The wages of cynicism

Print edition : March 25, 2011

FINANCE MINISTER PRANAB Mukherjee arrives at Parliament House to present the Budget, on February 28. - VIJAY MATHUR/REUTERS

Budget 2011-12 is afflicted to a far greater degree than before by a kind of cynicism that leads to policy paralysis.

IT is a strategy that seems to have been honed to perfection. When the Finance Minister rises to present the Budget, he launches on a long and tiresome speech filled with trivial detail. The intent is to make attention flag. Much of the detail, which fills Part A of the speech, has little to do with fiscal policy or the strategy being adopted to mobilise additional resources and allocate them in directions that reflect a clear agenda for development. The intent is to obfuscate the nature of the budgetary exercise. Some of the detail relates to allocations to existing or new programmes and initiatives, with the size of such allocations varying from a few crore to a few thousand crore rupees. The intent is to prevent early judgment of whether the allocation to a particular sector, given its size and requirements, is significant or not.

The Minister combines all this with small concessions to some sections, promises to others and statements that make inconsequential measures seem important. The intent here is to shift the debate to whether this is a soft Budget or not. What is kept out of the speech per se are the numbers that could show that much of what the Minister claims to deliver have not been provided the resources needed for implementation. The intent seems to be to divert the nation's attention by offering some concessions and wasting time on detail so that only after immediate interest in the Budget has waned the real character of the Budget is revealed.

For those who missed the actual event in Parliament or on television, this is a description of the Budget speech for 2011-12 delivered by Finance Minister Pranab Mukherjee. He pursued the strategy to perfection, but he does not seem to have succeeded fully in realising his objectives. It has not taken long for many to realise that a fundamental feature of Budget 2011-12 is that it does not have any focus or strategy whatsoever. As a fiscal package it is an almost random set of expenditure increases, very few of which are significant when measured as a ratio to gross domestic product (GDP). Above all, while paying lip service to inclusion, it is seen as delivering little of it.

Fiscal conservatism

The crux of this Budget is that the Finance Minister has chosen to stick to fiscal conservatism and keep aggregate expenditures in control. Plan expenditures as a ratio of GDP, which rose from 4.6 per cent in 2009-10 to 5 per cent in 2010-11, are budgeted to fall to 4.9 per cent of GDP. And non-Plan expenditures, which fell from 11 to 10.4 per cent of GDP in the course of the first two years, are budgeted to fall further to 9.1 per cent of GDP. There is likely to be a contraction, if anything, in expenditures.

In fact, the contraction is likely to be even more, since the Finance Minister will not have the benefit of the additional Rs.72,000 crore in non-tax revenues relative to the Budget that he obtained this year from the sale of 3G and wireless broadband spectrum. Thus, non-tax revenue receipts are estimated to fall from Rs.2,20,148 crore in 2010-11 to Rs.1,25,435 crore in 2011-12.

But what is surprising is that despite that fall, aggregate revenues are expected to rise marginally from Rs.7,83,833 crore in 2010-11 to Rs.7,89,892 crore in 2011-2012. This is to be ensured by projecting an increase in tax revenues of more than Rs.1,00,000 crore, from Rs.5,63,685 crore to Rs.6,64,457 crore. This increase is not to come from additional resource mobilisation. As the Budget speech makes clear, while the Finance Minister expects to garner additional revenues of Rs.11,300 crore from indirect taxes, he expects to lose Rs.11,500 crore from the concessions he has given on the direct tax front. So, revenues are optimistically expected to increase because of buoyancy and better compliance.

Overstated revenues

There is reason, therefore, to suspect that the revenue estimates for next year are exaggerated. In all probability, the increase will not be realised and expenditures will have to be cut further. This kind of enforced austerity, which affects expenditures directed at the poor, is expected in a year when the Finance Minister expects to obtain Rs.40,000 crore by selling public assets under the garb of ensuring people's ownership of the public sector. Much of that money is to be directed at realising fiscal deficit reduction targets.

In fact, if the position taken in the Budget on subsidies is an indication, policy is geared to further excluding rather than including the poor. On subsidies, the Finance Minister declared in his speech: To ensure greater efficiency, cost-effectiveness and better delivery for both kerosene and fertilizers, the government will move towards direct transfer of cash subsidy to people living below poverty line in a phased manner.

While cash transfers are poor substitutes for subsidies and are therefore controversial (as discussed in an accompanying article), the statement does not make clear what this targeted transfer will do to the volume of subsidies. An examination of the figures, however, makes that clear. It shows that aggregate subsidies, which rose from Rs.1,41,351 crore in 2009-10 to an estimated Rs.1,64,153 crore in 2010-11, are expected to decline to Rs.1,43,570 crore in 2011-12. This decline is before taking into account the erosion of the real value of these subsidies on account of inflation.

Slashing subsidies

There are two ways in which Pranab Mukherjee expects to ensure the slash in subsidies. The first is by reducing fertilizer subsidies by around Rs.5,000 crore and petroleum subsidies by a huge amount of nearly Rs.15,000 crore. Both these are possibly going to be realised through a shift to a cash transfer system.

That will happen in a year when oil prices are expected to rule extremely high and when the government has signalled that it is not willing to reduce duties on petroleum products to neutralise even a part of the price increase. Even if domestic prices are adjusted to take into account increases in international prices, the government could have reduced the proportional or ad valorem duties it levies on these products to reduce the burden imposed on consumers. Thus, for much of the population the higher prices of fertilizers and petroleum products and their knock-on effects on inflation seem inevitable.

The second way in which subsidies are to be reduced is by capping the food subsidy in nominal, money terms in a year when the Food Security Act is supposed to be enacted and implemented. The total subsidy on food in 2011-12 is budgeted to remain at the previous year's level of around Rs.60,500. This is despite the high food price inflation and the promise of the United Progressive Alliance (UPA) to extend and expand access to the public distribution system (PDS).

