How to think about the budget

This Saturday, I will be a part of a panel discussion about the budget.

This is happening at a college here in Pune, and today’s blog post is an answer to the question that I have been asking myself for the past couple of days: is there anything that has been left unsaid about the budget? For if not, I speaking at that panel discussion is a waste of everybody’s time, including myself.

Here are, very briefly, the three things hat I think are most noteworthy about this budget:

  1. In much the same way that we have the removal of exemptions, but not really, not just yet, we also have an admission of the real extent of the fiscal deficit: but not really, not just yet.

    To the credit of Finance Minister Nirmala Sitharaman, in this Budget, she has taken significant steps to improve transparency by presenting a statement on the vexed issue of extra-budgetary spending/borrowing (see Annex V of speech Part A and Statement 27 of the Expenditure Profile). That shows a total of about 0.85 per cent of GDP of such expenditures/borrowing in both 2019-20 RE and 2020-21 BE, excluding the footnoted reference to amounts for public sector bank capitalisation. Much of this is for financing the food subsidy through the Food Corporation of India. If added to the “shown” fiscal deficits (FD) for these years, it would raise the ratios to 4.6 and 4.4 per cent, respectively.
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  2. Revenue will be less than the government was hoping for, and as a consequence, it will not be able to spend as much as we would have hoped in an economic slowdown. We also remain dependent on disinvestments working out on a scale that has never before taken place. Read this article, by Vivek Kaul – especially the section titled “The Family Silver”. Note that this was written before the budget came out. This year’s budget is as optimistic, if not more, about income it hopes to earn through disinvestment.
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  3. We are, in the words of Shankar Acharya, lurching towards protectionism.

    For 25 years since 1991, successive Indian governments reformed our trade policies in favour of greater openness and engagement with world trade. Customs duties were greatly reduced and quantitative restrictions largely eliminated. As a result, our foreign trade — both exports and imports — expanded robustly, providing a significant boost to our economic growth and employment. Since 2017, we have reversed policy and retreated from engaging with the world economy. Our ministers and senior officials do not seem to appreciate that higher duties and restrictions on imports hurt our capacity to grow exports. No sizable, non-oil country has sustained high export growth while imposing significant duties and restrictions on imports. And no such country has sustained high overall economic growth without high export growth. We ourselves grew fastest when our exports expanded robustly (1992-97 and 2003-2012).

If you ask me, there really isn’t that much more to say about the budget, that is so noteworthy that it bears repetition and emphasis. In any case, I’d much rather think about the Economic Survey to reflect on that state of the economy, and what needs to be done about it. The budget, Andy Mukherjee says (and I agree), isn’t all that important.

But this past week, I read about Clayton Christensen and Andy Grove. Clayton Christensen, author of The Innovator’s Dilemma, and one of the most respected thinkers on strategy, passed away recently. I had been reading essays and blog posts written in his honor, and came across an essay written by Clayton Christensen himself about the distinction between the “what” and the “how”.

I’ve thought about that a million times since. If I had been suckered into telling Andy Grove what he should think about the microprocessor business, I’d have been killed. But instead of telling him what to think, I taught him how to think—and then he reached what I felt was the correct decision on his own.

The essay is much more than that, and you might want to read it. But that part truly resonated with me: the how over the what.

Now, you might be wondering about what this has to do with the talk on Saturday – or indeed about anything at all.

Well, reading this post by T N Ninan in the Business Standard is what brought the anecdote above to mind:

So it might be a good idea for the next Economic Survey to deal with not just the many “What” and “Why” questions in economics, but also the “How”. There is no other way to understand how the impossible becomes possible — as more than a campaign slogan. India struggles with budgets and procedures, and still has a major corruption problem that can send a project off the rails. China has corruption, for sure, but no other economy with a per capita income of $10,000 is able to grow at 6 per cent, or anywhere near that rate.

Of all the articles I have read about the budget and the economic survey (and there have been a fair few of them) this was the one that resonated the most. Maybe because I just finished reading (and thoroughly enjoyed) In The Service of The Republic, or maybe because of other reasons. But all of those other articles are, using Ninan’s framework, about the “what”. This needs to be done, that needs to be done, if only we had this, that or the other.

And all of those things are true, to be sure. We would be better if all of those many, many things were around. But a la Grove: how, dammit?

