Theme for a dream budget

It has now become a well-oiled process, a routine. Beginning December, like kids doing their annual ‘Please Santa I have been a good child can you get me…’ wishlist, the policy-influencing industry, largely comprising companies through their associations and the capital markets, try and persuade officials in finance ministry to help further their interests in the budget that follows three months later. Beginning with, “We urge the honourable finance minister to…” most of these end with “in consumer/worker/national interest.”

A random sample of demands by industry for Budget 2005, both general and specific, throws up only the predictable. The general demands include reduction of customs duty on naptha by the petrochemicals industry; halving of excise duty on synthetic fibres and yarns by the textiles industry and the abolition of dividend distribution tax on infrastructure companies. The list of specific demands is much longer and includes things like the extending of Cenvat credit on alcohol-based medicines by the pharmaceuticals industry and to classify drilling under infrastructure. And, as we all know, the list of demands hasn’t even begun yet.

The question is: where does “national interest” fit into an argument that demands lowering of duties? What do any number of “lakh workers” have to do with a sector being freed from price control? Why lean on consumers when it is clear that either way they will lose (an adverse price impact will be a pass-through and a favourable one pocketed)? And while the organised industry seeks concessions, individuals are unable to look beyond deductions, exemptions, rebates.

We as a nation are giving far too much importance to the budget. This is neither to deny nor to undermine its significance — how the government spends our money is important, how it balances the aspirations of various interest groups to walk the growth path is critical, how it contains its expenditure within fiscal limits is vital. As a financial lifeline, the budget is the government’s most important document — it must be examined, analysed, debated.

But there is only a finite amount of information that one individual bureaucrat collect, evaluate and take decisions on. Even if he has a ‘beautiful mind’, it would be impossible for him to know precisely the impact of an artificially-imposed price cut on the entire steel chain — manufacturers, distributors, dealers, transporters, workers, investors, consumers. Since one industry’s output is another’s input, this price fixation would have a more widespread impact.

This whole business of influencing the government to create artificial prices is an old-world legacy that must end. It is based on a premise that one person sitting in the finance ministry or, to be generous, one group of India’s most intelligent minds in the finance ministry, has the capacity to turn data (industry demands, slanted statistics, vested interests) into information (changes in policy that hope to have a positive impact on the nation’s balance sheet). Which becomes the raw material for the next budget and this cycle goes on.

In any living school of economic thought, the one entity that does have all the information all the time to be able to take the right decisions most of the time is the market. Critics may term the market an “abstraction”, “operator driven”, “manipulable” and so on. But like democracy in which you can’t fool all the people all the time, the scope for market manipulation too is limited. At the smallest opportunity of arbitrage, new players will come and collect excess profits, bringing the market, and hence prices, back to equilibrium. Most important, one person or group is vulnerable to lobbying pressures; a whole market is not.

You may say that even in the US, the epitome of market economy, such imperfections exist. True. As Raghuram G. Rajan and Luigi Zingales wrote in Saving Capitalism from the Capitalists: “There are 160,000 workers producing steel, while 9 million workers are in steel-consuming jobs. Despite being vastly outnumbered, US steel workers and firms gained the necessary political support to force tariffs on steel imports… The US government imposed tariffs to protect fewer than 9,000 jobs in the steel industry, which are likely to cost 74,000 jobs in steel-consuming industries.”

But we needn’t follow the US, or for that matter any other model; India can set standards. Instead of guaranteeing returns for the few through subsidies, taxes and incentives, the budget could expand the scope of wealth creation for the many. Not merely cater to the fancies of the Rs 100 crore plus club of wealthy investors but to encourage individual entrepreneurs, whose start up capital is Rs 50,000 — or less. Developed countries have concepts like search funds which gives young entrepreneurs access to high risk capital, enabling them to search for businesses to buy or start. The Indian entrepreneur is not asking for this money; only an atmosphere that allows the flowing of this risk capital into the economy.

Exactly thirteen years ago, in February 1992, Manmohan Singh presented a budget that unleashed the creative energies of Indian business. P. Chidambaram can take this one step further by changing the theme of Budget 2005 to “wealth creation for the individual” and unleashing that far greater, far widespread, far reaching potential.