Debating India


The missing `human face’

Friday 30 July 2004, by PATNAIK*Prabhat

The Budget has missed the opportunity to reconcile liberalisation with the welfare of the masses, as UPA leaders appeared to promise. Instead, it signals the continuation of the policies of liberalisation.

JPEG - 20.2 kb
Soldiers of the Mahar Regiment prepare themselves for a demonstration of battle deployment of arms and equipment at Chiloda, near Ahmedabad. Defence expenditure has gone up by Rs.11,000 crores over and above the sum provided by even the interim Budget of the previous NDA government.

BUDGETS in India tend to get hailed for precisely what they are not. The current year’s Budget, for instance, has been hailed as being "pro-poor, pro-farmer", having "the fragrance of the village" and "having a vision for agriculture, irrigation and rural development". Nothing could be further from the truth. The outlay for the Department of Agriculture and Cooperation remains at the same level as in the National Democratic Alliance government’s (NDA) interim Budget - Rs.3,014 crores. There is no additional outlay over what the interim Budget had provided for the food-for-work programme. And the extension of coverage from 1.5 crore to 2 crore families under the Antyodaya Anna Yojana had also figured already in the interim Budget.

In fact, paradoxically, for a government committed to Rural Employment Guarantee, there is a marked decline in Central Plan outlay on rural employment compared to 2003-04 (RE), from Rs.9,640 crores to Rs.4,590 crores. True, the outlay for 2003-04 was inflated because several rural areas were declared "calamity-affected" and the Finance Minister promised financial assistance upon request this year too. But even if we remove this special component from both years’ figures, the outlay actually decreases from Rs.4,751.25 crores to Rs.4,310 crores. If we take the outlay for the Department of Rural Development as a whole, again excluding the "calamity relief" component, the increase is meagre, from Rs.10,612 crores to Rs.11,437 crores. No doubt there are off-Budget measures promised, such as the Rural Infrastructure Development Fund, and the doubling of credit to agriculture over three years, but the Budget itself is extraordinarily niggardly towards agriculture and rural development, contrary to the promise of the Common Minimum Programme (CMP).

The Budget does bow in the direction of the CMP by raising the amount of budgetary support for the Plan by Rs.10,000 crores over the provisions of the interim Budget. Of this, however, a significant amount of Rs.4,910 crores, according to the Receipts Budget, which is financed by the 2 per cent cess levied on five taxes, should go for education. The remainder is too small to make much difference. By contrast, defence expenditure has gone up by Rs.11,000 crores over and above the sum provided by even the interim Budget of the NDA government. Questioning the need for such an enormous jump in defence expenditure may not be de rigeur, but the contrast between the attitudes to defence and rural development is quite striking, more characteristic of the NDA than of the United Progressive Alliance (UPA). It comes as no surprise that former Finance Minister Yashwant Sinha has expressed "satisfaction" over the increase in defence outlay while calling the education cess, perhaps the most positive feature of the Budget, a "mindless act".

WHAT is dubious about the Budget is not just its commitment to the CMP, but also its macroeconomics. The relentless pursuit of neo-liberalism, especially during the NDA years, had imposed a drastic deflation on the economy, compressing aggregate demand and giving rise to a combination of unutilised industrial capacity, unsold foodstock, and increased unemployment. Boosting domestic demand through increased government expenditure, and doing so via increased outlays in rural India, was the obvious need of the hour. The Budget not only does not raise outlays in rural India significantly, but it does not even give much boost, as it stands, to aggregate demand in the economy. This is so for two reasons: first, the fiscal deficit is supposed to come down from 4.8 per cent of gross domestic product (GDP) in 2003-04 (RE) to 4.4 per cent in 2004-05, which is contractionary per se; and second, since a large chunk of defence expenditure would go for equipment imports, representing a demand leakage from the economy, the 27.7 per cent increase in defence expenditure, which significantly alters the composition of public expenditure, would have a further contractionary effect. In short, the Budget as it stands does not free the economy from the scourge of deflation.

