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SUKHDEV SHAH

It would be difficult for the ordinary folks like most of us to imagine the nature and significance

of the 2011/12 national budget presented by Deputy Prime Minister and Finance Minister Bharat

Mohan Adhikari on July 15.

The budget is an annual ritual, performed near the end or before the beginning of the new fiscal

year that starts on the first day of the month of Srawan, usually the middle of July. The budget

presents expenditure and revenue estimates for the coming year in the background of currenteconomic situation and how the government foresees next years developments will be and

plans to put in place a mechanism to produce a more desired outcome.

The budget contains big numbers about planned incomes and expenses of the government,

which the government would be tasked to manage over the year, to achieve social and

economic objectives beneficial for the population.

This years budget envisages total spending of Rs 385 billion and income of Rs 247 billion,

leaving a gap between expenditure and income of Rs 138 billiona budget deficitto be

covered from foreign aid and domestic loans. The large revenue-expenditure gap means that of

each rupee government would spend during the year, over a third of it will come from foreign

aid and borrowings.

To help understand the underlying meaning of these numbers, let us start with a small

numbera billion rupees. Many with some level of education will know that this is 1,000 million.

A better way to comprehend this number is to think of what a billion rupees can buy if used

wisely and productively, which is the expectation when you are handling public money.

Suppose you want to construct housing for the poorfor a family of four. Though the costs of

land and materials have increased sharply, one unit can still be constructed for 500,000 rupees

in small towns and villages and, with a billion rupees, we can get 2,000 units. Similarly, for

school buildings costing 2 million each, 500 building units could be put in place, adequate to run

a primary school. Similarly, other public sector infrastructureroads, bridges, water supply,

irrigation, power plantscan be built for a mere billion rupees.

Now you can imagine how much more can be done with 100 billion rupees? This much ofspending will make a visible impact on access to public amenities in a single year. Continue this

for 10 or 20 years, and you can have a modern, highly-developed Nepal, hurtling toward joining

the club of emerging economies and advanced societies.

Now let us review the budget presented for the new fiscal year, 2011/12. As noted, the budget

proposes total spending of close to 400 billion rupees, intended to accelerate the pace of

countrys development, an on-going effort for the past 40-50 years.

The substance of the budget story is that there is no need to be elated

seeing the rapid growth in revenue and spending envisaged in the new

budget. As past records show, this budget game has been played time

and again and nothing seems to have changed.

Of course, the only part of the budget that directly ties to economic growth is how much of it is

used for capital accumulationfor investment in physical and social infrastructure. Budget sets

aside Rs 150 billion for such spendinginvestment in the economy to help future growth. This

is a lot of money by any measure150 times more potent than what can be done with a mere

1 billion rupees.

WASTEFUL SPENDING

Unfortunately, the above scenario is no more than engaging in day-dreaming. We have been

doing this sort of development spending now for almost half a century, backed up by our

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enormous effort at tax collection, domestic borrowing and, most importantly, attracting foreign

aid. There is no reliable historical record of how much has been spent for development purposes

until now but a rough estimate will place it at as much as 2,500 billion rupees, calculated in

todays prices and cumulated over 40 years starting in the early 1970s.

There is no evidence, however, that development spending has had a measurable impact on the

pace of economic growth, which has hovered around 3 percent rate a year on average, or

barely matching population growth. In other words, average incomes on a per capita basis has

barely moved over this long period, implying stagnant incomes and unchanged living conditions

for most in the population.

Assuming, however, a careful spending of money allocated for development purposes, economic

growth could have moved up, on average, at least an extra 2 percent rate per year, from the

1970s onwards, which means a doubling of average income per capita in 35 years. This would

have yielded a per capita income of $1,000 todayon par with Indiaswhich is twice larger

than actual per capita income we have now at $500.

Let us not exaggerate the pointthat we have not invested wisely to achieve desirable rate of

growth. Development money has been wasted in a number of other countries of the world and

Nepal may not be the worst case. Former World Bank economist William Easterly cites in his

celebrated book Illusive Quest for Growth (2002) the case of Zambia, an African country, which

received massive amounts of foreign aid starting in the 1960s. If this money would have been

invested wisely, says Easterly, Zambia would be an industrialized country today with a percapita income of $20,000 but, instead, it remains one of the poorest, with per capita income of

just $600.

The substance of the budget story, then, is that there is no need to be elated seeing the rapid

growth in revenue and spending envisaged in the new budget which, supposedly, should make

the country prosperous and people happy. As the past records show, this budget game has

been played time and again and nothing seems to have changed, in terms of the income levels

of people and quality of life generally. However, the fact of the matter is that the budget money

has been spent and books closed, and the cycle starts again.

At the end, there is little looking backan assessment of accountabilityas to what had been

promised and what was delivered. It then appears that bringing out the new budget happens to

be the only task that absorbs the finance minister and his staff and, once this is approved, the

budgeted amounts get distributed and spent, regardless of a quid pro quo.

It appears then that the accumulated level of debtnow at Rs 500 billion ($7 billion) and

ticking upwill be the only legacy we will leave behind to pass on to future generations.

Understandably, this $7 billion doesnt include $10 billion in foreign grants so far provided to

Nepalcourtesy of foreign generosity. Even though much of it has been wasted, the good thing

is that this need not be paid back. However, the unfortunate thing is that foreign donors record

those transactions as humanitarian assistance to the poor people of Nepal which, as we know it,

is hyperbole as well as hypocrisy.

The writer is an economist and former IMF staff member

sshah1983@hotmail.com