From kirana store budgets to open budgets

Once, budget proposals were top secret. The Finance Minister wouldn\’t breathe a word on budget-related matters for months before the event.

But no more. Finance Minister P. Chidambaram is touring the world, hitting global headlines on what the budget will contain. He initiated this open approach with domestic audiences and has now gone global.

He pledges to reduce his fiscal deficit this year to 5.3 per cent of GDP, and cut it further to 4.8 per cent in 2013-14 . These key targets underpin his whole budget philosophy of prudence. He wants to convince the world that, after years of drift and policy paralysis, India has got its fiscal act under control. That cannot be done by budget secrecy.

This open budget approach has succeeded. Credit rating agencies no longer threaten to downgrade India\’s rating to junk status. By going public on future budget targets and buttressing them with actual action (PSU sales, higher rail fares and diesel prices) Chidambaram has restored India\’s global credibility.

Investment analysts have upgraded their expectations for India. Billions of dollars have flowed in, strengthening the rupee and thus helping tame inflation. This has enabled the RBI to cut interest rates, further improving the investment climate.

Chidambaram says he is considering a higher income tax rate for the super rich. Overall, he favours stability in tax rates, to reduce uncertainties and hence encourage productive investment.

He has laid the ground for major tax reforms through a deal with State Finance Ministers compensating them for losses on abolition of central sales tax. This has opened the way for a grand bargain between Centre and States on a unified Goods and Services Tax that will greatly check tax evasion, and encourage production and exports . This major tax reform has not and cannot be done in secret.

For decades after independence, budgets constantly tinkered with tax rates on this or that item. People with advance knowledge could make money buying or selling items before the tax rate changed, so secrecy was deemed paramount.

However, tinkering budgets are best called kirana store budgets. Kirana shopkeepers may raise or lower their prices for short-term aims, but these provide no grand vision of where the store is going, or how sustainable or solvent it is.

In the bad old days, the budget speech would first specify proposed government spending, notably the increase in annual Plan spending. It would then specify expected revenue, and say this left too large a gap to be filled entirely by deficit financing (which meant printing money). So, the Finance Minister would say, I am raising taxes on the following items – and a long list would follow, often hundreds of items. He sometimes cut tax rates, typically before an election. Such tinkering made it possible to profit from budget leaks, so there was total budget secrecy.

Fortunately Indian budgets are no longer about endless tinkering with hundreds of rates, looking just one year ahead. They now have a broad single rate for goods and services, with just limited exceptions. The FRBM Act brought in long-term budgeting, with fiscal and revenue deficit targets for years in advance.

In contrast with British budget secrecy, the US has always had an open budgeting system. First the President announces his budget proposals, then the House of Representatives produces its own version, and the Senate produces a third version. These three sets of budget proposals are then debated, with the public joining in, and finally a compromise budget is hammered out. Such openness is a virtue in any democracy. It also means that the budget debate is not on endless tinkering, but on broad tax and spending philosophies.

US budgets look at spending and revenue over years, even decades. By contrast, traditional Indian budgets used to focus on raising taxes on cigarettes or polyester or whatever, just to make ends meet in the coming year.

In those days of blind self-sufficiency , there was no sense of India\’s place in the world. The aim was to minimize imports through import substitution, and plug the remaining trade gap with foreign aid. But after the reforms of 1991, India has become much more gobalised, with the ratio of imports and exports to GDP rising from 15 per cent to 45 per cent. This has made India far more prosperous, but also means that the budget has to address a global audience, not just an Indian one.

Even more important, discussions on spending and revenue (including PSU disinvestments) continue throughout the year. TV analysts constantly examine trends and issues. This is more than open budgeting: it is constantly open budgeting.

That\’s a great development. Kirana store budgeting is now history. Good riddance.

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