AS Finance Minister Pranab Mukherjee knows from past experience, public response to a Budget depends as much on how it is dressed up as on what it contains. Not surprisingly, in the course of a long and dilatory introduction to his post-election Budget speech, he attempted to persuade his listeners that he seeks to accelerate recovery, restore growth and do so in a fashion where the fruits of these efforts would be more equitably distributed. India, he seemed to suggest, had weathered the global crisis well and was poised to return to its years of high growth. His aim was to facilitate that process and ensure that the common man would be included among the beneficiaries of the turnaround.
The fact of the matter, however, is that in terms of new fiscal initiatives the Finance Minister has done little. He has tinkered with direct taxes, offering marginal concessions to personal income tax payers and imposing new minimum tax requirements for the corporate sector, which together with other manoeuvres are revenue neutral. Direct taxes are projected to garner the same amount of revenues as expected prior to the new tax measures.
In the case of indirect taxes, the large excise duty reductions resorted to a few months earlier as a temporary measure aimed at stimulating demand and reviving growth have not been withdrawn. The revenue loss on this count has been more than neutralised by adjustments in other areas by measures that were not primarily aimed at additional resource mobilisation. Thus, a few customs duties have been restructured to protect or stimulate domestic industry. And excise duties at the 4 per cent level have been raised (with significant and substantial exceptions) to ensure convergence in the run-up to the proposed goods and services tax (GST). In the net, these measures are projected to yield additional revenues to the tune of Rs.2,000 crore in 2009-10.
These limited initiatives on the tax front have implied that spending measures have also remained more or less the same as before, except in two areas where the Finance Ministers hands are tied. First, with the full-year effects of the implementation of the recommendations of the Sixth Pay Commission having to be recorded for the first time in the regular Budget, the salary and arrears bill of the government has registered a substantial increase. Second, since the Sixth Pay Commissions effects and the revenues forgone and the expenditures incurred as part of stimulus packages announced to address the effects of the global crisis increased the governments borrowing significantly last year, its interest bill has risen substantially. These pre-committed expenditures have resulted in a sharp increase in the non-Plan spending of the government. As a result, aggregate expenditures have risen even though there are no brave new initiatives launched by a government that has come to power with a comfortable majority and by the Congress party which has significantly increased its influence within the coalition that governs the country.
Unfortunately, the comfortable mandate and the claim of the previous United Progressive Alliance (UPA) government that its efforts at reform, growth and redistribution were being hampered by a Left that was obsessed with stalling pro-market reform had generated expectations of significant new measures. Media speculation suggested that those expectations included large tax concessions, a major privatisation thrust and substantial financial liberalisation. What is more, the Economic Survey, which was written almost as a pamphlet advocating reform, only strengthened such expectations.
However, having stuck with the status quo on the taxation front and burdened with higher salary and interest expenditures, if the Finance Minister had delivered on the expected fiscal measures, the revenue and fiscal deficits would have increased sharply from their already high levels of 4.8 per cent and 6.8 per cent of GDP (gross domestic product) respectively. Given the fiscal conservatism that characterises neoliberal ideology, this was not on.
In the event, the expectations created in the run-up to the Budget were belied. The details of the Budget were so obviously at variance with the rhetoric that preceded and accompanied it that it disappointed most, if not all. Most sections of the population see the Budget as having taken away with the second hand what it sought to give with the first. Examples were not hard to find. A marginal increase in the exemption limit and the abolition of the surcharge on income tax for personal income tax payers is accompanied by increases in indirect taxation that are bound to impinge adversely on this section. The abolition of the Fringe Benefit Tax (FBT) and a further extension of the tax holiday for export-oriented units, which must please corporations, is accompanied by a hike in the Minimum Alternate Tax (MAT) that would hurt a significant number of them. And the promise of inclusiveness for the poor has not been accompanied by outlays that match that rhetoric.
This lack of coherence implied that the first responses to the Budget were mixed and muted. But these were not the only reasons why the Budget proved a disappointment. Its principal failure is that though the Finance Minister gifts himself significant resources from non-tax sources, such as about Rs.35,000 crore from the sale of 3G spectrum and massive borrowing reflected in a 6.8 per cent fiscal deficit to GDP ratio for 2009-10, he has not done much to either spur investment or deliver benefits for the poor and deprived.
Consider the claim the Minister made that he intends to reverse the recent economic downturn and restore the buoyancy the economy has displayed in recent years. The increase in total expenditure in 2009-10, relative to the revised figures for 2008-09, amounts to 2 per cent of GDP. But, as noted, much of this increase is the consequence of previously committed non-Plan expenditures rather than Plan expenditures with long-run effects.
Thus, the budgetary support for the Central Plan, relative to 2008-09, is projected to increase by just around one half of 1 per cent of GDP. That much for the Finance Ministers claim that his Budget seeks to stimulate growth and induce buoyancy. In fact, his speech is disingenuous when it claims that the difference between the actual fiscal deficits of 2007-08 and 2008-09, amounting to 3.5 per cent of GDP, constituted the purposively delivered fiscal stimulus to combat the downturn. Much of this was owing to a pre-committed set of expenditures, which have since been erroneously treated as outlays needed to deal with the recession.
