The 'main hun na' school of budgeting

Arun Shourie: Saturday, March 29, 2008

Arun Shourie puts the Budget to the aam aadmi test and argues why the UPA fails miserably

In the Budget for 1990/91, the VP Singh Government announced a loan waiver of Rs. 10,000 crore. The Government was soon out. I am not on the precedent, but on the accounting! The waiver had been included in the Budget.

Soon, a new Government was in office. Delivering the Budget speech on 24 July, 1991, the then Finance Minister was as stern as he was scornful about the loan waiver, and about the way it had been budgeted.

‘There is one large component of non-plan expenditure that is a burden on the exchequer,’ he told Parliament. ‘I refer to the Government’s obligation under the Rural Debt Relief Scheme. Unfortunately, there was a gross under-estimation of the total fiscal liability under this scheme which was introduced last year. In addition to the sum of Rs. 1500 crores provided in the revised estimates for last year, we have to provide Rs. 1500 crores in the current year. But this is not all. We may need a similar provision in the next year.’

Guess, who was so punctilious then. The words constitute paragraph 39, of the Budget Speech delivered that day by the then Finance Minister, Dr. Manmohan Singh.

And now? No provision at all for the Rs. 60,000 crore that the loan waiver is supposed to cost. ‘Main hun na’… ‘Credit me with some intelligence...’ ‘Funds will be found...’ ‘Modalities are being worked out…’

After much bewildered talk, the Prime Minister and Finance Minister did hit upon one source for financing the waiver: we may sell Public Sector equity, they suggested. On behalf of the CPI(M), Brinda Karat shot that down with one sentence. Chidambram then told Parliament – and this is after two weeks of confusion -- that he was confident that he would be able to carve Rs. 40,000 crore out of buoyant revenues this year, and that he was equally confident that it would not be difficult for whichever Government is in office next year to find the remaining Rs. 20,000 crore.

Take him at his word for a minute. If it is possible to be so confident on 14 and 17 March when he said as much to the two Houses of Parliament, why it could not have been said while announcing the waiver a fortnight earlier?

Here is Parliament being asked to approve a scheme of Rs. 60,000 crore with no inkling of where the money will come from, and, hence, with no idea of what its impact will be – on prices, on interest rates… Even of whom the waiver will benefit. Is this ‘accountability’? ‘Transparency’?

And this is just a typical omission.

The Sixth Pay Commission is to report soon. Given that election loom, the Government will certainly implement the pay hikes. The Fifth Pay Commission had increased emoluments by 35 per cent. There will be cascading effect for state governments, for municipalities, indeed for each and every institution even vaguely linked to the State machinery. There is no provision at all for this certain outlay in Chidambram’s Budget. When it is prudent to include Rs. 5,000 crore in the Railway Budget as the likely outflow on account of the Sixth Pay Commission increases, why is prudent not to make a provision for the same contingency in the General Budget?

Similarly, subsidies on petroleum products, on food and fertilizers are mentioned, but not included! The latter two alone are estimated to be over Rs. 63,000 crore. The Fiscal deficit is put at 1,33,287 crore in this Budget. Once you include the four items that have been left out – the loan waiver, the subsidies on petroleum, food and fertilizers -- plus the impact of the 6th Pay Commission, it is liable to be double the figure that has been indicated. Fiscal responsibility?

A reform they were to institute

‘Seven years ago, I placed before Parliament the first paper on subsidies,’ Chidambram said in the Budget for 2004/05. They need to be sharply targeted at the poor and the really needy. So? He has, he said, initiated a new study on them!

By the next Budget, he had taken further action: he had placed the study before Parliament. Subsidies are necessary, ‘However, we must now take up the task of restructuring the subsidy regime in a cautious manner and after a thorough discussion.’

Nothing was done even by the 2007/08 Budget. ‘The issue of subsidies is proving to be a divisive one,’ Chidambram said, ‘but I would urge Honourable Members that it is imperative that we make progress on this front if we are serious about targeting subsidies at the poor and the truly needy.’ It isn’t that he had done nothing: ‘My Ministry has held extensive discussions with stakeholders on three major subsidies, namely, food, fertilizer and petroleum. We have also sought the views of the general public. Working groups/committees have gone into the question of fertilizer and petroleum subsidies, the latest being the Dr. C. Rangarajan Committee. I would urge Members to help the Government evolve a consensus on the issue of subsidies.’ Another consultant to Government.

