In all democracies fiscal management is by its nature intensely political. Lobbies and constituencies need to be placated, and the ordinary business of government needs to be financed. It is unreasonable to expect excessive coherence.

Even so, like Winston Churchill's pudding, the last couple of Budgets of the NDA government were clearly somewhat theme-challenged. As momentum develops for the 2005 Budget, to be presented at the end of February, it is worth asking what the theme might, or should, be, and whether the absence of a theme makes any difference.

By the time of the Budget a number of building blocks will be in place domestically and internationally. The report of the Twelfth Finance Commission has been submitted (though not yet revealed). The Mid-Term Review of the 10th Plan should also be ready. The results of the state elections will be available.The US presidential election is behind us, the US Cabinet is largely known, and President Bush will be a man in a hurry, seeking to use the two years before the next congressional elections to exercise his mandate and with an eye to his historic legacy.

With a new Commission President and team of commissioners also installed in the European Union, the Doha round should gain additional energy. India is receiving respectful international attention in a way it has not for almost 40 years. A bold and successful Budget would add considerably to the momentum that already exists.

The members of the economic team, as well as the Prime Minister, have been unusually and commendably forthright in signalling their individual wish lists. The Left supporters of the government also leave us in little doubt as to their agenda. At this point, however, each constituent is pulling in a different direction.

The finance ministry and the Reserve Bank of India [Get Quote] are anxious to uphold the Fiscal Responsibility and Budget Management Act, and the associated rules notified by the ministry soon after this finance minister assumed office.

Despite the patently inefficient nature of some government revenue spending, particularly subsidies, the ministry view (presented in the Kelkar task force report of last July) is that India's revenue deficit problem is primarily one of declining, inadequate and inefficient taxation, and that the simplest way to hit the revenue-deficit target is through a radical reform of indirect taxes.

The Left supports the ministry in its desire to boost revenue, but not on the cuts in public investment that are implicit in the fiscal deficit targets of the FRBM rules.

The Planning Commission sides with the Left in seeking to boost public investment. It would like to do so without crowding out private investment, by monetising the incremental expenditure so as to widen the current account deficit.

The RBI is mounting an extremely spirited defence of its policy of foreign exchange intervention. In the mid-term review of its Annual Policy Statement, in the recent Report on Currency and Finance (2003-04), and in press reports of remarks by the deputy governor before the Pravasi Bhartiya Divas last week, the RBI continues to insist that prudential considerations justify not only its present stock of reserves but also further accumulation.

This apparently implies further turns of the merry-go-round of exchange market intervention, sterilisation operations, and increases in short-term public debt.

The macro framework necessarily must include views on the future of the financial sector. In some extremely bold and challenging remarks before a financial sector conclave in New Delhi last week, the finance minister laid out an impressive vision of an Indian financial sector increasingly integrated with the world economy, able to take on foreign competitors in the domestic market, and in due course becoming an internationally competitive sector following in the footsteps of the software- and information technology-enabled sectors.

Most thoughtful observers would accept that such international competitiveness requires a combination of more effective competition in the domestic market, together with continued moves to liberalise the capital account. Such competition is clearly inhibited by several factors.

These include common ownership of the bulk of the domestic banking system by the public sector and the opposition of the Left to diluting public equity in the public sector banks.

While these are long-standing elements of the Indian financial system, more worrying are the moves toward shotgun consolidations of the public sector banks, as also the itch that the public sector displays in nominally private sector organisations, as revealed by the attempted coups at both IDFC [Get Quote] and more recently at UTI Bank [Get Quote]. Also, the RBI insists that capital account liberalisation must await fiscal consolidation.

The Budget speech offers the government with an important opportunity to impose some order in these debates and to articulate a coherent, considered vision of its economic strategy. I believe that this articulation should include a microeconomic dimension, a macroeconomic dimension, and a doctrine on a modern role for public sector corporations.

On the microeconomic side I would like to repeat a suggestion made in an earlier column, that a powerful unifying theme could be the support of greater competition in the domestic economy.

This would commit the government to battle for the consumer and to challenge monopolies and cartels whether in the public or the private sector. As noted by the finance minister, the focus on competition is a characteristic of the National Common Minimum Programme.

A competition focus would help in several ways. It would legitimise further radical trade reform (badly needed both for domestic competitiveness and in the light of the various bilateral free-trade agreements we are entering into).

Second, it would provide the justification for empowering independent regulators to take on powerful public sector incumbents, particularly in the infrastructure and energy areas. This is a priority stressed by the Prime Minister himself.

Third, to the extent that caps on FDI in such areas as telecoms, civil aviation, and the financial sector effectively protect vested interests in the domestic economy, the relaxation of these restrictions could best be justified again in terms of facilitating entry.

Enhanced competition would need to be accompanied by a better designed social safety net, one that addresses frictional unemployment, not only long-term poverty.

This microeconomic strategy needs to be complemented by a macro doctrine, or anchor. If I read the RBI's writings correctly, they are still targeting the monetary base.

I would suggest that, for a couple of years at least, we target the current account deficit as our main macro objective, to ensure that the fiscal-monetary mix is such as to allow the economy to absorb a prudent, sustainable quantum of the foreign savings that wish to enter India. If this involves a certain amount of real exchange rate appreciation, so be it.

Finally, we need the government to offer a clearer articulation of how it sees the public sector in a modern, competitive economy. A possible model is exemplified by the national airlines: allow the incumbent to continue, but license new competitors so that each sector can discipline the other.

The risk is that the government will end up destroying even the limited franchise value that these enterprises possess. It is clearly an inferior solution to privatisation, but is superior to the public sector monopolies of the past. We will need to learn to live with it.