Published by The Indian Liberal Group, a think tank founded in 1964 by Minoo Masani, the text titled “The Liberal Budget: Building an Equitable Society” authored by Mr Sunil S Bhandare – Chairman of the Group, Dr Ajit Karnik, Dr CS Deshpande, Mr Sanjay Panse and Ms Seetha – all members of the Indian Liberal Group was published in 2004 and has a total of three chapters: “Liberal perspectives and human development”, “The current budget scenario” and “Policy framework and structure of the Liberal Budget”.

The following text is the Executive Summary of the brief. You can read the original, unabridged version here.

Man is the measure of all things. This about sums up the Liberal credo. Liberalism has no dogma except one – the centrality of the human being; what is good for him or her is acceptable. What is not is not. Liberalism, like Socialism, aims to promote the welfare of all. As Ludwig von Mises, the great Liberal philosopher, put it, where the two differ is “not be the goal at which it aims, but the means that it chooses to attain the goal.“

Philosophically speaking, the Liberal position is very clear. It is that the business of government is governance and not business. In a Liberal State, the individual is supreme, and the State must work to further his or her potential. So it will focus its activities on law and order, defence, and physical and social infrastructure (health, education and a social safety net).

When preparing this Liberal Budget from a Liberal perspective, we have kept these fundamentals in mind. The key basic tenets of this Liberal Budget are:

• Effective Fiscal Governance
• Fiscal Consolidation and Stabilisation
• Efficiency and Productivity
• Acceleration of Growth
• Promotion of Equity

The main focus of the Liberal Budget will be issues concerning human development or human capital formation – health, education and a social safety net for those who are not capable of looking after themselves.

At the same time, no budget can be genuinely Liberal in its essence and powerful in its impact unless the overall economic policy regime becomes genuinely liberal, deregulated and capable of nurturing and fostering private and individual initiative. In other words, an interventionist State cannot be the right setting for a Liberal Budget.

Unfortunately, over the past fifty years, the Indian State has become an interventionist, appropriating practically every aspect of human life. As a result, it has spread itself too thin and cannot play an effective role in any area, let alone the areas of its main responsibility. The Liberal Budget will, in a sense, attempt to set this right and provide resources for the government to effectively carry out its main responsibilities.

What kind of targets relating to human development should the Liberal State set for itself? The Liberal Budget sets out the following nine-point objectives of a Liberal State:

1. Reduction of poverty ratio by 5 percentage points by 2007 and 15 percentage points by 2012.
2. All children in school by 2005; all children to complete five years of schooling by 2009.
3. Increase in the literacy rate to 75 per cent by 2007.
4. Reduction of infant mortality rate (IMR) to 45 per 1000 live births by 2007 and 28 by 2012.
5. Reduction in maternal mortality ratio (MMR) to 2 per 1000 live births by 2007 and 1 by 2012.
6. Improve infant and child feeding and caring practices to reduce the prevalence of underweight children under three years from 47 per cent to 40 per cent.
7. Reduce the prevalence of severe undernutrition in children in the 0-6 age group by 50 per cent.
8. Provide 100 per cent coverage of the rural and urban population with safe drinking water.
9. Provide cost-effective means of safe and sanitary disposal of solid waste and wastewater.

While framing the Liberal Budget, we have recognised some distinctive recent changes, especially the tax policy, which reflects what Indian Liberals have been advocating in the preceding several decades. This change has already brought about several remarkable gains in our economic performance, particularly in the industry and the external sector of the economy. But this exercise is far from complete. Much more remains to be done, and we will endeavour to set out a strategy to make India a truly world-class economic power over the next decade, even while attending to the basic needs of the population, particularly in rural India.

The liberal economic philosophy recognises the importance of expenditure policy as a powerful tool of fiscal policy. The expenditure policy impacts key parameters of socioeconomic development, employment generation and poverty alleviation. It directly affects or indirectly the sectoral composition of growth as well as patterns of the income distribution. Thus, an efficient expenditure policy is a critical component in accelerating growth and improving its quality.

In this context, the effort of the Liberal Budget is not merely to reduce and rationalise expenditure but to shift the focus and direction of the expenditure policy. What are the key guideposts for this purpose?

• First, expenditure growth in real terms over the next three years shall not exceed the anticipated real GDP growth.
• Second, the composition of expenditure must change decisively in favour of developmental spending over the next three years. Thus, the development expenditure ratio shall increase from the present average of about 7% of GDP to 9% in stages over the next three years and remain at least around this level after that.
• Third, the Liberal Budget strongly advocates the case for reducing non-developmental expenditure. The savings from non-developmental expenditure shall be redeployed largely to finance sustainable, well-conceived social sector and welfare programmes such as (i) primary education and healthcare; (ii) employment guarantee scheme; (iii) mid-day meal scheme for deserving school children ; (iv) health insurance for the poor; and (v) an effective pension scheme, etc.
• Last, it is imperative to devise specific qualitative benchmarks to evaluate the effectiveness of both development and non-development expenditure.

