Why we don’t need budget-as-usual: 11 ideas for Modi’s govt’s first

Narendra Modi chooses as the next finance minister will presumably not be a place-holder, someone who got the job due to political considerations. Since Modi is not exactly planning to be a one-term Prime Minister, he needs an FM with the equally long-term vision in mind, even though some results may be demanded in the short-term.

Budget 2014-15 needs to make a clean break from the messy financial jugglery left behind by Palaniappan Chidambaram, who, in his last innings as FM, simply did not cut it. In the dying moments of the UPA, he did some half-hearted reforms, but his government neither had the will nor the moral authority to make things happen. Worse, Chidambaram chose creative book-keeping as his final contribution to the nation.

So, the first thing the new FM has to do is clean up the books, restate the government’s accounts for 2013-14 and draw up a new fiscal consolidation roadmap from 2014-15 onwards. Arun Jaitley indicated as much to Firstbizwhen he spoke on the fiscal situation. “You have to deal with the factual position, so the benchmark from where you will start (cutting the fiscal deficit) will be much higher…We have to rework it. The economy hasn’t changed, it is only the camouflaged figures which will change…”

However, more than correcting Chidambaram’s arithmetic, the next FM – even if it is not Jaitley – will have to fundamentally change the approach to budgets in order to have a larger impact over the long-term.

Here are 11 reforms he could consider - and only one or two of them require a huge political consensus at the outset.

First, the finance minister must shift to an accrual-based system of accounting. This means the budget will take into account revenues due during any given year (even if not received) and account for expenses incurred (but not yet paid out). This is what good companies do. This would give a true and fair picture of the real state of financial health of the Centre. Right now, Chidambaram has happily brought forward next year’s incomes and pushed back expenses from this year to next year (oil and fertiliser subsidies, for example) to show a better fiscal balance. It is a piece of accounting fiction. The least a finance minister can do is present a clean set of books to the nation. Otherwise, what separates a Ramalinga Raju from a P Chidambaram?

Second, the Centre should steadily shift to a system of zero-based budgeting (ZBB) for long-term schemes and projects financed by the taxpayer. What’s ZBB? Shorn of the technical jargon, ZBB is about asking yourself regularly if a half-finished project is worth finishing and wasting more money on. Let’s say a bridge was sanctioned in 2001 at a cost of Rs 100 crore. Today, after only a third of it is done, the sunk cost is Rs 500 crore and the total estimated cost is Rs 2,000 crore. The human instinct will be to say since we spent Rs 500 crore, might as well put the rest of the Rs 1,500 crore and finish it. But a ZBB guy will ask: since we are going to spend Rs 1,500 crore (or more) to finish the bridge, can we get better bang for the buck on another project with that kind of money? Or something better for a lower cost? A longer road diverted around the river, or whatever. ZBB is about pulling the plug on deadbeat projects and saving the money for something better.

 

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