social spending, and massive corruption and waste of government resources, Mukherjee has his fill of problems to solve. So what should he do?

    Between a runaway fiscal deficit, careening subsidies, demands for more social spending, and massive corruption and waste of government resources, Mukherjee has his fill of problems to solve.
    The good news is that nobody is expecting him to solve all the problems in one go. Firstpost believes that if he undertakes serious reforms and even sets the right course, he will have done his job at a difficult juncture. When it comes to positive change, the direction is more important than the speed. We need no miracles, only sensible policies.

    Here are 10 reforms he could consider – and none of them require a huge political consensus at the outset.

    First, every new spending proposal from any ministry should be accompanied by its own means of financing. For example, if Sonia Gandhi wants to implement a Rs 1,00,000 crore Food Security Bill, ask her to approve a cess directly for that. This way we will at least know who is paying for it. There is no need to run huge budget deficits to finance social spending. Also, spending ministries have the option of funding a part of the social spends through voluntary contributions, too. The job of government is to enable worthwhile social spending, not do all of it itself.

    Second, every subsidy – whether for oil or fertiliser or food – should be directly coming from the budget. This will, of course, bloat the budget deficit in the short term, but it will at least be transparent. It will allow for realistic budgeting and make people conscious about costs and benefits. When ONGC subsidises your diesel and kerosene, everyone thinks these goodies have no cost. This needs to change.

    Three, no public sector undertaking should be administered by any ministry directly. The job of a ministry is to make policy, not run companies. All government shareholdings should thus be transferred to a public trust owned by the president. The trustees should be public spirited persons of impeccable integrity. Their job should be to maximise value from these shareholdings for the taxpayer and the exchequer. Every government order that impinges on public sector profitability and autonomy should be routed through this trust. This way, Praful Patel will not be able to ruin Air India with his meddling, and Coal India will not have to foot the power sector’s subsidies. This is the reform that will face maximum political opposition: which child will let go of the lollipop?

    Four, the finance minister must adopt a policy of zero-base budgeting. Currently, a project started five years ago will continue to bleed the exchequer indefinitely merely because it remains unfinished, and even though it may no longer be needed. With zero-base budgeting, every project will be re-evaluated every year so that if it is not delivering the expected results, the government can pull the plug on it and cut its losses. The worst thing to do is keep spending more on white elephants just because they are there.

    Five, as a corollary to item four, the finance ministry must set up a well-staffed spending monitoring arm which not only figures out where the money has gone, but how well it is being spent. For example, the objective of every scheme should be to maximise benefits for the people it is intended, and reduce administrative costs and waste. If only Rs 5 out of every Rs 10 spent on the public distribution system goes to the poor, the monitoring arm should blow the whistle and start cutting allocations or fix the problem in a timeframe.

    Six, the differentiation between plan and non-plan spending does not make any sense any more. What we need to know is whether we are spending money on creating assets (which is capital outlay) or in feeding people and administration (which is revenue outlay). The PM’s Advisory Council head, C Rangarajan, already supports this change. Time to implement it.

    Seven, every tax proposal must state clearly who is likely to benefit from it (especially if the beneficiary is a company), and also the number of people it will benefit. Very often a concession is announced and we find that there are only one or two beneficiaries. Transparency is the key to new tax proposals. There is nothing wrong if a policy has only one beneficiary, but we need to know this and not find out about it after a scandal.

    Eight, elimination of subsidies must begin not with identifying the poor, but the rich. For example, once the Aadhaar Unique ID is established, anyone earning more than Rs 2 lakh, according to his tax returns should automatically be lopped off from receiving cheap LPG or kerosene or diesel. It is easier to identify the rich than the poor in India. Identifying the poor can wait for later.

    Nine, the best way to ensure long-term fiscal consolidation would be to mandate that expenditure growth must be 50 percent lower than revenue growth every year till fiscal consolidation is achieved (say, a fiscal deficit of 3 percent of GDP or less). Thus, if revenue is expected to grow at 15 percent next year, expenditure should be held down to 7-8 percent. And if this is not achieved, fresh taxes should be imposed or unproductive expenses cut.

    Ten, in a dynamic economy, where the economic environment changes frequently, the budget cannot be a one-time event. Taxes, spending and policies have to be changed whenever objective conditions change – as we did in 2008-09 after the Lehman crisis. The finance minister is not an accountant, but the country’s economic risk manager (along with the Reserve Bank chief). A budget thus has to become a living document that is adjusted frequently to meet new challenges emerging from global and domestic events.

    In short, we need to abolish the budget tamasha where we lead everyone to believe that this is the final thing. It never is. Check last year’s budget and see which major prediction has come true.

    The answer is: not one. Not the fiscal deficit, not the borrowing requirement, not the disinvestment target, nor tax collections, nor spending, nor GDP nor inflation.

    Why do we need a budget document that can’t get anything right? Best to have plans and projects that can be modified with changing circumstances.
Have any questions or thoughts about this?