But, as almost everyone recognises, the revenue estimates of the Budget are grossly unrealistic. Income tax revenue is budgeted to rise by 26.5 per cent over the revised estimates of 2003-04, despite the fact that as many as 14 million tax payers, out of a total number of 27 million tax assessees, are being taken out of the tax net. (This measure, incidentally, has to be rectified since in its present form it introduces anomalies such that people with higher pre-tax incomes end up having lower post-tax incomes in absolute terms compared to those with lower pre-tax incomes.) Corporation tax revenue is expected to grow at an even more phenomenal rate, 40.4 per cent. The Budget has, of course, increased the rate of service tax from 8 to 10 per cent and extended its coverage. It has also introduced an extremely innovative tax on stock market transactions, though it has removed the tax on long-term capital gains, entirely without any justification. (Interestingly, the introduction of a stock market transactions tax, in addition of course to capital gains taxation and larger service sector taxation, was advocated by a convention of economists, organised by Social Scientist and Sahmat, in New Delhi on July 5.) But a major assumption behind the revenue estimates is that a "tidy sum" would be fetched from all tax arrears, which is rather sanguine.

If, in the likely event of tax revenues falling short of Budget estimates, the government cuts back on expenditures in order to meet the fiscal deficit target, then the deflationary scourge on the economy would persist and the CMP would remain even more of a chimera. But if the revenue shortfall gets covered by a larger fiscal deficit, then aggregate demand would receive a boost and the CMP targets would appear less remote. True, even in such a case, we would not have used the best means of boosting aggregate demand, viz. through rural development expenditure; we would have essentially boosted demand through tax-cuts on middle income groups and some increase in Plan outlays (apart from the limited stimulus of defence expenditure). But at least there would have been some escape from the scourge of deflation.

JPEG - 19.4 kb
The Life Insurance Corporation of India building in Chennai. The Finance Minister’s claim that the insurance sector meets the CMP criteria for FDI defies logic. The government-owned insurance companies have far greater experience, a far larger reach, far greater social commitment, and a far better record of honouring claims than foreign companies.

Hence it is important that the Finance Minister stick to his expenditure targets even in the event of a revenue shortfall. Such a course would no doubt be contrary to the Fiscal Responsibility and Budget Management Act, but that is a piece of legislation with which the government must not tie itself down. Inspired by Right-wing American ideologues like Buchanan and meant to appease finance capital which is always opposed to state activism in matters of expenditure, the Act constitutes an insult to intelligence. "Thou shalt not have a fiscal deficit exceeding a certain proportion of GDP from now to eternity" cannot possibly be accepted as an immutable value-judgment. In the European Union (E.U.), where there is a limit on fiscal deficits under the Maastricht Treaty, as part of the currency unification process, France and Germany have recently been violating the limit. In the U.S., from where the preaching on fiscal orthodoxy originates, the recent boom has been stimulated by a substantial expansion of the fiscal deficit under George W. Bush. And yet in India the NDA has tied everybody’s hands by enacting this law, which is theoretically absurd. In a demand-constrained system, harping on keeping down the fiscal deficit is bad economics, apart from being socially retrograde. And this is all the more so when the expenditure financed by the fiscal deficit creates demand within the public sector itself and hence gives rise to larger public sector profits. (These theoretical arguments are discussed in my paper "The Humbug of Finance", Frontline, February 4, 2000.)

But quite apart from general theoretical considerations, there is a further specific reason why this Act is absurd at the present juncture. We have had huge foreign exchange inflows through foreign institutional investors (FIIs). The Reserve Bank of India (RBI), quite rightly, has prevented the rupee from appreciating too much (and thereby precipitating a domestic de-industrialisation) by holding on to reserves which currently exceed $120 billion. The high-powered money created as a consequence has boosted bank reserves though the demand for bank credit from quarters that the banks consider creditworthy (which unfortunately excludes the peasantry and petty producers) has been limited. To support banks’ profitability, the RBI has been putting government securities into their portfolios (in what are misleadingly called "sterilisation" operations). In the process, however, the RBI’s own holding of government securities has gone down dramatically and with it the RBI’s own profitability.

This decline in RBI’s profitability is significant not only in itself but also for an additional reason, namely that much of the finance for rural credit through the National Bank for Agriculture and Rural Development (NABARD) comes from the RBI’s profits. With the drying up of the RBI’s profits there has been a drying up of such funds for rural credit as well. It is extremely urgent that additional government securities be put into the RBI’s portfolio. For the government to refuse to do so because its hands are tied by the Fiscal Responsibility Act is folly beyond belief. In short, to have a Fiscal Responsibility Act that limits the size of the fiscal deficit, when there are no controls over the inflow of finance from abroad, is plain illogical. This bit of absurdity inherited from the NDA government must be done away with. At any rate, the Finance Minister, if he is serious about his commitment to the CMP, should pay little heed to it.

