Dear finance minister,
You are about to present your fifth and last full budget in your current term. Next year, you can present only a vote on account because a general election is due in May 2009. So, you will undoubtedly be under great pressure from friends and colleagues in the Congress party to make this year’s exercise an election budget, full of populist giveways.
Please resist such pressures. Election budgets make hardly any difference to election results. That is more true than ever right now, since the general election is a good 15 months off, and voters have notoriously short memories.
Every finance minister, whether in New Delhi or state capitals, is urged to produce an election budget in the final year of his government’s term. Yet, this does not work – in practice, voters vote out four-fifth of all incumbent governments. Announcing a tax cut or a new spending programme seems to make no difference to voters. Preparing a populist election budget and expecting electoral dividends is an exercise based on hope over experience.
Remember the experience of the last BJP finance minister, Jaswant Singh. In 2003, he sought to present an election budget 15 months before the 2004 election. He slashed import duties, and abolished excise duty on 16 items consumed by the aam admi and aurat , ranging from umbrellas and kerosene lamps to toys and kitchenware. He cut the excise duty from 32% to 24% for items consumed by the new middle class – cars, air conditioners, soft drinks. He abolished the surcharge on income tax, and increased the standard deduction for salaried folk.
But Jaswant Singh knew that voters in the 2004 election would not remember his 2003 budget measures. So, he hit on a masterly strategy. In January 2004, shortly before the general election was formally notified by the Election Commission and before the vote on account was due, he came out with a series of tax cuts and new spending programmes. He took advantage of the fact that the law permitted a wide range of tax changes between budget presentations. And so he produced what was, for practical electoral purposes, a virtual full budget.
In this virtual budget, he announced indirect tax cuts that gave away an estimated Rs 12,000 crore of goodies to consumers. He made healthcare more affordable by cutting the customs duty on life-saving bulk drugs and medical equipment to 5% and exempting them from the countervailing duty. He halved the excise duty on computers.
Moreover, to cover every conceivable vote bank, he announced the creation of two new funds with a whopping Rs 50,000 crore each, one for agricultural infrastructure and the other for manufacturing infrastructure. He further announced a Rs 10,000 crore fund for small and medium industry.
He said all these new funds would get bank finance cheaply, at 2% below the prime lending. And for rural housing he announced an Atal Graha Yojana.
At the time, this was hailed as a masterstroke in electoral populism. He had found a way round the formal rules to present what was in all but name an election budget. Very clever.
But did it win any votes? The BJP and its allies were thrashed soundly in the 2004 election. Much has been written about the failure of the BJP’s India Shining election campaign. We need also to remember the failure of Jaswant Singh’s two election budgets.
These proved conclusively that voters are not impressed by tax cuts or promises of grand new programmes. They are interested in improvements in the quality of their lives. And that is something far beyond the scope of a mere budget.
I am sure, Mr Finance Minister, that the logic of this is clear to you. Instead of trying to gain a reputation as a successful populist, you should aim to go down in history as a strong, sensible finance minister.
However, given political realities, you will not be able to ignore totally the political demands from your party. You cannot say that you will do nothing populist because it is counterproductive. That would be politically incorrect.
So, tell your party colleagues that populism 15 months before an election will be completely forgotten. Far better to present a sober, prudent budget this time, and postpone populism until a virtual budget close to the 2009 election.
The Pay Commission is about to submit its report on the wages and pensions of government staff. Experts predict that your wage bill will go up by Rs 40,000-100,000 crore. Please tell your party colleagues that you need to conserve your giveaways in the coming budget to cope with the Pay Commission award.
Then, in January 2009, you can come out with any number of tax cuts and populist programmes in a virtual budget, a la Jaswant Singh.
You and i know that this will make virtually no difference to the election outcome. But it will satisfy your party that you have tried your best. Meanwhile, you can focus on long-term tax issues, thus ensuring yourself a place in the history books as a finance minister who really changed India.