Budgeting for dreams, living with realities

State, Market, Society

We have become used to the Budget as an annual thing. Each year, in the final days of January, we get a document from the government that tells us what the state of the economy is, and a day or two later, another document is shared, accompanied by a reading of it in Parliament, that tells us how much money the government will spend in the coming year, and on what. The assumption is that the challenges identified in the Economic Survey are the ones being tackled in the Budget.

When something happens repeatedly, people start looking for signs of distinction. Almost as if to ask, what is special this year? Is this going to be the year of big ideas and transformative change? Or, to put this in the familiar language of each February, will this one be a ‘dream’ Budget?

But dream Budgets are just that -- dreams. We’re better off sticking to reality. The stark truth is that the environment for private investment is weak. But that isn’t new. It was the reality last year also, and the year before that, and so on back to 2011. There are plenty of reasons for this, which are often stated in the business press in a particular language that is not spoken anywhere else. Ajay Shah, who has thought about these things more than anyone else I know, has pointed out to excessive central planning, the stressed balance sheets of lenders, the loss of confidence in India as a market economy, and iffy rule of law. Those stretch back to 1947.

We can’t dream our way out of this, or Budget the way forward either. There is a fundamental problem at the heart of our economy, and our society. It was there at the birth of the nation, because it was there in the British Raj, and among the kings and emperors who preceded it. That problem is the assumption -- indeed, presumption -- that the State is more important than the market and society. It is the hallmark of all ‘ruled’ places. And it tends to produce ruled outcomes.

Post-Independence, the government told us this was necessary, because the market was so weak, and the society couldn’t quite be trusted to overcome its divisions. But rather than set a course to strengthen the market and to flatten social divisions, successive political leaders presented themselves as saviours who would cover for these weaknesses through their own actions in government. It hasn’t worked.

Why? On the economic front, the answer is simple. The economy grows mostly thought investment by citizens in private companies and businesses. If that’s made second-class and State investments enjoy higher status, the economy grows slowly. About 50 countries tried this in the second half of the 20th century, and nearly all still languish in the bottom half of the world’s nations in development.

Could this be fixed by merely tilting that scale alone? Would our development accelerate if the private sector invested more, and the public sector’s role in the economy was smaller? Yes, but that’s not likely, because the confidence of private investors depends on things that have a large social component. It’s hard to create a free market without freer people. And a State that isn’t willing to embrace greater freedoms for the people isn’t likely to enable, or even permit, greater freedom for markets and businesses. Investors know that. And the stronger we try to make the State, the more this trend will harden.

What’s the answer? We have to fix the imbalance and put in place a more equal partnership between the three spheres. The vast and varied energies of the people cannot be substituted for by the actions of governments. Instead, we have to believe -- in thought and action -- that the path to development runs equally outside the government, and is critically dependent on the personal and economic liberties of the people.

Governments do try to signal something like this, in every Budget. But it’s usually small, and often slows to a crawl not long after the first announcement. That won’t do. What we need is something much more robust, and which is manifest in public expenditure. There are two big tests -- first, collect less money. And second, let the most local level of government spend more, while higher levels of government spend less.

There’s a thumb rule to this which is worth bearing in mind. The central government collects a lot of taxes and spends it slowly. The states collect a little less than the Centre but still much more than local bodies. They also spend faster than the Centre, but not as fast the local councils. And the councils spend the fastest of them all, but have the least money. And the people -- they spend even faster, but they’re the ones giving the money to the rest!

With this measure, it’s evident that what we’re doing each February is the very opposite of what is needed. We’re looking for new economic momentum from the slowest spenders in government. We’re also not factoring in what expenditure by the public -- both individuals and businesses -- can achieve if they had more money and confidence in the system. It’s almost as if, even as we speak of and breathlessly await the magic formula for development, we routinely disregard the potions in that magic.

That’s why our story of development has remained weak, and as a result, hundreds of millions of people live in avoidable suffering.