Such commitment also requires a degree of control over capital flows into and out of the country, a pre-condition, as everybody must recognise after the Asian currency crisis, for overcoming thraldom to the caprices of globalised finance. Unfortunately, the Budget not only shows no recognition of this, but has even taken a few limited steps towards increasing the role of globalised finance in our economy, such as raising the investment ceiling for FIIs in debt-funds from $1 billion to $1.75 billion, and allowing banks, including foreign banks, greater latitude in the capital market. In fact, while the RBI Governor spoke recently with legitimate concern about "India becoming a parking place for dollars", the Finance Minister, in contrast, wanted to make the Indian capital market "attractive" for globalised finance.

LIKEWISE, the Finance Minister’s decision to raise the foreign direct investment (FDI) cap in telecommunications, civil aviation and insurance is a thoroughly unwarranted step. His claim that the insurance sector meets the CMP criteria for FDI defies logic. The government-owned insurance companies in India have far greater experience, far larger reach, far greater social commitment, far greater expertise and a far better record of honouring claims than foreign companies. To induct the latter into the economy serves no other purpose than gratuitously handing over a chunk of the lucrative Indian market to them. Raising the FDI cap in telecommunications hands over a strategic area to foreign investors and in the process goes beyond what even the NDA had dared to do. And raising the cap in civil aviation amounts to giving foreign companies, again quite gratuitously, a share of the profitable Indian market at a time when the global industry continues to be in crisis.

The Budget does, of course, put forward proposals to strengthen the healthy public sector enterprises with equity support of Rs.14,194 crores and to set up a Board for Reconstruction of Public Sector Enterprises to advise the government on the measures to restructure ailing public sector enterprises. But, this healthy concern for the public sector is belied by the plan to disinvest in the National Thermal Power Corporation (NTPC).

An intellectual Gresham’s Law is operating in economics these days, whereby bad economics drives out good economics. A completely erroneous proposition, namely that a fiscal deficit can be "closed" through disinvestment proceeds, has become "acceptable" and underlies the NTPC disinvestment. But since those buying such equity do so not by skimping on their flow expenditures on consumption or even investment (surely even the government itself does not want private investment going down for financing the purchase of equity), covering a fiscal deficit through disinvestment proceeds is different from covering it through taxes, which do curtail flow expenditures. In fact, since the whole rationale for covering a fiscal deficit at all arises from the presumed need to ensure that the economy does not face excess demand pressures, "covering" a fiscal deficit through disinvestment is no "covering" at all. It merely constitutes an unnecessary and unwarranted transfer of public assets to the private sector.

The implementation of the CMP requires a strengthening of State government finances, which are in a crisis for no fault of theirs. The two main reasons for this crisis are the implementation of the Fifth Pay Commission recommendations in line with the Centre, which the States could not possibly avoid doing; and the exorbitant interest rates charged on Central loans to the States. While the Budget does reduce interest rates on fresh Central loans to 9 per cent, it is silent on the issue of debt write-off, which even the NDA government’s Planning Commission had proposed for non-small savings debt. And the eagerness to introduce value-added tax (VAT) when there has been no study whatsoever of its consequences and when the Centre’s promise of full compensation to States extends only to one year is completely unjustified. (The case of Haryana which has made a revenue gain from the introduction of VAT cannot be cited to justify its introduction in other States since Haryana is a virtually metropolitan State). The introduction of VAT has the potential to inflict great damage on State government finances and hence should be eschewed until its consequences are better understood.

THE first Budget of the UPA government was eagerly anticipated by all for the signals it would provide about the ways of the new dispensation. While many believe that "liberalisation with a human face" is an impossibility, that the immanent logic of "liberalisation" pushes governments, no matter what their political complexion, into bowing to the caprices of globalised finance, and hence necessarily having to sacrifice welfare objectives (whose achievement therefore requires abandoning the neo-liberal path), the outlook of the UPA leaders is presumably different. They believe that a reconciliation of "liberalisation" with the welfare of the masses is possible.

The 2004-05 Budget would have been the means for them to show how such reconciliation is possible. What we have instead, in substantive terms, is little of "the human face", but a continuation, no doubt in a less aggressive manner than the NDA, of "liberalisation". The identity of the fly trapped in the fly-bottle may have changed, but it still remains trapped in the fly-bottle.

See online : Frontline

SPIP | template | | Site Map | Follow-up of the site's activity RSS 2.0