A few days ago, Sanjay Pugalia, head of CNBC-Awaaz - which is the Hindi business channel of Network 18 - and I were discussing the forthcoming Budget. I told Sanjay of a little-known economist from the Carnegie-Mellon University called John Muth, who back in the very early 1960s, wrote a paper that after about a decade and a half came to be recognised as the foundation stone of the rational expectations theory. He died in 2005, unrecognised by the Nobel-wallahs, but the man who developed his theory, Robert Lucas, did get the award.
Muth put forth a simple proposition, namely, that because people are rational, they do not make the same mistake twice. He might have over-stated it a bit, but he got it largely right: certainly rational people don't make the same mistake several times over.
The question then arises: why do Indian governments repeat their mistakes so many times? Why do they think that Budgets in an election year must contain a large number of handouts and lollipops to the electorate when, since 1971, an incumbent central government has been voted back to power only once (in 1984), and that too because of a massive sympathy vote that rode on the back of a terrible hate campaign against the Sikhs?
The strategy of a populist Budget has worked only once, which was the first time: in 1970, when Indira Gandhi was in full socialist flow and gulled the voters of March 1971 with her rhetoric.
But even that Budget was supported by a lot of other things. By itself, it is doubtful if it would have succeeded. After 1971 populist budgets have never succeeded, never, not once. Yet, come election year and governments go all silly and giggly and cause enormous damage to the fisc.
Consider the evidence. Although 1979 was not a designated election year, Charan Singh presented a highly populist Budget that February. If Budgets made a difference, in the election that came around unexpectedly towards the end of that year, he ought to have done well. But he just managed to retain his own seat and his party was defeated.
The next election year was 1984 and the Budget contained the following gems. I have given the para numbers as well, just in case. And, this is just a very small sample:
- "46. ...The total allocation for various programmes of the Ministry of Rural Development would be Rs 932 crores (Rs 9.32 billion), which is nearly double the amount of Rs 480 crores (Rs 4.8 billion) provided in 1983-84..."
- "47. The allocation for Rural Landless Employment Guarantee Programme, which seeks to provide employment for 100 days in a year to at least one member of every rural landless family, is being stepped up to Rs 400 crores (Rs 4 billion) in 1984-85 as against a provision of Rs 100 crores (Rs 1 billion) in 1983-84...depending on the progress of expenditure, more funds will be provided during the course of the year as necessary."
And so on.
The next election year was 1989. Actually Rajiv Gandhi had wanted to hold the election in 1988 and so the 1988 Budget was also a populist one. But he got cold feet because of some new Bofors revelations and elections were held on schedule a year later. That resulted in two successive populist Budgets. Yet the Congress was comprehensively beaten.
After telling the country a nice joke, namely, "The limited availability of concessional finance has compelled us to increase the share of commercial borrowings, but we have tried to keep these within limits that are manageable. We do not envisage any difficulty in servicing our external debt", the finance minister went berserk and announced a barge load of schemes and expenditures for employment, education, health, sanitation, irrigation and so on. But the Congress was defeated.
- 1996 was the next election year (no Budget in that year), so the previous year's Budget did the usual things:
- "60. ...The plan allocation for the Department of Rural Development has been increased from Rs 1,263 crore (Rs 12.63 billion) to Rs 2,195 crore (Rs 21.95 billion). The plan allocation for the Department of Rural Employment and Poverty Alleviation is Rs 6,437 crore (Rs 64.37 billion)."
- "65. The plan allocation for the Department of Education has been increased substantially from Rs 1,825 crore (Rs 18.25 billion) to Rs 3,388 crore (Rs 33.88 billion)."
- "73. ...The increase on account of higher subsidies for phosphatic and potassic fertilisers will be Rs 1,724 crore (Rs 17.24 billion) over last year's provision of Rs 500 crore (Rs 5 billion)."
And so on. But the Congress lost nevertheless.
In 1997, the government a month after the Budget was presented. Inder Gujral, who became prime minister, tried the Pay Commission trick for the 1998 election, but to no avail. It had huge budgetary implications, though.
The 1999 general election was a freak event, so the Budget was spared. But the 2004 election was held on schedule and the BJP-led coalition repeated the mistake of its predecessors. Although the election was over a year away in February 2003, the government was not taking any chances. Paras 14-62 and 71-86 were devoted to the electorate.
Yet, the National Democratic Alliance lost.
So back to the original question: why do governments keep repeating their mistakes? In John Muth's terms, are they irrational?
Thus, will the present finance minister come up with a sad little Budget that someone will confront him with a decade from now? Or will he make a clean break with the past?
I think he will make a clean break, but then I am always wrong about him.
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