A paradox of a deal

Published : Mar 17, 2001 00:00 IST

The Budget exemplifies how what may be a dream for some can be a nightmare for others.

THE initial euphoria that greeted Budget 2001-02 has waned. Stock market analysts who dominated the airwaves had declared it a dream Budget and rated it close to 10 on a ten-point scale. Their enthusiasm was understandable. The Budget had done away with earlier surcharges on income tax; reduced tax on dividends distributed by domestic companies from 20 to 10 per cent; exempted from taxation capital gains derived from the sale of securities and units so long as they are reinvested in primary issues of pu blic companies; and provided a host of tax holidays to investments in sectors ranging from infrastructural areas to Internet Service Providers (ISPs) and broadband networks. The Sensex immediately captured the enthusiasm in market circles generated by th ese concessions, rising by more than 170 points on a single day.

But the euphoria in the markets proved short-lived. A bear-run, allegedly based on insider information, sent the Sensex crashing, forcing the regulator to intervene and launch an investigation. This, however, was not a chance event that was unfortunate f or a Finance Minister who had 'performed' well. It brought home a message that is central to the assessment of the current Budget: markets are not benign institutions peopled by agents involved in arm's-length transactions; they are sites of contest b etween powerful and manipulative entities which have no scruples while engaged in their search for ever-higher profits.

WHY, it may be asked, does this message matter for the Budget? It does because what has been seen by many as most significant in this Budget are a set of "off-budget" measures that are based on the premise that markets left to themselves are the best mea ns to organise economic activity. Examples of such measures mentioned in the Budget speech are many, but two deserve special mention.

First, consider the food policy initiatives "announced" in the Budget. From a budgetary point of view what matters here are the subsidies, which have to be met by the exchequer. In the neo-liberal ideology dominating public policy debates these days, suc h subsidies have been considered unsustainable. Hence, the fact that food subsidies budgeted at Rs.8,210 crores in the Budget for 2000-2001 have turned out to be close to 50 per cent higher at Rs.12,125 crores, has been bothering the advocates of reform.

What needs to be noted is that this increase has not been the result of the largesse of the government vis-a-vis the poor. Rather it is the result of the foolishness of the government in repeatedly raising the issue prices of food distributed through the public distribution system (PDS) to levels even higher than warranted by the increase in procurement prices, in order to reduce food subsidies. The net result has been a sharp fall in offtake from the PDS. In the event, even in a year when foodgrain out put growth has been low, the government has found itself saddled with huge and rising stocks, which increased its outlays on the costs of carrying these stocks. It is those costs that the higher subsidy goes to meet. A wrong policy aimed at reducing subs idies has ended up increasing subsidies even further.

That experience would suggest that what the government should do is revise issue prices downwards, as well as use the foodstocks available with it to launch food-for-work programmes that improve rural infrastructure, so as to reduce stocks to reasonable levels. The Finance Minister has, however, offered what he thinks is a completely different solution. In order to deal with the embarrassment of rising food subsidies, he has suggested that the government should virtually wind down the system of procurem ent and distribution of foodgrains. The Food Corporation of India (FCI) should procure only the quantity required to maintain a "security reserve" - an estimated 10 million tonnes. If implemented, this would mean no procurement for the coming few years, since the government holds more than 45 million tonnes of food in stock.

Meanwhile, food movement and food distribution throughout the country is to be freed and privatised and the task of servicing the PDS is to be left to the States, which would be provided "financial assistance" to meet the subsidy for the population below the poverty line. This would mean that the PDS is to be in large part dismantled. Markets would reach food to the people, including those who live in food deficit States. Immediately this would spell disaster for the farming community, because the FCI w ould disgorge its stocks. And if bad monsoons persist and stocks dry up, it would mean that rising food prices in the future would erode the real incomes of consumers. Some sections would lose heavily at all times. In the first instance, that is the caus e that would be served by leaving food distribution to the market, in keeping with the neo-liberal agenda.

However, these markets are not to be left to themselves. In order to facilitate their functioning, the Finance Minister has announced that private agents investing in the handling, storage and transportation of foodgrains would enjoy one of the many long -term tax holidays incorporated in the Budget. The only section to gain would be large conglomerates like Cargill, waiting in the wings to rush into the food distribution business.

The other area where markets (read oligopolistic firms) are to be allowed to operate freely is in defining the terms of purchase of labour power. Giving official sanction to a recommendation that has been mooted by powerful lobbies, the Finance Minister has suggested that firms employing up to 1,000 workers are to be allowed to close and/or retrench and layoff workers freely. As has been noted in a section of the media, providing this freedom, hitherto available only to units employing up to 100 workers , to those employing up to 1,000 workers, increases coverage to more than 95 per cent of the organised industrial sector.

India's industrial history is replete with instances where because of whimisical private decisions, intra-family and inter-family business disputes and actions aimed at siphoning off surpluses from still-profitable industries to fund speculative investme nts, many viable units have been rendered sick. Even where the government, through the financial institutions, wields substantial influence over individual firms, such experiences have been common. Letting an industrial sector replete with examples of su ch units full freedom over the livelihoods of workers is obviously disastrous.

