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.

Wrong Assumptions

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

  1. The imprint of neo-liberal ideology cannot be missed in anywhere in the budget. The following provisions for instance clearly favour the rich:
  2. Withdrawal of the surcharge on the income tax: The 10 % surcharge levied on the corporate tax and 15 % surcharge on others has been withdrawn. It will benefit right from the high-income bracket salaried people to the industrialist and foreign investors.
  3. The dividend tax has been reduced from 20 % to 10 %, again benefiting the capitalist class by crores of rupees.
  4. Full exemption of the tax on capital gains if it is invested in the primary issues. This seeks to impel hard earned savings of common man to share market. It is well known that the speculative world of the share market is governed by big money bags in the ring who eventually siphon of such moneys of small fish through their net.
  5. Many other investments have been given tax exemptions or tax concessions in the budget the benefit of which again would accrue to the rich.
  6. The reduction of custom duty even below the levels committed to WTO will promote the influx of the foreign goods and endanger the Indian industry. Contrary to commonplace understanding the brunt of this also is borne by the working class. The capitalist can have various options to compensate his loss but the worker gets thrown on the road due to the job loss.
  7. Rationalization of the excise duties to partially compensate loss of Rs. 2,200 crores has raised excise duties on the manufactured goods for people’s consumptions and reduced it for the luxury items. It is clearly regressive to have a common rate of excise duty on the luxury items like cars and air conditioners and the necessities such as oil, soap, pens and pencils. The rich are expected to benefit by Rs. 4,400 crores through this measure.

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

  1. The reduction of the capital expenditure as explained above is going to impact the poor disproportionately.
  2. Reduction of the interest rates on the provident fund and small savings schemes by whooping 1.5 % shall mean direct attack on common people. This is prompted by the need to control the swelling burden of the interest payments by the government in order to control its fiscal deficit (remember the theatrics of the Finance Minister about the debt trap!). For this the government touches the provident fund, which by definition is meant to provide for the poor for their future needs.
  3. The interest rate reduction announced in the budget has impelled the RBI to reduce the bank rates and consequently the interest on bank deposits have also come down. Considering the prevailing rate of inflation of 8.57 % and the net interest rates on the bank deposit, it is increasingly leading to a funny prospect of eroding principal as the time passes by. Since, common people depend on bank deposits for their savings, the impact on them shall be severe.
  4. Divestment of the government’s equity in PSUs is estimates at Rs. 12,000 crores in the budget. It is obvious that the privatization of PSUs leads to downsizing and spells death knell to many. Dalits shall be the worst sufferers, as besides losing the opportunity of job gains through reservations, they are rendered vulnerable for any kind of attack in absence of any protective cover. The revised estimates for the current year is scaled down to Rs. 2,500 crores. Out of which govt. could mop up just Rs. 788 crores, Rs. 552 crores being from the controversial BALCO deal. The balance divestment of Rs. 1,312 crores must have been planned on the lines of BALCO deal to be effected within a month. However, in view of the BALCO controversy refusing to die this money may not materialize. The government may resort to divest its equity in the stand-alone refinery companies to the oil PSUs and compensate for this loss.
  5. The budget anticipates the tax collection to grow by 14 %. With the reduction of rates across the board, it is unlikely to materialize. The impact of this will further reduce the capital expenditure and accentuate the difficulties of people.
  6. The government has declared its intention to reduce its employment by 10 % in the next five years. It will impact dalits by way of reservation. But that is not all. The reduction of the government employment will severely affect the state of public services such as sanitation, health and school education in non-metro India used by the poor. In fact, there is huge requirement for these services in the country but the government is just not concerned with it. The sphere of employment accounted by the government in India is much smaller in comparison with the developed and developing countries that offer public services to their citizens.
  7. Labour law reforms proposed in the budget inter alia shall allow the management of companies employing less than 1000 workers to close down the company or effect reduction in its employment by any other means without any prior permission. It also seeks to liberalize the provisions relating to casual employment including its regularization. All this is going to impact the poor people severely.
  8. The budget envisages cancellation of reservation for certain products such as toys, leather goods etc. in the small-scale industries. Already the reforms have led to the closure or sickness of lakhs of small-scale industries in the country. This is going to be a final whip on the back of a dying camel. Since this sector is the major employer of dalits and other downtrodden people, the impact of this move also is clear to be seen.
  9. The government proposes to start a micro-credit movement in the rural area with the intial provision of Rs. 40 crores. The rural people will get easy loans for their consumption through this scheme. This innocuous move is really meant to convert the rural areas into a market for plunder of the MNCs as many studies on similar schemes in other countries have revealed. They want to seed consumption habit of rural masses in a particular way. Already the satellite television has polluted the living of rural masses and distorted their consumption pattern. It is not difficult to see that in the remote villages Pepsi or Coke being easily available but not even the life saving drugs. As many studies have revealed, the rural masses easily fall prey to the urban allurement and reduce the expenditure on essentials as education, health etc. of their children.
  10. Privatisation of the procurement and its logistics operation for the Public Distribution System envisaged in the budget is going to result in raising the prices of food grains. It provides for distribution of food grains through the PDS with increased subsidy for the people below poverty line but for the rest of the population it will all be the market. It is going to impact people severely in short term and in long term hand over our food production sector to the transnational conglomerates.

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.

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Source:D-Mag March Edition
Referred by: Sashi Kanth
Published on: June 1, 2001
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