The Budget 2001: Beginning
- By Dr. Anand Teltumbde
The budget 2001 earned for the Finance Minister Yashwant Sinha unprecedented encomiums from the businessmen, traders, brokers, industrialists and generally high-income people. As per their ecstatic reaction reeled off on the television the budget was a dream budget, it had exceeded even their expectations, it was the best budget in the decade etc. The economists of the establishment also used similar flowering language in praise of Sinha. Some had fallen to a ridiculous depth in giving the budget 11 out of 10. The software exporters’ lobby even declared that the budget has exceeded their demands. In short the budget that marked the inauguration of the second phase of India’s economic Reforms has showered all kinds of benefits on the elite classes.
In fact this euphoria of the ruling classes is enough to infer what havoc it would cause to the oppressed people. In the din of delight of these classes however, not a single voice taking cudgel for the people was heard in the mass media. The traditional sprinkling of decorative critique that made India a greatest operative democracy in the world also was conspicuous by its absence. It has created an impression as though this budget was sans class- universally good to all the people. It is imperative therefore for the ones who consider on the side of people to expose the real anti-people character of the budget.
The single biggest characteristic of this budget is the complete subservience of the economic policy establishment to the neo-liberal ideology propagated by the institutions like IMF, WB and WTO. This ideology has been underscoring the economic policy formulation during the last 10 years after its formal adoption by the Narsimharao-Manmohan Singh duo in July 1991, but never before it was reflected in such a pristine form as in this budget. As the evil effects of the economic reforms based on this ideology started showing up in people’s misery, the ruling classes had to indulge in political repairs and show some amount of concern for the people. This was clearly reflected in the budgets as the ruling class compromises with their avowed ideology. Although, in the recent past years, the government with the declaredly rightist ideology is increasingly reflecting its fascist tendencies in pushing its reactionary agenda, it is the first time that it is showing up in its naked form through the annual budget.
Will the Budget Spur Growth
The prominent reason resonated in the elite ecstasy for budget was that it would spur economic growth while controlling the fiscal deficit. We do know that the economic growth is not the sole guarantee for the people’s prosperity. Until there is an operational mechanism to distribute the surplus income through growth among the people, economic growth accentuates the existing inequality. As we see during the last decade, both economic growth as well as inequality had risen, the latter perhaps more speedily than the former. Still, in the prevailing milieu, the poor still have to depend on the growth in economy for it is only then that they can hope for getting jobs, income and improve their lot. It is therefore always necessary to examine the claim of growth orientation in the budget.
Economic growth results basically in two ways: 1. Short-term growth through government’s revenue expenditure and 2. Long term growth through government’s capital expenditure. Some people cite third way of exports, forgetting that the exportability also demands the above expenditure in the economy. In a way the economic growth can be construed as a manifestation of the degree of fiscal momentum in the budget. Seen thus, one does not find anything in the budget that will result into economic growth. The ratio of the revenue expenditure minus interest payment to the GDP has been falling in the reform period till 1996-97 when the trend reflected some upturn till last year. But in this budget, this trend is reversed and this ratio is slated to go below even its level in 1989-90.
The ratio of the capital expenditure to GDP is considered as a reliable indicator of economic growth. This ratio which was at the level of 5.9 % before the reforms were started (in 1989-90), had come down to 3.1 % in 1996-97. It showed upward tendency thereafter but during the last two years it again slid back to an alarmingly low level of 2.5 %. It is expected to be around this level in this budget too.
Thus, on the basis of fiscal considerations, the budget fails to promise any incremental economic growth. This inference is validated by the savings rate in the economy. The incremental capital out put ratio for our economy has been around 4. That means, even to maintain our growth rate at 6 %, the rate of savings in the economy should be 6 x 4 = 24 %. But, our savings rate also has been on decline in the reforms period and today it is at mere 22 %. There is enough ammunition in the budget, as we would see shortly, in the form of cuts in the interest rate on small savings etc., to shoot it down still further. Strategically, there are two ways to increase the growth rate, One, increase savings and two, increase the incremental capital output ration with technological inputs. There is nothing in the budget on both these counts. It is pertinent to remember that the dream growth rate of Mr. Sinha had materialized in the East Asian economies when their savings rate was over 40 %. The folly of the budget makers is that they show people the mirage of growth from the drying up oasis of savings.