The Liberal Budget envisages a systematic and rigorous expenditure management process, essentially reflecting the following elements:

• First, each Ministry and Department shall formulate inspiring missions, aspirations and targets for its activities for the future. At the same time, there must be a mechanism for mid-course corrections when found necessary;
• Second, on the pattern of the “profit centre” favoured by corporate enterprises, there shall be “performace cells” in each Ministry and Department;
• Third, there shall be an effective performance management system to monitor the achievements separately of each Ministry and Department together with those of the top officials from the level of Principal Secretary to Deputy Secretary. This must also be accompanied by a suitable “reward – punishment” mechanism;
• Fourth, while there must be tight controls on budgets and performance against targets, there should be operational autonomy for the implementation of various projects/programmes.
• Fifth, in designing the process, there must be a participation of the officials concerned so that there is a clear understanding of the missions, aspirations and targets. Also, a quarterly report card would become a useful tool for constantly monitoring the process.
• Sixth, the process shall be transparent, and the aspirations and targets of these missions shall also become part of the public domain.

Expenditure reduction has to be accompanied by steps to raise revenues to fund government spending in essential areas. Both tax and non-tax revenues have to be tapped. The policy prescriptions (both Budget and non-budget) set out in this document will result in significant buoyancy in tax and non-tax revenues. Restoring high growth levels and increased investment activity will automatically lead to the growth of revenues.

Rationalising and simplifying Direct and Indirect Tax Laws and bringing them in line with the current needs of a liberalising and competitive global economy is an urgent task. Accordingly, in the area of tax reforms, the Liberal Budget would be guided by the following two broad principles:

(i) Any increase in tax revenues would not be by growth in the tax rates but by rationalisation and simplification of the tax system.

(ii) tax reforms would be through creating a simplified and rational tax policy and globally competitive tax rates.

It is imperative to stress that the falling tax-GDP ratio is a source of worry. Still, the Liberal State doe snot envisage any drastic increase in this, given the need for substantive reduction and rationalisation of taxes, especially indirect taxes. However, the fact remains that the State does need to raise revenue to finance its various functions. This can be done, without increasing the incidence of tax rates, through efficient and innovative tax administration.

The Report of the Task Force on direct/indirect taxes under the chairmanship of Dr Vijay Kelkar was submitted in November 2002. Though it provides radical changes in tax administration and addresses issues in the tax policies to achieve rationalisation and simplification, it has unfortunately not found acceptability with the government. However, the Liberal response to this report has generally been favourable, and hence, Liberals will give it serious consideration.

All this will lead to better tax compliance. However, there will still be a host of defaulters, and the State cannot ignore its responsibility of improving tax administration without giving draconian powers to tax authorities, which they can use to harass taxpayers. While supporting a government with a will to govern and implement laws necessary to ensure their compliance, the Liberal way does not accept actions that lead to intimidation and the invasion of the individual’s privacy.

Thus, provisions for search and seizure will be abolished since they have not served their purpose of acting as deterrents but have been misused to harass taxpayers. Similarly, the “public interest provisions” (relating to disclosure of information about the assessee, exemption or reduction in taxation rates for oil companies, etc.), which give the government undue discretionary powers, would also be abolished. Inefficiencies in the tax administration system would be eliminated, and the powers of the assessing officers will be reviewed. Tax collections can be strict without being brutal.

Taxpayers with an income up to Rs 5 lakhs will not be required to maintain books of accounts, and assessing officers will not have the right to demand books of accounts from them. Computerisation of all tax operations, including customs clearances, will be given the highest priority in the interest of transparency and efficiency.

The Liberal Budget is concerned that the ratio of non-tax revenue to GDP has declined over the years. This occurs when the tax/GDP ratio has also been stagnant, putting considerable pressure on government finances. Therefore, we will endeavour to expand resource generation through dividend and interest receipts from PSUs and Departmental Undertakings by improving their efficiency and profitability on a continuing basis.

In recent years, the Union Budget has been looked upon as an Annual Financial Statement and as a signalling mechanism to the world at large (and the investing community in particular) of the progress in India’s economic reforms programme. Hence, it is necessary to:

1. Identify some of the crucial factors that influence the Budget; and
2. Suggest specific policy reforms to enable the Liberal Budget to become functionally effective.

The process of disinvestment/privatisation of PSUs needs to be speeded up substantially and extended to state-level public sector enterprises. The criterion for privatisation must not be whether a PSU is loss-making or profit-making. The test should be whether the State should be in that field of activity in the first place. While deciding on issues of disinvestment/privatisation, the Liberal Budget will not be guided by arbitrary or ad hoc considerations of the strategic reasons for PSUs’ businesses and operations.

