The fallacies in the Budget

Budget 2004-05 was significant mainly for two reasons, the first being the unexpected victory of the Congress-led coalition in the general elections, which raised the apprehension that economic reforms may be stalled due to the overriding influence of the Leftist allies.

Second, three of India's most reputed economists were at the helm of the Indian economy. The lethal combination of Manmohan Singh, P Chidambaram and Montek Singh Ahluwalia raised people's expectations to new heights.

Budget 2004-05: Complete Coverage

Whatever Budget 2004-05 stood for, it was definitely not a reflection of sound economics. The reasons I expound in this article. Personally, I wasn't too disappointed since I expected the same economic fallacies to be repeated in this Budget -- just like the earlier Budgets.

Reliance on welfare economics: It is a common belief that it is the government's duty to promote the well-being of the nation through numerous welfare measures. Hence, it was not surprising to see a spurt of welfare programmes announced in this Budget (again, just like previous Budgets), mostly pertaining to "rural development".

Let us first see why welfare economics as a whole is bound to fail and then discuss the inefficacy of specific welfare programmes such as employment generation, subsidies, state education and so on.

The argument that the failure of welfare programmes is inevitable was made by Nobel Laureate Milton Friedman in his best-selling book Free to Choose. Friedman's argument goes something like this.

There are four ways in which you can spend money:

You can spend your own money on yourself. For instance, you can go to a restaurant and buy yourself food -- here, you will not only keep a keen eye on your pocket, but will also like to ensure that you get the maximum value out of it.
You can spend your money on others; buying gifts, for instance. Here, though you will care about the money in the same way as in the first case, you will not worry the same way about the value you derive, because you are not directly consuming it.
You can spend someone else's money on yourself. Spending on company's account, for instance. Here, you will not care about the monetary factor as long as there is no upper ceiling, but you will be concerned about the value in the same way as in the first case.
You can spend someone else's money on yet somebody else. For instance, the welfare activities or the redistributive policies of the government. Here, neither is there an incentive to keep a close check on the amount you are spending (because it is not the government's money), nor is there any incentive to derive maximum value out of these activities (because they are spent on yet another different set of people). This lack of accountability on the monetary/ value front makes it impossible for welfare measures to succeed.

Employment generation by the state: The finance minister in his Budget speech assured that the government, "through higher investments and targeted intervention will guarantee 100 days of employment in a year at the minimum wage to one able-bodied person in every poor household".

Note the words "targeted intervention".

This intervention by the state is nothing but the precursor of full-blown socialism. It has been proved time and again that the "minimum-wage hypothesis" is the main culprit for mass unemployment, but the state will still resort to such sugar-coated words to show its false munificence for the poor.

Moreover, when

you give free jobs to the poor, not only are you destroying all the incentives for that person to work hard and earn his living but you are also supporting redistributive policies, which by nature are immoral.

Let us explore a basic question: is it the state's job to generate employment? Wouldn't the same number of jobs be created if people spent the money on themselves rather than the state?

The government's duty is to ensure that favourable conditions exist so that people can create wealth for themselves.

However, the Indian Constitution does not recognise economic freedom as a fundamental right. Wouldn't the poor benefit more if they enjoyed complete economic freedom rather than suffer from numerous rules and regulations of the government, which hurt them the most?

Subsidies: The practice of giving away subsidies to various sectors of the economy has been repeated without exception in this Budget.

The finance minister in an interview with a reputed news channel has said that he is compelled to give subsidies, knowing fully well that there are numerous leakages in the system.

His argument is that if he has to wait for the delivery mechanism to revitalise, he may have to wait forever. Such is the undaunting confidence of our finance minister in the delivery system!

So every year, the government will announce subsidies to various interest groups by taxing citizens, which will never reach the needy due to the leakages in the system -- and the taxpayers have to accept such thievery as a part of their moral obligation!

Education cess: The government has imposed a cess of 2 per cent on all taxes to provide primary education to the poor. Will this strategy help to curb the malady of illiteracy that plagues more than half of our population? Definitely not.

It's just hard-earned money going down the drain in the name of welfare economics. A more logical step would be to adopt the voucher system by which parents can send their children to any school of their choice.

Competition among the various schools to attract more students will ensure that the teachers provide quality education to the students, or close down their schools. The money would naturally be better utilised.

Public goods: The finance minister announced in his Budget speech that "crutches, wheel chairs, walking frames, artificial limbs and so on would be fully exempt from customs duty".

This statement speaks volumes for the failure of the government to provide the most essential public good, that is, the roads. Today, a little research will prove how orthopaedic clinics have mushroomed all over India. The maximum deaths are due to road accidents.

What better can you expect when the government puts the cart before the horse? That is, it prefers to invest in automobile companies (a private good) rather than providing safe roads (a public good). Wouldn't the consumers gain more if the government did away with the preposterously-high import duty on foreign cars? Was there any need to increase the outlay on defence expenditure when the most dangerous threat is actually on the roads?

The list of economic fallacies that encompass Budget 2004-05 is too long to fit here. However, if these broad arguments are appreciated, it will become clear that the road to prosperity for India lies not in the hands of the welfare state but in the hands of common citizens.

If only they are left alone by the state to pursue their life, liberty and property at their own free will.