The Prime Minister, of course, alternates his emphasis: reforms one day; reforms with a human face the next! And yet, at least on occasion, he has spoken clearly. The Gross Budgetary Support for the 11th Plan is going to be double of what it was during the 10th Plan, he told the Planning Commission last November. ‘These are large increases by any reckoning,’ he continued. ‘This will only be possible if we have strong growth, if tax revenues remain buoyant as they have been in recent years and if non-Plan expenditure is checked and checked effectively. We need to address the problem of mounting subsidies in food, fertilizers and now, in petroleum which is a recent phenomenon. Over Rs. 1 lakh crores are going to be spent this year alone on these three items. I would like my cabinet colleagues and the Planning Commission to reflect what these mean for our development options and what development options these subsidies are shutting out. Do they mean fewer schools, fewer hospitals, fewer scholarships, slower public investment in agriculture and poorer infrastructure? It is important that we restructure subsidies so that only the really needy and the poor benefit from them and all leakages are plugged.’

The warnings having been given, the task is done – what more are consultants to do, after all? There is no mention of the subject in Chidambram’s Budget speech this year.

But there is mention of one of these subsidies – that on fertilizers – in the document distributed with the Budget, Implementation of Budget 2007-2008. In the Budget for 2007/08, Chidambram had emphasized the need to distribute fertilizer subsidies by some alternate way – so that they reach the farmer directly rather than being eaten up by fertilizer companies. So, what is going to be done? ‘The fertilizer industry has agreed to work with the Department of Fertilizers,’ he told Parliament, ‘to conduct a study and find a solution.’ And what will happen once the study has been done? By now, you should be able to guess: ‘Based on the report, Government intends to implement a pilot programme in at least one district in each State in 2007-08.’

That was the last Budget. And what are we told now about what has been done on this matter? ‘The modalities for providing an alternative method of delivering the fertilizer subsidy directly to the farmer are being worked out. The proposal was examined by a Group of Ministers (GOM) and the Report is being finalized.’

In the meanwhile, all the ills continue: the industry does not get reimbursed in time; the farmer does not get the full benefit; the application of fertilizers remains distorted and our land is harmed.

Exactly the position in regard to the other subsidy, of Rs. 32,600 crore – that on food: the 61st Round of the NSS reveals that one half of the poorest quintile do not have either a BPL card or one for the Antyodaya Anna Yojana. On the other hand, more than a sixth of the richest quintile have BPL cards!

The Italians have the right expression for it

‘The Eleventh Plan target for additional power generation capacity is 78,577 MW,’ Chidambram told Parliament while speaking on this new Budget, adding, ‘which is more than the total capacity added in the previous three Plans.’ In the 10th Plan the target was 41,000 MW. Additional capacity that got commissioned was just about 21,000 MW. But why be niggardly in setting targets? John Galbriath had a word for Indian Planning: ‘therapeutic targetry’! But the sentence that scores for gall is the next one: ‘By end March 2008, we will achieve Commercial Operation Date (COD) on about 10,000 MW, marking the best first year in any Plan period.’

Just pause for a moment, and read that sentence again: ‘By end March 2008, we will achieve Commercial Operation Date (COD) on about 10,000 MW, marking the best first year in any Plan period.’ The trick in it is the benchmark that has been used, ‘Commercial Operation Date (COD)’ – a plant that has been completed is said to have attained ‘Commercial Operation Date’ once it has been in operation at full load for at least 72 hours. Ten power plants contributing 3020 MW were included when totaling up the achievements of the last year of the 10th Plan on the ground that they had been ‘commissioned’. They have been counted again among the achievements of the first year of the 11th Plan – on the ground that in regard to them ‘Commercial Operation Date’ has been achieved! The plants are the same ten. Nor is it just that: among these ten, is Ratnagiri CCPP (Dabhol) II, a plant that was completed in the Ninth Plan; among them is the atomic power plant at Kaiga – which is virtually shut for want of fuel; among them is Karbilangpi, a plant of the Sixth Plan! Nor indeed do the remaining ten plants – accounting for 3090 MW of the 10,000 MW for which Chidambram takes credit – testify to either reforms or execution in the power sector having improved. Each one of them has been under construction for years – among them is another Dabhol plant, Ratnagiri CCPP III, which too was completed in the Ninth Plan; among them are two plants at Purlia which were sanctioned in the Eighth Plan!