This cut in subsidies is likely to aggravate ongoing inflationary trends. Besides, the Finance Minister's decision to make up for the revenue loss owing to his direct tax concessions with increases in indirect taxes would in a number of cases contribute further to inflation. The Budget appears to be contributing to, rather than combating, inflation.

Inflation

The Finance Minister claims that he is addressing the inflation problem through supply-side adjustments aimed at increasing the production of food articles and streamlining the supply chain with a set of small expenditures and some gratuitous advice to the States. While this claim is made, allocations show no effort whatsoever to step up Plan spending in the agricultural sector and reverse the long-term decline in public capital formation in agriculture-related areas.

Central Plan outlays on agriculture and allied activities, which increased from Rs.11,014.14 crore in 2009-10 to Rs.14,361.55 crore in 2010-11, are budgeted to rise only marginally in nominal terms to Rs.14,744.15 crore in 2011-12, which amounts to a significant decline in real, inflation-adjusted terms. The corresponding figures for rural development are Rs.38,569.04 crore, Rs.46,104.1 crore and Rs.46,292.08 crore respectively, which too point in the same direction.

Increased credit flow

Unwilling to spend money on building rural infrastructure and enhancing productivity to restore the viability of crop production, the Finance Minister seems to be hoping that the rural population will be able to borrow its way out of an agrarian crisis. Towards that end he has called for an increase in credit flow to the rural areas from Rs.3,75,000 crore to Rs.4,75,000 crore.

Credit is indeed important, but private debt is no substitute for public investment. In fact, there is much evidence to show that public investment is needed to stimulate private productive investment in agriculture. Thus, the Budget does little to address the long-term supply constraints that underlie the inflationary surge.

Pranab Mukherjee, of course, claims that he is adopting more immediate measures to protect the really poor from the worst effects of inflation. An example he gives is the decision to link wages paid under the National Rural Employment Guarantee Programme (NREGP) to inflation. But those wages have been fixed in nominal terms at Rs.100 a day, which is less than the legal minimum wage and can hardly be considered adequate protection against hunger and malnutrition.

Pretence of inclusion

The refusal to consider the legally declared minimum wage an inviolable benchmark is visible elsewhere as well. When the Minister declared that he was doubling the wages paid to anganwadi workers to Rs.3,000 a month, all he was doing was bringing that wage in line with what is paid under the NREGA, which, as noted, is short of the minimum wage. But even faulty and inadequate measures of this kind are presented as major advances towards inclusion of the poor. The mismatch between claims and policies in this area is reflected in the allocations to the social sectors. Though the Central Plan outlay on social services such as education and health are budgeted to rise from Rs.1,36,941 crore in 2010-11 to Rs.1,53,182 crore in 2011-12, that increase is almost matched by a budgeted decline in non-Plan expenditures in this sector from Rs.35,085 crore to Rs.20,862 crore.

In sum, Budget 2011-12 is afflicted to a far greater degree than before by a kind of cynicism that leads to policy paralysis. No more is the Budget seen as an instrument through which resources are mobilised not just to keep growth going but to distribute its benefits to those left behind or marginalised by the growth process. The cynicism runs so deep that those responsible for policy are not willing to heed calls even from within their own party to garner resources for enhanced social expenditures and social protection. The treatment being afforded to the Sonia Gandhi headed National Advisory Council is evidence enough of this.

This kind of cynicism and brazenness is disconcerting because among the economic benefits expected from functioning within the framework of parliamentary democracy is a check on the executive arm of government in the form of a fear of inflation, a distaste for excessive inequality and a sensitivity to deprivation. This seems to be lacking today.

State capture

There are two factors that could account for this. One is the possibility that what we are witnessing is a form of state capture, in which those holding the policy reins do not believe they need to do things that give them legitimacy and help them win voter support. That is seen as the task of those managing parties and not governments.

The other is that the powerful within the executive arm believe that fiscal policy is no more an important instrument of development policy. This seems to be part of the belief that private initiative and markets, facilitated by government largesse of course, will deliver growth, the benefits of which will in time reach the people.

There is evidence of such belief in this Budget too, which has much on offer for private capital, both domestic and foreign. For example, bond and mutual fund markets have been opened up further to foreign investors, who have been provided a substantial concession in the form of a reduced withholding tax.

Privatisation of the public sector is to be accelerated. Entry for corporates into banking is to be permitted. And, the revenue forgone on account of exemptions and tax concessions for corporate taxpayers alone is not just high, but is projected to increase from Rs.72,881 crore in 2010-11 to Rs.88,263 crore in 2011-12. That sum far exceeds the subsidy on food, for example, that is to be curtailed.

This kind of exclusionary policy is sought to be justified by focussing on the growth achievements of the country, led by the private sector. The obsession with growth does have some fallout for capital spending in certain areas.

Central Plan outlay for the energy sector, which rose only from Rs.1,14,307.9 crore in 2009-10 to Rs.1,26,225.24 crore in 2010-11, is projected to rise to Rs.1,55,495.16 crore in 2011-12. The corresponding figures for industry and minerals are Rs.30,690.33 crore, Rs.38,851.66 crore and Rs. 45,213.76 crore respectively, and for transport Rs.86,453.03 crore, Rs.98,726.87 crore and Rs.1,16,860.91 crore respectively.

The UPA-II government is conscious that its growth obsession requires that the infrastructure needed for the private sector to flourish has to be invested in. But given the absence of even a semblance of economic governance and the evidence of fiscal conservatism associated with neoliberal ideology, even these objectives may not be realised.

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