This is not to imply that the Finance Minister does not have a vision as to how growth will occur. Query him about the insubstantial increase in expenditure on rural development in its various forms and he would refer to his promise to increase the flow of credit to agriculture (from banks, and not the Budget) from Rs.2,87,000 crore in 2008-09 to Rs.3,25,000 crore in 2009-10. Ask him about the adequacy of the support provided to crucial infrastructure sectors in terms of additional public investment and he would point to the fact that India Infrastructure Financing Company Limited (IIFCL) would provide banks refinance to the tune of 60 per cent of their exposure to infrastructure projects in the private-public partnership (PPP) mode.
In sum, expenditure to stimulate growth does not come fully from the government but substantially from an ostensibly independent banking sector offering credit to the private sector. The private sector, it is presumed, will respond to this offer, with a little help from the state, and hike its investment targets. There is, of course, no guarantee that this will indeed occur.
The lack of correspondence between rhetoric and practice is not confined to the growth objective alone. It also affects the promise of being inclusive and benefiting the common man. Consider, for example, the Finance Ministers claim that allocations for a flagship programme like the National Rural Employment Guarantee Scheme (NREGS) have been hiked by 144 per cent. That is true when you compare the Budget Estimates for 2009-10 with the Budget Estimates for 2008-09. But, the fact of the matter is that since the NREGS is a demand-driven programme, the allocation for it in the 2008-09 Budget was just notional, with the promise that more would be provided in response to demand. Even with the still-limited implementation of the NREGS, actual allocations in 2008-09 were much higher than budgeted for and rose to Rs.36,750 crore. Compared with this, the budgetary allocation for 2009-10, at Rs.39,100 crore, is just Rs.2,350 crore or 6.4 per cent higher. Assuming that implementation improves and the States get their act together, this figure will be far short of what is needed.
There are many other examples of such inadequacy. The National Rural Health Mission (NRHM) has been allocated only Rs.1,730 crore (or around 1.2 per cent) more than what was spent last year, although evidence shows that India is a country where private expenditure dominates total health expenditures and leads to indebtedness in rural areas.
Despite the fact that a few years back the Supreme Court ordered that the Integrated Child Development Services (ICDS) should be universalised, the increase in allocation for this still-sparsely delivered scheme is only Rs.361 crore or 1.1 per cent more than earlier. While the right to education has been recognised, the increase in budgetary allocation for elementary education is less than Rs.200 crore.
Above all, while the UPA has made much of its proposed Food Security Act (which will, in fact, reduce allocations of rice or wheat to the poorest from 35 kg to 25 kg a month), the subsidy on food is expected to increase by just Rs.8,862 crore even though the minimum support price and, therefore, the required subsidy per kg have gone up substantially.
Put all this together and it appears that this Budget is not merely incoherent and self-contradictory but also inadequate to meet its own objective of higher growth with a human face. This, however, is not to say that this Budget lacks direction altogether. One thrust in it is to sustain concessions offered to private capital in the name of the recession. As has been noted above, a significant part of the governments stimulus aimed at combating the economic downturn was the sanction of large excise duty reductions that were expected to sustain demand. These cuts were seen as temporary. But this Budget, despite proclaiming that the worst of the downturn is over, has chosen to stick with these reductions.
More than this, the Budget pushes ahead with or promises to undertake further economic reforms that would please financial capitalists. One direction such reform has taken is a range of tax concessions that have been provided to investments made by the New Pension Scheme (NPS) Trust in private equity. Besides dividend tax concessions, these investments have also been exempted from the Securities Transaction Tax (STT). This would only encourage the diversion of savings in pension funds to the stock market in the hope of higher returns. This would benefit stock market operators, but would also increase the vulnerability of the life savings of middle-class citizens deposited in the NPS. This implicit sanction for speculation of the kind that triggered the ongoing financial crisis has been strengthened by the abolition of the Commodities Transaction Tax (CTT), despite evidence that transactions in commodities markets have grown at a pace where they point to speculative trends that clearly need reining in.
Finally, an important direction of renewed reform is the new drive for privatisation, which the Economic Survey released a few days earlier advocated. While promising to sustain public control over public sector assets, the Finance Minister has made the case in the Budget for creeping privatisation. To quote him: The public sector undertakings are the wealth of the nation, and part of this wealth should rest in the hands of the people. While retaining at least 51 per cent government equity in our enterprises, I propose to encourage peoples participation in our disinvestment programme.
The privatisation agenda is now being promoted in the name of peoples participation. The idea, ostensibly, is to obtain resources for the Budget through the sale of public equity to the public at large. In itself, this is not merely short-sighted, but, given the growing profitability of the public sector, irrational. But it may be the option the government will exercise if it finds, as is likely, that expenditures are rising more than it expected and revenues are falling short of what is projected.
The Finance Minister does know that the truly common man does not invest in equity. The people he speaks of as public stakeholders are members of the small elite who directly or indirectly participate in trading in the stock market. The idea is to sell public assets to them so that they can sell it on to higher bidders, leading inevitably to influence if not control by big private capital. It is these interests that the Budget primarily serves. But judging by the first response of the stock market, even they are not impressed.
And that possibly is because the Finance Ministry, by converting Economic Survey 2008-09 into a pamphlet advocating accelerated reform of a kind that sounds irrational given the lessons of the recent crisis, created expectations of liberalisation that it could not itself meet. This time around this could not be blamed on an intransigent Left that was unwilling to accept the reality of modern India. It is because the advocates of irrational neoliberal reforms, which restructure policies in favour of private capital, seem to be out of tune with what is feasible in actually existing capitalist economies especially those that are functioning political democracies.