Claims and promises in regard to the Ultra Mega Power Projects in Chidambram’s successive budgets have been even more farcical, even more brazenly misleading. It is our intention to award five projects before December 31, 2006, he told Parliament in the Budget for 2006/07. By the 2007/08 Budget, this became, ‘Seven more UMPPs are under process and we are confident that at least two will be awarded by July, 2007.’ In this Budget, he says that the fourth UMPP ‘will be awarded shortly,’ and that five more can be brought to the bidding stage provided the states extend the requisite support. After listing four Ultra Mega Projects, his document of ‘accountability and transparency’, Implementation of Budget 2007-2008, reports ‘Five other suitable sites have been identified by the Central Electricity Authority’ – it proceeds to list five sites in five states. The fact as of 20 February, 2008 is that not one site has been finalized, not one. In regard to each of them, letters are going to and from central and state governments: I can supply the list at short notice.

And yet you can’t quite say that the Government has lied – notice the words it has used, ‘Five other suitable sites have been identified by the Central Electricity Authority.’ That doesn’t mean they have been settled, and, if you concluded as much, well, that is your problem.

The Italians have the right expression for this kind of reporting: suppressio veri suggestio falsi – to suppress the truth is to suggest the false!

A symptom

And yet the Budget is but a symptom of the ways of the Government:

•Just go on announcing schemes;

•Grab existing schemes, group them, give them a new name, and proclaim them as historic new initiatives;

•Announce huge grants and outlays, forget them;

•Advance false claims: those ‘Action Completed’s;

•Shove problems to the future – as in the loan waiver; shove blame on the past – even when doing so flatly contradicts what you have yourself stated in Parliament, as the Prime Minister’s ‘the unpaid distress bills of the NDA’ is flatly contradicted by what is set out in the Economic Survey 2003/04 that Chidambram himself tabled;

•Mislead – as in the calculation of the deficit;

•Double-count – as in regard to power;

•Proclaim the desirable –‘we must aim at outcomes, not just outlays,’ the necessity for reforms as in the Economic Survey – and make people believe that, because you have proclaimed the desirable, you are straining to attain it.

And do all this with full faith – that no one will actually read the documents you pile on them; that, even of they do, they will soon forget; that the media are the easiest to bamboozle…Mismanagement

The Budget is a symptom also of gross mismanagement of the economy. Apart from the fact that reforms have been at a complete standstill ever since this ‘dream-team’ of ‘reformers’ took office, their management has brought the country back into the vicious cycle of high interest rates, declining growth, and inflation. Till 2004 April, foodgrain stocks had been scrupulously kept 40 to 50 per cent higher than norms set by experts – so that fixers always knew that, were they to raise prices, Government could, and would, counter them by releasing stocks from its godowns. Ever since, stocks have been allowed to fall below the norms – with the result that traders today know that the Government just does not have the wherewithal to stabilize prices.

The result has been worsened by erratic policies. Exports of non-basmati rice were banned; soon the ban was lifted. Government did nothing as wheat output fell short; then it floated a tender to import wheat; then it cancelled the tender, then…

As prices kept rising, it hurtled to swat a fly with an axe – the axe of monetary policy: higher interest rates, tightened money supply… Prices continue to rise, and naturally so. Investment is discouraged, and naturally so. Growth rate of manufactures has already begun falling, predictably so…

The dream-team…

(Concluded)

For all stories visit www.indianexpress.com/arunshourie

Where the Buck Really Stops

Arun Shourie
Continuing excerpts from Disinvestment Minister Arun Shourie's Cariappa Memorial Lecture 2002

Every country works solely for its own interests. There's little use in invoking justice, morality or law: indeed, doing so can be counter-productive -- by sticking to ideals, so to say, we cleared the way for China in Myanmar. If I could I would burn into the consciousness of every policy-maker in India the conversations between Henry Kissinger, Richard Nixon, Chou En-lai, Huang Hua. Every country works solely for its own interests as perceived by it at that time: this may not accord with our interests, or with our perception of what is in the interest of even that country itself. for eg: US aid to Pakistan in the wake of 9/11.

