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  • OUTLOOK ARENA  >>   VIEWS ON NEWS >>  FEBRUARY 15, 2006

    India: Lessons from the US Budget...
    MYSTOCKS | FREE NEWSLETTER

    "Taxpayers in America don't want us spending their money on something that's not achieving results," is probably the strongest message that the US President has passed through his Federal Budget for 2007, released some days back. The President has also committed on continuing his fight against the 'War on Terror' through financing the same through the budget's planned outlays. The budget policies are also aimed towards promoting a strong and sustainable growth of the US economy.

    In terms of managing finances better, the US budget lays emphasis on focusing taxpayers' dollars on select priorities and enforcing additional spending restraint elsewhere across the government. The Indian Finance Minister can take a leaf (or some leaves) out of the US budget when he rises to present his' for India on February 28 2006.

    Another striking feature of the US budget is its planning for the long-term instead of charting a yearly path, as has been done in almost all the past budgets in India. Most of the budget proposals (in terms of receipts and outlays) have been made for the period between 2005 and 2011. In this write up, let us understand some of the positive features that underline the US budget of 2007, and what India can draw from the same in respect of the direction and not micro aspects.

    Restraining spending
    Call it 'washing sins of the past' or anything else, the US budget has laid great emphasis on restraining excessive spending, thus managing finances better. Going by the current details, in the long term, the biggest challenge to the US' fiscal health comes from unsustainable growth in social security and medicare spending. Programmes in these directions are growing much faster than the US' ability to pay for them, faster than the economy, faster than the rate of inflation, and faster than the population.

    The concerning fact is that as more baby boomers retire and collect their benefits, the US' deficits will grow further, if not brought into control now. While the budget does not intend to cut these programmes fully, it has indicated towards a slow their growth of the same. As such, the budget proposals for 2006 are directed towards producing US$ 65 bn in savings from mandatory programmes.

    In line with the same, the government in Delhi must make sure that Indian taxpayer's funds are either spent wisely or not at all. We believe that the focus must be on results. Funding for programmes that do not perform well must be redirected toward programmes that either have been proven to work or hold promise of achieving the government's goals most effectively.

    Creating a system of accountability
    In line with the US budget proposals, the Indian budgetary exercise also needs a system of accountability that ensures that development programmes perform as promised. What we have seen in the past is that a large number of programmes announced by the government in the budget either do not see the light of the day, or remain unfinished during the planned period. The Indian taxpayer expects the government to implement programmes that will go towards the long-term growth and development of the country. Taxpayers deserve to have their money spent wisely to create the maximum benefit.

    Managing for results
    The US budget has clearly identified a roadmap for managing results and achieving them. It indicates that budget proposals, if are to be successful, need to have a clear definition of success and a clear action plan for achieving success. Creating a system of accountability, as indicated above, shall flow from the system of managing success of planned programmes. The Indian system needs to understand this as well.

    Indian competitiveness initiative!
    The US budget document states, "The jobs of the 21st Century will require critical thinking skills, problem-solving abilities, and computer literacy. To remain competitive in the global economy, every student that graduates from high school in the United States, whether they plan to go on to college or immediately into the workforce, will need the strong analytical skills that only a rigorous math and science curriculum can provide."

    This is probably one of the most novel proposals shall go a long way in improving productivity levels in the US economy. To address these issues, the budget has proposed the American Competitiveness Initiative, which focuses on improving the country's long-term economic competitiveness. As part of this initiative, the Budget proposes a series of new and expanded programmes designed to strengthen the capacity of our schools to improve math and science learning by investing in research, teacher training, and teacher recruitment.

    An 'Indian Competitiveness Initiative' can well be the way for raising India's productivity levels going forward. India, despite moving up 5 places, is still placed 50th on the Global Competitiveness rankings. This is a good indicator of the road that we need to travel going forward. Plans and policies aimed at reinforcing India's global strengths should be directed towards unleashing the country's internal strengths, which will require more of pro-market policies from the government.

    Getting the finances right!
    Apart from the other macro measures that India will do good to emulate from the US budget, there is another micro aspect of routing spending. A look at the graphs below shall make the picture clearer. While a 65% of the US budgetary expenditure is directed towards human resource development (social security and medicare programmes included), the Indian government spends only 5% of its total expenditure towards real human development, which includes education, employment, social services, health, income and social security.

    While factors like acquaintance with the English language and high levels of technology skills will play a very vital role in the growth of the Indian economy, sustenance in this growth can only be brought about by addressing basic needs of the populace. India has been a laggard on some of these human development factors. Also, due to a huge workforce and inability in proper distribution of wealth, a large proportion (around 35%) of India's population is poor. These factors, if not taken proper care of, are likely to ruin India's chances of building up a solid and sustainable growth model for the future.

    Another 'demoralising' aspect of the Indian expenditure programme is that a large part (almost 28%) goes towards servicing government debt, which is also non-developmental in nature. The government, however, true to the stature of a developing economy, is spending a large amount (35%) towards developing physical resources, which include energy, agriculture & allied activities, rural development, industry & minerals, transportation, communication and science & technology. In contrast, the US budget has allocated only 5% towards these areas.

    Conclusion
    Each year, from about the middle of January, the people, regardless of their stature or knowledge, get caught in the whirlpool of anxiety about the 'possible' announcements of the Finance Minister in the impending budget, which is generally released only at the end of February. During this period, a flurry of guesses, both educated and uneducated, are made and even a small remark of the FM is dissected and analysed threadbare by the pundits and finally blown out of all proportions. Then follows a stream of advises as to what should be included and what not. All this while, the stock markets, the barometer of the economy and policy making (in some ways), add a measure of nervousness to the already 'feared' atmosphere.

    In these times, thus, when one would find a flurry of 'wish lists' from industry association, the hoi polloi and the elite, we also intend to propose our wishes to the FM for him to dispose in the budget for 2007. But that shall be the matter of our forthcoming article. For the moment, this is it!

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