At the same time, while privatising a PSU, care will be taken to ensure that the process is completely transparent. Also, it is necessary to safeguard against a public sector monopoly being replaced by a private sector monopoly. The best way to do this would be to open up all sectors to competition. Where this is impossible or may take time, privatisation must be preceded by a strong independent regulator.

This privatisation exercise is a temporary one in the sense that it is correcting a policy (of nationalisation) that was adopted at one point in time and which has resulted in putting a huge strain on the fiscal health of the country. In a genuinely liberal economic environment, there will be no PSUs in areas where the private sector is interested and capable of investing.

Moreover, a whole range of reforms is necessary to improve the investment climate in the country. These include deregulation and liberating industry from the tyranny of inspectors; ending the practice of reserving sectors for small-scale industry or restricting entry into non-strategic areas; allowing companies the freedom to restructure; faster liquidation of companies; and a more flexible labour law regime, among other things. In the area of labour law, the government must not take upon itself the task of deciding the level of wages, etc. or standing judgement over whether or not companies should retrench workers. Instead, it should confine itself to enforcing contracts, for example, ensuring that workers get their termination benefits and that companies do not default on social security obligations. An improvement in the domestic investment climate need not do anything more apart from ensuring no restrictions on FDI in any areas or placing ceilings on levels of FDI.

The Liberal Budget also calls for the following crucial policy initiatives:

1. A movement towards a more liberal interest rate and exchange rate regime.
2. Agriculture: The declining trend in investment in this sector has to be reversed. This has to be accompanied by better targeting of subsidies and increased investment in infrastructure, especially irrigation, power and rural infrastructure. All controls on the domestic movement in and trade of agricultural goods need to be lifted. An atmosphere conducive to attracting private investment in the agriculture sector needs to be created. Land ceilings also discourage investment and inhibit growth. These need to be reviewed. Contract farming and partnerships between the corporate sector and farmers must be encouraged. These steps will only strengthen the agricultural sector and enable it to not only face up the global competition but fully exploit global opportunities.
3. Trading Activity: Reforms are necessary for the legal arena, which should be geared towards creating a transparent system integrating the country into a single market. States should consider a single procedure for granting licenses.
4. Physical Infrastructure: It is necessary to have a phased but definite movement towards the promotion of private sector participation and public-private partnerships in the development and/or management of infrastructure, whether it be power, roads, ports, transport or telecom.
5. Reform of Legal/Judicial Appartus: A mammoth exercise has to be undertaken to repeal and amend several Central and state-level laws to reduce the costs of doing business and promote greater economic efficiency. In addition, judicial reforms are necessary to ensure the speedy disposal of cases and enforcement of contracts. The judiciary also needs to be sensitised about the effect of its decisions in economic matters.
6. Policies of States and Local Bodies: There is a dire need to ensure the percolation of liberal policies and procedures at the State and decentralised levels of administration.
7. Independent Regulators: Even in a free economy, a certain amount of regulation (like coordination, checking negative externalities and ensuring that the rules of the game are observed) is needed. Rather than the government, the task should be carried out by independent regulators. However, these regulators must be genuinely independent. They are still heavily dependent on the government, and their independence depends on the person heading the regulatory body. This is not a desirable state of affairs and will neither promote true competition nor check market failure.
8. Restructuring Government: The re-orientation of the role of the State will necessitate a restructuring of government as well. Reducing the number of government employees is an important measure which is outside the scope of the Budget but has a tremendous impact on it. Government salaries and pensions account for over 25 per cent of total revenue receipts and are one of the committed liabilities that cannot be cut down. The only answer, then, is to reduce the number of people to whom salaries are to be remunerated. Each ministry must be subjected to a performance audit, and ministries/departments found inconsistent with the liberal conception of the role of the State should be closed down. At the same time, a Liberal Budget does not call for a blind downsizing across the board. What is needed is rightsizing. This means that staff will be retained – and numbers increased – in areas where the government is needed, and this should be accompanied by measures to ensure accountability and increased responsibility.
9. Political Environment: It will not be possible to create a liberal economic environment unless there is a major change in the political environment and culture in the country. Political parties and politicians must learn to rise above narrow personal and partisan ends and addresses the needs of the nation.

Besides, there is the phenomenon of legislative work being sacrificed at the altar of political grandstanding in Parliament and state assemblies. All this needs to be checked.

Law and order is another issue that needs to be addressed. Though not an economic issue, it has a far-reaching impact on the country’s economy. Neither domestic nor foreign investors would like to put their money in areas where the law and order situation is poor. The government has to make efforts to address the root causes of violence and maintain law and order firmly. In substance, the Liberal economy requires the Liberal Budget of the kind envisioned in this document.

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