The protagonists of the economic reforms have been flouting the growth statistics in justification of their policies. Their euphoria is just begun to wane when the growth rate is slowly recoiling back. It has already slid down from 6.6% in 1998-99 to 6.4 % in 1999-2000 and further to 6.0 % last year. It may at best be maintained at that level this year if everything goes smooth. The reforms had certainly enlivened the economy to a magnitudinally higher plane but its direction has not been without a question mark. The growth in the reform period mainly accrued through the impetus to service sector. The commodities sector, on the other hand, has been on decline. The growth of the industrial sector has fallen from 8.2 % in 1998-99 to 6.5 % in 1999-2000 and is expected to further fall this year. The growth of the commodity sector is an index of the demand in the economy. Its sluggishness indicates the recession in demand. The real growth in India can only accrue through boosting this demand. The export led growth that was relied upon in the reforms has been too inconsistent to depend. The budget needed to mind two basic dictums at this juncture: 1. There is need to strengthen internal demand for economic growth and 2. There is a need to increase the government expenditure for strengthening the internal demand. There is no evidence of either in the budget.
The lost opportunity
The budget makers had an unprecedented opportunity to boost internal demand but they could not see it through their glasses of neo-liberal ideology. This opportunity manifested in the form of two things: 1. Huge stocks of food grain in the government godowns and 2. Similar huge reserves of foreign exchange with the Reserve Bank of India. Today despite the declining output of food grains their stock in the government godowns are exceeding 45 million tones. The FE reserves in the RBI hovered over $ 41 billion at the time of budget making. This combination spelt a golden opportunity for the government to boost expenditure without a danger of inflationary trend that normally sets in due to increased demand for food and other commodities as a result of increased incomes in the hands of people. The food stocks could take care of the increased demand for food and the FE reserves could be used for importing other commodities to curb their price rise. Instead of spending huge money in maintaining these stocks of food grains and booking it to inflate subsidy to the poor, the government could use it for food-for-work programme. As the experience shows, it is a proven method to directly impact rural poverty. It would have also resulted into much needed rural infrastructure that has been the biggest constraint on the economic activity of our majority population. This could have pulled up the poor below poverty line and pushed them into the market for boosting the internal demand. The budget entirely foregoes this opportunity.
The political economics driving this seeming irrational behaviour of the budget makers becomes clear when we see what government seeks to do with the stocks of food. Instead of devising the ways to distribute these food stocks among hungry people as indicated above, the government proposes privatization of procurement of food grains and entire logistics operations till its distribution. The government’s liability is spelt out in terms of maintaining the safety stocks of estimated 10 million tonnes. Taking into consideration, the current stocks of 45 million tonnes with the government, it implies that there will not be any government procurement of food grains at least for 3-4 years from now. The privatization in this critical sector will play havoc not only with the poor consumers but also with the 65 % of our population connected with farming which shall be devoid of any support in the event of vagaries of nature. The field is getting opened for the big international companies to enter the Indian agro markets.
A Text Book Example of The Neo-Liberal Economics
The manifestation of the neo-liberal economics can be observed in the conditionalities and overall policy framework of the IMF and World Bank. The hegemonic shadow of this economic ideology has engulfed entire world. The salient components of this ideology is promoting entrepreneurship, reliance on free market and reduction of government interference with the free market processes. They imply reduction in the rates of direct taxes, reduction in the rates of custom duties on imports, removal of other controls on imports, reliance on the free financial markets towards financial liberalization, and control of fiscal deficit of the government. We will find that the budget 2001 is the textbook example of this policy package.