The US approach was well set out by Kissinger in his account of the period when the USSR and China fell out: ''The challenge for the United States was to make sure that it always had more options than either of the two parties within the triangle. This obliged the United States to stay closer to both Moscow and Beijing than they were to each other, with a tilt towards Beijing since it was the Soviet Union which represented the more immediate and by far the more powerful threat.''

This is what US policy will be in dealing with India vis-a-vis Pakistan, India vis-a-vis China: and it sets a limit to the extent to which it will heed India's interests.

The way countries deal with us depends also on what the record has led them to believe is our nature: China has carefully cultivated an image of being a porcupine-one that will brook no nonsense, one that will use force to wrest what it feels it should have. Perception about us is ambiguous, at best, given events such as Goa, Sikkim, atomic weaponry, the 1971 war that broke Pakistan. But if 61,000 had been killed in the US, China or Russia by terrorists trained, equipped, armed by a country, what would they have not done to take out the source of the assault on them?

Security is a multiplicative function, not an additive one: the expression the Chinese use is indeed apposite: 'Comprehensive National Strength''. Among the pillars on which it is built is economic strength.

Does anyone need armies today to bend Argentina and Brazil? Of the ones who keep counselling us to open a dialogue with Pakistan, how many counsel President Bush to open a dialogue with Mr Saddam Hussein? Why is it that Russia can be bent today on cryogenic engines, on Iraq, on nuclear disarmament -- and China cannot? Economic strength and independence make all the difference.

Today economic levers are routinely used to achieve political and diplomatic ends. To safeguard our freedom of action, our sovereignty, the first requisite is that we do not have to succumb to economic pressures. Nor is it enough that ''our fundamentals are strong''. Nothing happened to the ''fundamentals'' of Southeast Asian countries in 1997. The ''fundamentals'' of Japan continue to be as strong as they were 12 years ago-but the political stalemate has ensured that it has not been able to lift itself out of a bog for a decade. The ''fundamentals'' of Mexico, Argentina, Brazil did not collapse overnight -- but their economies did, and with that their freedom of action.

Therefore, when we do anything that slows economic progress, when we block the reforms that are necessary for that growth, we weaken the country. We expose it to danger: should we, for instance, have to turn to the IMF today, we would be squeezed not in spite of our atomic weapons, but because of them!

And how easy it is to slip: two years ago when we were losing almost a billion dollars every month; a single wrong decision -- for instance that the value of the rupee must be protected ''at all cost''-could have resulted in a run. Nor is it that when we thwart a reform -- for instance, by blocking steps needed for containing governmental deficits -- or by bringing work or trucks and trains to a halt, all we do is to slow down economic progress. That is not the only consequence. We confirm the perception that India is not able in the end to carry through its announcements. That perception itself is temptation to an enemy.

The lightning speed at which technology, the balance between countries, relations between them are altering: our policies have to be ''omni-directional'' and our processes have to be swift enough to match these.

The countries that were to eventually form ASEAN had approached us at the very outset. We paid insufficient attention. The result is that a few days from now, China will be meeting the ASEAN leaders to finalise an agreement for a free-trade area. We will be meeting them to commence discussions for a trade and investment area of which we too can be a part.

Faced with a decision, our first instinct must be to see the repercussions it will have for national security -- take the case of ground handling at airports. But simultaneously, we must bring our ideas about national security up to date. Take the signs at our airports ''No photography allowed'' in this age of satellite photography, when satellite images of half-meter resolution are becoming commercially available.

We must face some facts: of inundation from Bangladesh, the Islamisation of Bangladesh, the madrasas on our borders, the Chinese advances in Myanmar, the current ''denial mode'' in regard to Chinese economic advances. A senior intelligence official said, ''One word has killed us: examination.'' We were asked in the early '80s to identify Jamaat cadre who had infiltrated into the Kashmir administration, to identify madrasas that had become centres for secessionist activity. What happened thereafter? There were reports of the demographic inundation of the Northeast. What happened? Only 850 kms of 3286 kms of fencing has as yet been completed on the Bangladesh border.

