The morning-after view

The annual budget speech of the Indian finance minister became a media spectacle after the Asian Games of 1982. The widening reach and rapid spread of television, especially colour television, began the budget day tamasha. Till then the good and bad news from the budget was heard on radio and read next morning in newspapers.

Prime Minister Rajiv Gandhi’s decision to allow live telecast of budget presentation and then get government and non-government analysts to appear on Doordarshan, minutes after the finance minister presented his budget to the Lok Sabha, to discuss its salient features, not only took budget presentation and analysis into people’s bedrooms but also made celebrities of staid fiscal analysts. It all began with Prannoy Roy on Doordarshan. He still soldiers on, but a new generation of TV anchors and producers have taken over the budget circus.

While media coverage has improved, instant analysis has created its own problems. Almost every year the finance minister and his officials are forced to step in and explain the budget to clear the air. The Bombay sensex’s sharp fall on budget day was, however, partly due to poor drafting of the speech and partly due to genuine confusion about the likely impact of some of the proposals.

That the sensex recovered smartly next morning is clear evidence, if evidence was needed at all, that finance minister Arun Jaitley and his ministry must improve their communication skills. The confusion created by the announcement on employees provident fund (EPF) is a classic example of the wages of poor drafting and weak communication. While on the topic of drafting and communication — why do finance ministry officials allow the finance minister to read such a long speech if he cannot stand for so long? All the right political and economic buttons could have been pressed in a one hour speech, if the speech had been smartly crafted and drafted.

The focus of much of the post-budget commentary has been on (a) the balance struck between “Bharat” and “India” in the Nine Pillars of Budgetary Strategy spelt out by Mr Jaitley; (b) adroit fiscal management, balancing the need to keep the deficit low while stepping up government spending; and (c) tax reform and several pro-reform steps taken to ease the business of doing business. In each case the proof of the pudding will be in the eating. 

The bottom line as far as Mr Jaitley’s third budget is concerned is this: it has helped enhance his credibility as a finance minister. All the chatter about the Prime Minister changing his finance minister will now be stopped. Not only has Prime Minister Narendra Modi lent his imprimatur to the finance minister, but Mr Jaitley has also demonstrated his capacity to deliver.

Defence Spending: One of the ‘morning after’ comments on the budget has been about defence spending. Defence analysts have noted that nothing on the defence budget figures in the budget speech. This is rare. Most finance ministers, over the years, have chosen to make the inane statement that whatever the actual allocation for defence in the budget they would not hesitate to open their purse strings if the nation so requires. While this sounds very patriotic, the fact is that over the years, and irrespective of which party is in government, the defence ministry’s ability to spend what is allocated has been found wanting.

There is in Mr Jaitley’s decision to reduce financial support for the ministries of defence and external affairs an important message – this year will be the year of getting domestic policy right. If the Indian economy recovers, if investment spending is stepped up and everyone wants to ‘Make in India’, then India’s global profile would improve, even with reduced spending on foreign affairs and defence.

Critics of the finance minister among defence analysts have, however, raised alarm over the fact that defence spending as a percentage of national income is today back to where it was in the early 1960s, before the Chinese attacked India and the Indian government went running around the world to buy better defence equipment. At around 1.75 per cent of national income, defence spending is almost half of where it ought to have been.

So what is the ideal ratio for defence spending? This question was addressed by the National Security Advisory Board (NSAB) in 1999. As the convenor of the NSAB’s economic security group (which included former Reserve Bank of India deputy governor Rakesh Mohan), I wrote a paper pointing to the fact that the global average for the ratio of defence spending to national income right through the 1990s, the post Cold War decade, was 3.0 per cent. India exceeded this level only twice. In 1964-66, as a result of the post-1962 arms purchase and defence build up, and in 1985-87, when Rajiv Gandhi chose to undertake massive purchase of defence equipment. 

The fact is that India’s defence spending has never exceeded the 3.0 per cent of GDP mark since 2000, and has in fact been going down. In part this is because India’s national income grew rapidly over the past decade and a half, and in part this is because successive governments have delayed defence purchases.

While improving relations with one’s adversaries through better diplomacy, and making India more attractive to the world through a more liberal economic policy is certainly a good idea, in the medium term the requirements of defence cannot be ignored. Moreover, the development of a home-based defence manufacturing capability is a corner stone of the new Make in India strategy of the Modi government.

If industrial development has to be stepped up through investment in defence manufacturing and defence-related industries, the government will have to spend more on acquisitions and promoting domestic capability and capacity. 

So, while the ratio of defence spending to national income need not go up all the way to 3.0 per cent of GDP, as envisaged by the NSAB at a time when India’s national income was just about a trillion dollars and growing at 5.5 per cent, it should certainly be above 2.0 per cent, for a two trillion dollar economy.  

It seems any increase in defence spending can now only come from an improvement in the government’s fiscal capacity. That makes better fiscal management a national security priority. After all, it was Kautilya who said several centuries ago, in the Arthashastra, “from the strength of the treasury the army is born”.

The writer is an author and policy analyst