Mr. Yashvant Sinha explained his compulsion in his theatrical style. The income of the center is Rs. 281,000 crores. From this after deducting the share of the states in central tax and grants of Rs. 72,900 crores, what remains with the center is Rs. 209,000 crores. Interest payment (Rs. 101,000 crores), defence expenditure (Rs. 59,000 crores), various subsidies (Rs. 23,000 crores), pension (Rs. 16,000) totals up to Rs. 199,000 crores, leaving behind Rs. 123,000 crores for the government expenditure. The government’s unproductive revenue expenditure is Rs. 77,000 crores. Considering nominal capital expenditure the government has to take loan of Rs. 110,000 crores just to make the two ends meet. The mounting interest on the existing loans and the additional interest burden on the fresh loans will certainly push the country into a debt trap.
This seemingly transparent presentation is based on certain wrong assumptions. The first assumption is about the limitation of the government income. The ratio of the net tax revenue of the center to the GDP has been declining from the pre-reform level of 7.9 % in 1989-90 and has come down to 6.6 % in 1999-2000. In comparison with other developed as well developing countries, this ratio for India being already low, the budget proposal to reduce the rates of direct taxes and custom duties is incomprehensible. In this budget for instance, two provisions are responsible to limit the government income: 1. In the name of promotion to entrepreneurship, the grant of various fiscal concessions to corporates and high income group people and 2. Reduction in the rates of customs duty in the name of trade liberalization. Only these two things shall amount to a loss of Rs. 28,000 crores in government income.
The second assumption is about taking the growing interest burden as inevitable. After the reforms were launched, in terms of financial liberalization the government had to mobilize debt equivalent to its deficit in the open market at much higher interest rate instead of monetizing it by issuing treasury bonds to RBI at much lower rate. The rationale provided by the IMF was that the RBI’s autonomy to operate monetary policy to promote economic growth and control inflation was being eroded if it had to monetise the government deficit. As the experience shows, this autonomy in practice has never materialized. RBI is burdened with the more arduous task of controlling the exchange rate of rupee that substantially eats up its ability to devise this kind of monetary policy. The flow of the portfolio investment tends to raise the exchange value of rupee which if allowed to happen would adversely affect it. Therefore RBI needs to purchase Dollars in the market and maintain huge stock of foreign exchange to govern the rupee value in a small band. Also, in order to attract the foreign funds the country had to maintain high interest regime as ordained by the reform package. If we had independently followed our own economics, the savings on the interest payments could be in tune of Rs. 16,000 crores.
Just these two assumptions would reduce the government deficit by 40-50 % or in other words this much money could have been available for the government for capital expenditure. But, instead of taking a dispassionate relook at the cost benefit of the reforms, the government was keen to launch its second phase!
Bounty to the Rich
This is the way, the government freely distributes the bounty among the rich and then resorts to curb its expenditure in the name of controlling the fiscal deficit at 4.7 %.
Blows to the Poor
Thus each provision in the budget could be seen directionally as anti-people and in corollary pro-rich. It is amusing to analyse impact of the budget on dalits as an entity beyond the general poor and exploited masses. Because, this socially disadvantaged section of the population that admeasure approx. its 25 %, finds a token mention in a single para. The resource allocation of Rs. 280000 crores has a sprinkiling of some few crores in their name. This budget talks of increasing the budgetary provision for the Post-Matric Scholarship Scheme from Rs.72 crores to Rs.130 crore for the scheduled castes and of stepping up the plan allocation by Rs.126 crores for tribal welfare.
The budget, which is the crucial instrument in the hands of the rulers also does not seem to significantly distinguish dalits from the stock of generally poor and exploited people. This holds many lessons for the dalits, especially the educated ones who curiously tend to behave ostrich like in refusing to see the reality. One of the lessons is that the dalit destiny is intertwined with the destiny of the exploited masses in the world and the specificity of their caste cannot obliterate this reality.