The Hindu Business Line : Top-down Budget making

With a little more than two months on hand for sewing up the Budget for 2010-11, one would have thought that the Finance Minister, Mr Pranab Mukherjee, would have already completed the series of consultations that had become a mandatory prelude to Budget-making.

By now, in previous years, at the invitation of the Finance Minister, a procession of representatives of chambers of industries and commerce, economic think-tanks, the academia and business and financial media would have been seen wending their way to the portals of the Finance Ministry to offer their views and ideas on what exactly should form part of the next year’s Budget.

Somehow, this year, all seems quiet on that front. One also misses the proactive media blitz of the various federations of business and industry which used to come out with their own versions of dream Budgets embodying their preferences and priorities.

Knowing Mr Mukherjee’s temperament, I doubt whether, astute veteran that he is in both politics and public administration, he really believes in the usefulness of going through the motions of such confabulations.

After all, with his grasp of the overall economic situation and public finances, he is in the best position to know what precisely fits into the scheme of things and how far he can go.

Thus, holding rounds of brainstorming may at best yield some frills at the fringes, making scant difference to the substantive aspects on which the Finance Minister may have already made up his mind; mostly, from the Finance Minister’s standpoint, they may be nothing more than exercises in public relations so that everyone has the satisfaction of having had his say.

Especially is this the case if the consultations are set too close to the Budget for, by then, most decisions on schemes and allocations would have been made, leaving little scope for radical changes.

More of the same?

No doubt, such exchanges have their own importance in generating goodwill and support for the Government’s policies and proposals, and no Finance Minister can afford to be oblivious to that fact. There is, therefore, still the prospect of the hardy annual ritual materialising very soon.

The Finance Minister’s temperament differs from that of his immediate predecessors in another respect. He is a politician among bureaucrats and a bureaucrat among politicians.

This means that he is not given to playing grand upsetter of the apple cart. He believes in continuity and consolidation, rather than being flashy and frenetic.

For him, slow and steady wins the race and rules of the game are sacrosanct. Bearing all this in mind, I have a suspicion that he will dispense more of the same medicine for 2010-11 also, particularly in the absence of any compulsion, political, electoral or financial, to do anything out of the ordinary. He may fine-tune a provision here, and spruce up a scheme there, but the Budget on the whole will hold few surprises or spectacular features.

Second look

But there is one time-honoured mode of Budget-making which requires a second look by the Finance Minister as it is partly to be blamed for the runaway nature of the expenditure and the difficulty in reining in the fiscal deficit.

As a way of gearing itself up to the Budget-making process, the Finance Ministry obtains from all other Ministries and agencies of the Government their proposals in terms of continuation or expansion of existing schemes, launching of new projects and the corresponding fund allocations.

The common tendency of the Ministries is to inflate the demand for fund allocations, knowing that the Finance Ministry will not accept them in toto and subject them to pruning taking into account the trends in past performance. Even then, as it is not possible for Finance Ministry officials to go through every demand with a fine toothed comb, the Ministries succeed in getting through the scanner unjustified or unnecessary spending provisions.

What eventually comes before the Lok Sabha are estimates of expenditure which are nothing but the totals of the figures agreed to between the Finance Ministry and line Ministries.

Increased compliance

The Finance Minister will do well to consider replacing this practice by an alternative top-down approach which will help him retain control over allocations to suit the realities of the situation and the rationale of the requirements. In this approach, the Finance Ministry itself determines the quantum of total expenditure as a lump sum, allowing for a percentage increase from that of the previous year.

Within that overall ceiling, the Ministry intimates to the various Ministries and agencies the Ministry-wise, sector-wise allocations which can, thereafter, serve as the basis for further discussions with the individual Ministries with a view to finalising the allocations. It can be left to the Ministries to change the allocations within each sector so long as the sector ceiling is not exceeded.

The credit for putting me wise to the new procedure belongs to a paper “Top-Down Budgeting: An Instrument to Strengthen Budget Management” by Dr Gosta Ljungman, prepared under the aegis of the International Monetary Fund. (Visit http://www.imf.org/external /pubs/cat/longres.cfm?sk)

It gives the examples of Finland, Korea, the Netherlands and Sweden where such a top-down approach has resulted in reducing expenditure by as much as 30 per cent.

The last two countries, in fact, peg the total government expenditure to a binding multi-annual ceiling (the Netherlands, four years; Sweden, three years) before the start of the budget year, with the stipulation that the Government’s Budget must conform to this pre-determined total limit.

It would be well worthwhile for the Finance Minister to examine whether this innovation will bring about an increased compliance with the imperatives of fiscal responsibility and Budget management.

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