February 25, 2020
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A Budget Wish List

How can the finance minister bootstrap a recovery on the cheap? A 10-point primer.

A Budget Wish List

In a resource constrained environment with rating agencies howling for fiscal discipline how can the finance minister bootstrap a recovery on the cheap? Here’s a take at what ails the Indian economy, what its symptoms are and what should ideally be done in the budget.

1. Inability to find a compromise amongst multiple stakeholders

All interest groups have different priorities and agenda, and no government body seems to be given responsibility to find solutions and drive a  compromise in the larger good of the country. Organisation in government must be on the basis of solutions and outcomes sought. These outcomes must be disclosed and measured. One problem in implementing and enforcing this is the government’s track record of not meeting its commitments in a time bound, efficacious manner. Budget allocations must be set aside to keep commitments, the details of which should be disclosed along with timelines. There should be a stated compounding penalty for delay. The absence of an effective deterrent has allowed the administrators to make a mockery of the system. 

2. Infinite cost escalations because of delays by various government agencies

Government administration should be organised in groupings charged with finding solutions. It must be their responsibility to get approvals to facilitate solutions from other government agencies. The government needs to be more professionally managed and would do well to adopt some corporate practices. All government agencies should disclose on their website the daily cost of delay, as measured by imputed capital cost on notional and actual capital at work. Investing in measurement, disclosure and derived accountability is the cheapest and most cost effective way of getting the Incremental Capital Output Ratio (ICOR) back to 4 from the 6.6 level it has slipped to recently—reminiscent of pre reform inefficiency.

3. Instead of being outcome-driven, government spending is outlays-driven

Outcome-based budgeting will not only increase efficiency and eliminate waste, but also allow exploration of innovative ways to accomplish the desired outcome. This outcome-driven governance will be driven by prioritisation, ensuring that future monetary allocations give precedence to improve governance. Clearly, eliminating poverty and starvation should come before cultural awareness programs and hosting international sporting events. 

4. Ad hoc economic intervention cloaked in socialistic verbiage suppresses investments

The budget should allocate capital to train and certify every minister, bureaucrat as well as members of the judiciary involved in economic policy. Specific focus of training should be to make them aware that:

  1. Ad hoc mandated price controls stifle supply response and reinvestment in all except monopoly businesses, and actually end up raising real market clearing prices for all except the specific beneficiaries of largess. Removing bottlenecks to increase supply is the only way to lower long term prices 
  2. Ad hoc banning of exports and policies dissuade integration into global supply chains, leading to Indian industry being classified as unreliable and undependable in the global context. This lack of vision in creating clusters, in turn, results in huge long term losses in the form of lost opportunities like experience curve benefits and meaningful job creation, 
  3. Subsidising items like energy whose consumption increases with per capita income actually subsidises the rich at the cost of the poor. 
  4. Handing out entitlements temporarily distorts consumption patterns and capital allocation. When this is done by deficits, it actually lead to the poor being made worse off than before. 
  5. The only sustainable way to improve the standard of living is to increase the wealth generating capacity of the economy. The way to do it is to reduce the cost of doing business, making it faster, creating relevant enabling infrastructure and talent pool, facilitating economies of scale etc so that Indian businesses becomes globally competitive. The government's proposal to impose Corporate Social Responsibility not aligned to the main activities of a business will only hinder growth.
  6. Administrative intervention in market clearing prices creates more problems and increases long term costs and the Indian experience validates this comprehensively. Investment should be made on creating a unit to measure the loss and name and shame officials responsible for the same.

5. Investment in equity unattractive because of disproportionate influence of controlling shareholders

Investing in capacity to investigate and prosecute this abuse of fiduciary responsibility will open up opportunity to channel domestic savings into equity systematically reducing cost of capital in the economy.

6.  Vast economic resources are stuck in non-viable economic entities

A bankruptcy law is required to focus on quick redeployment of economic assets and retraining of human resources.

7. Economic velocity is suppressed because of judicial delays hindering contract enforcement

Invest in increasing capacity in the judicial system, starting with abrogating court holidays, running shifts, attracting talent by economic incentives as well as upgrading evidence act to make it relevant to the electronic era and giving teeth to the perjury laws.

8. Systematic gaming of government finances by following cash instead of accrual accounting convention 

Selling capital assets to fund revenue expenses, ad hoc delays in payments due to fertiliser and energy companies, harassment of tax payers by tax claims, a large percentage of which are ultimately overturned by courts, pre-emption of financial resources by government borrowings, and not creating savings for meeting long term liabilities accruing to government employees are all consequences of this distortion. Investing in a transition team to move the government to accrual system of accounting would have amazing long term benefits. The government’s needs to fast-track this and cannot be allowed to get away with the feeble noises of acquiescence and estimating a 10-12 year period for effective transition.

9. Stifled investments because of government failure in collective planning

Invest in teams to deliver planned urban capacity and viable targets annually in urban centres, through planned investments in urban public transport, waste recycling and disposal, security, crisis management capacity and plan for recharging ground water via precipitation.

10. Persisting disguised unemployment in farms

Partner with states to incentivise creation of manufacturing clusters in industries that need incremental capacity and in which India has competitive advantages, such as electronics, pharmaceuticals, automobiles, home products etc

It’s time to dedicate a budget to the ordinary Indian who wants to work hard and get an opportunity to grow and responsibly take care of his or her economic needs, while contributing to society without waiting for a handout or genuflecting to a government plenipotentiary.

Rahul Bhasin is Managing Partner, Baring Private Equity Partner India

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