Insularity does not mean independence. Put to use, close economic relations fortify security. Consider an example: There are at any time about 60,000 Chinese students in Japan. By contrast, there were just 250 Indian students in the country. Two and a half million Japanese tourists visit China every year. By contrast, only 60,000 visit India. Every week there are 282 direct flights from Japan to China. There are only 7 to India. The trade between China and Japan is a colossal 90 billion dollars. By contrast, the trade between Japan and India is just three and a half billion dollars.

The point holds just as well for foreign and security relations. In the wake of the Tiananmen killings, few lobbied harder to keep the US from taking any consequential steps as American firms that had invested in China: after all, for American firms China is today important not just as a market but as a manufacturing platform for exporting to third countries; after all, American firms earn about 7 to 10 billion dollars a year from China, a figure that is a fifth higher than the next source -- Mexico; after all, with a trade surplus of approximately eighty billion dollars every year vis-a-vis the US, China has accounted for a tenth of the total purchases of US Government securities.

Today few work as assiduously to promote China as an investment destination as the merchant bankers and consulting firms that have been used by China for its IPO's in the New York stock exchange and elsewhere, few work as resolutely to keep up China's image in the investing public as the Fund Managers whose principals have invested billions in Chinese issues.

Is it any surprise, then, that an American analyst should observe as follows? ''In other words, if the United States should opt to curtail commercial links with the mainland, it may be effectively cutting off a key source of foreign capital -- something the world's largest debtor nation can hardly afford.''

Now, if there is an eruption on the Sino-Indian border in Arunachal, which side would the Americans or Japanese be pre-disposed to believe?

We must multiply manifold intellectual work on security issues: how often we have to turn to US and European sources for material on countries that are much more liable to endanger us than Europe and the US? Get over the inhibitions of ''political correctness'' -- report of the US-China Commission on Security Implications of US-China Economic Relations. The wealth of information on which even this open-source report is based. Equally important, the candour with which it states the facts.

Governance is the central task. Defence forces cannot remain an island forever: the inertia, the vices that come to infect general governance cannot but infect the armed forces. Can it be that corruption in civilian life will become as pervasive as the very air we breathe but that affairs touching defence forces will remain pure? Can it be that delays will mar all governance but purchases of snowmobiles and bullet-proof jackets will be executed on time?

Second, in our system the higher command remains in the hands of the ones who have come up through the same political system. And I don't mean just the final decisions -- of going to war or not, of returning Haji Pir or not. Day to day decisions-budgetary allocations, postings and transfers, even such minor things as awards and decorations -- also affect morale, and therefore the fighting ability of the defence forces. And these remain in the domain of the political and administrative establishments.

Third, even if the top leaders are of the highest calibre, their decisions are bound to be affected by the general level of persons in public life: which Prime Minister or Defence Minister will shut out the clamour in Parliament or the media from his awareness? And so, the calibre of the generality of the political and administrative class, indeed of the entire lot that is in public life and discourse is certain to affect the formulation and conduct of security policy. And this is our Achilles' Heel today.

That is why I will leave you with the one image with which I began, and with the two questions that I asked.

* An image to bear in mind: Defence forces are to a country what an iron railing put around it is to a tree: in the end, howsoever strong the railing, howsoever sturdy and well-polished it looks, it cannot protect a tree that has been hollowed by termites from within: the storm shall fell it.

* A question to take home: Think of Bihar. A population of 83 million, that is a population 30% larger than that of Britain, of Italy, a population equal to that of Germany, and an area 40% as extensive as Britain. In this vast area, over this huge population, governance has evaporated. If you were running the ISI, would you waste lives in Kashmir? Or would you just smuggle 23,000 AK-47s through Nepal into the state?

And another one: When the horizon of the political class is the hulla of the day in the legislature, or the debating point that can be extracted from the headlines of the day, or the next bout of elections how can the policies and strategies that alone can enable us to deal with Pakistan and China be sustained and implemented for 20-30 years?

It is when we have rid the tree of termites that India will be secure. And only then. It is when we have made questions such as these two redundant that India will be secure. And only then.

Part - I Political Will Hunting

The Indian Express
October 30, 2002