Here is Ninan’s solution:

“Is there a solution? Yes, railway engineers of old like the metro builder E Sreedharan, builders of government companies like D V Kapur and V Krishnamurthy, and agricultural scientists like M S Swaminathan have shown how they made a difference when given a free hand. Vineet Nayyar as head of Gas Authority of India was able to build a massive gas pipeline within cost and deadline in the 1980s. The officers who are in charge of Swachh Bharat and Ayushman Bharat, and the one who has cleaned up Indore, are others who, while they may not match China’s speed, can deliver. Perhaps all we have to do is to spot more like them and give them a free hand.”

But as any experienced HR professional will tell you, spotting them is very difficult, even in the corporate world. And as any corporate CEO will tell you, giving these talented folks a free hand is even more difficult. And as any student of government bureaucracy will tell you, achieving the intersection set of these two things in a governmental setup is all but impossible.

And so what we need to study and copy from China is not so much anything else, but lessons in achieving, and sustaining, excellence in government bureaucracy. Or, if you prefer, how to improve state capacity.

In short, quality of government, not size of government, is what matters for freedom and prosperity.

Because we could analyze the budget and its numbers all we like, but without the Grovesian “how”, the “what” is essentially theory without practice.

For just one extremely effective example of the “how”, see this.

So how did China get so very lucky?

Indeed, we may now be living at the peak of the influence of the so-called Class of 1977. A September press conference ahead of the celebration of the 70th anniversary of the People’s Republic of China gathered together three of China’s top economic technocrats: central bank governor Yi Gang, Finance minister Liu Kun, and National Bureau of Statistics director Ning Jizhe. In an unusually personal moment for such an event, they mentioned that all three of them had taken the college entrance exams in 1977.

That is from Andrew Batson’s blog post titled “A Very Fine Reallocation of Resources“. An opportunity for some of her best and brightest to learn, and therefore apply meaningful change to their society, is one important factor in China’s rise. Du Runsheng, whose write-up I linked to above,  is just one example. There are many, many more.

More important than the budget is the Economic Survey, and I think T N Ninan is right, the next Economic Survey ought to focus on the how, not so much the what.

All that being said, here is a list of articles I enjoyed reading about the Union Budget:

Lessons from 1966 and 1991 for this year’s budget.

Contrary to the received wisdom that she should take steps to increase demand, I think she should do what was done in 1966 for exactly the same reasons: being broke. No fiscal boosters to artificially increase demand.

That said she should also do what the 1991 budget did: free businesses from random, illogical and counter-productive controls.

In short, we need a sensible combination of the1966 and 1991 approaches, namely, deep fiscal prudence (1966) and a withdrawal from the economic stage (1991).

Spend less and increase non-tax revenue significantly – and that’s pretty much the best way to judge if this is a good budget or not, says T C A Srinivasa Raghavan.

Surjit Bhalla’s summary of the good, the bad and the ugly in this year’s budget. I am slightly confused about exactly what his idea of the “good” was. For me, personally, it is the government being clearer about it’s actual expenditure.

Vivek Kaul provides an excellent summary in four parts over on NewsLaundry.

Deepak Nayyar is less than impressed with the budget.

Rathin Roy remains worried about the artihmetic.

 

India: Links for 2nd December, 2019

What else?

  1. “The non-government part tends to form 87-92% of the economy. In the July-September period, it formed nearly 87% of the economy. If 87% of the economy is growing at 3.05%, the situation is much worse than it seems.”
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    Vivek Kaul about the GDP data is worse than it looks.
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  2. “At its core, Indian industry is cooling rapidly, with industries like coal, steel, cement and electricity having contracted in October. Eight core infrastructure industries have not grown in the first seven months of this year. Manufacturing, led by the automobile industry, has contracted, and mining stopped growing in the second quarter. Energy utilities and construction saw their growth rates almost halving from the same quarter a year ago. Another three months of declines will officially qualify as a manufacturing recession.”
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    The R-word is being heard, louder and louder.
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  3. “The good news is that GDP growth in the next quarter or the fourth quarter could well be a wee bit higher. The pop thesis is that given the lower base of the previous year, growth could be statistically higher—a bit like standing next to Leonardo DiCaprio, who is six feet tall, and then next to Tom Cruise, who is 5 feet 7. The bad news is that the slowdown is not going away anytime soon. ”
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    Shankkar Aiyyar, in top form.
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  4. ““Besides monetary easing by the Reserve Bank of India (RBI), the government needs to simplify the goods and services tax (GST) and introduce a new direct tax code to clear the tax jungle created by our ancient income-tax law and rules,” he says.”
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    The “he” in this case being Arvind Virmani.
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  5. This may be behind a paywall for you, in which case, my apologies. But the final link in this set is from TN Ninan over at Business Standard.