Advocates of reform would argue that things have changed in post-reform India. The growth of the stock markets to maturity and the greater ease with which poorly performing firms can be punished by stockholders and even be taken over by rivals, has made the stock market itself an important means through which markets discipline errant managements. That view, to start with, is derived from a dubious reading of the dominantly American system of corporate governance. Further, it is of little relevance to a country in which markets are dominated by a few manipulative big players, including foreign institutional investors (FIIs) with little interest in productive employment in the domestic economy. This is a lesson that the post-Budget plunge in stock marke ts drives home to anyone with a mind that is still open. To use such arguments for freeing labour markets is to risk the livelihoods of an already overexploited labour force by subjecting their tenure to the dubious whims of profit-hungry capital.

THE Budget is not the true province of these market-friendly measures. Neither does the Finance Minister have jurisdiction to decide upon them, nor can he use the Budget speech as the means to put them in place. The issue that remains is what the Finance Minister has done with regard to what he can do through a Budget, namely, spur growth and redress inequality. Here the record is dismal.

The first premise of recent Budget-making exercises, including the present one, has been that India's prime fiscal task is to reduce the fiscal deficit. The second is that the deficit is high because of expenditures being higher than warranted. These ass umptions are trivial and wrong. India's economic situation today calls not for fiscal compression but fiscal expansion, for two reasons.

First, the accumulation of huge stocks of foodgrains, estimated at 45 million tonnes, with the government. Second, the comfortable foreign exchange reserves position of the central bank, with foreign currency assets alone amounting to $41 billion.

When food stocks are aplenty and foreign currency reserves comfortable, the manoeuvrability of the government is substantial. It can undertake expenditures without the perennial fear that plagued it in the past that such expenditures, by raising employme nt, incomes and the demand for food, could create a food shortage that triggers an inflationary spiral. And even if the economy, in the wake of such expenditure, runs into temporary supply bottlenecks in particular sectors (such as say, sugar, edible oil s or onions), the foreign exchange reserves can be used to resort to imports to ease supply and dampen price increases. The danger that expenditure increases on the part of the government would trigger inflation hardly exists.

This ability to increase expenditure without triggering inflation constituted an opportunity because it occurs in a context where demand in the economy is sluggish and poverty remains high. India's GDP growth rate is estimated to have declined from 6.6 p er cent in 1998-99 to 6.4 per cent in 1999-00 and 6 per cent in 2000-01. What is more, even this rate of growth has been ensured because of the buoyancy of the services sector, whereas the commodity producing sectors have been performing poorly. Industri al growth, placed at 8.2 per cent in 1998-99, fell to 6.5 per cent in 1999-00 and is expected to be considerably lower this year. And there is little disagreement on the fact that the sluggishness in industrial growth is a result of slackening demand gro wth in the system. The obsession with the fiscal deficit has resulted in the loss of a major growth opportunity.

Consider now the Finance Minister's premise, repeated in his Budget speech, that the fiscal deficit is where it is owing to excessive expenditures. This assumes that receipts are given. What the Minister failed to note is that between 1989-90 and 1999-20 00 the Centre's net tax revenues to GDP had declined from 7.9 to 6.6 per cent, or by 1.3 percentage points, resulting in loss of revenues totalling close to Rs. 30,000 crores. This decline occurs in a context where India's tax-GDP ratio is low compared t o many other developed and developing countries, providing a case for raising the tax-GDP ratio over time. Instead, what we have is a decline.

The tendency to ignore the decline in tax-GDP ratio is not without motive. It allows the government to extend its neo-liberal tax concessions aimed at stimulating the private sector. In this Budget these concessions have not merely come in the form of th e withdrawal of surcharges on income taxes, of 10 per cent in the case of corporates and 15 per cent in the case of non-corporates, without substituting them with other direct tax levies, but through several other measures directed at finance and industr ial capital mentioned earlier. These, combined with other concessions, are expected to result in a revenue loss of Rs.5,500 crores of direct taxes in a year. In addition, the drive to reduce customs tariffs even when they are below those specified in com mitments made to the World Trade Organisations , is expected to result in a revenue loss of Rs.2,128 crore.

EVEN while conforming to the thrust of neo-liberal reform, these tax losses are a problem, given the obsession with the fiscal deficit. Yashwant Sinha deals with this problem in three ways. He has partly made up for them through an ostensible "restructur ing" of excise duties aimed at moving to a single 16 per cent rate of Cenvat on all commodities. It hardly bears stating that a common rate of duty on commodities, varying from manufactured necessities like soap to luxuries like automobiles, is regressiv e by definition. Yet the Finance Minister's excise homogenisation initiative has involved reducing duties on a range of luxuries varying from automobiles to refrigerators and increasing them to double their current ad valorem levels on many mass consumpt ion goods. The net estimated effect is additional revenue mobilisation to the tune of Rs.4,467 crores from indirect taxes other than customs duties.

Not being enough, this has to be compounded with a squeeze on capital expenditures. The ratio of non-defence capital expenditures to GDP, which had fallen sharply in the last two years, is budgeted to remain at its low level in the coming year.

Finally, 'revenues' have to be generated from hasty and large-scale privatisation of lucrative public assets. The Budget provides for a record Rs.12,000 crores to be garnered from disinvestment of equity in public sector undertakings. Even the revised fi gures for 2000-01 provide for Rs.2,500 crores from disinvestment. Thus far, the government has managed to garner only Rs.788 crores from privatisation, Rs.552 crores of which comes from the Balco deal. This implies that over March, hasty privatisation to the tune of Rs.1,712 crores would have to be gone through in order to validate the Budgetary estimates. Big bargains await those who are cash-rich. And those bargains would get better still when the rush to find another Rs.12,000 crores from privatisati on gets under way in 2001-02.

Combining all this with optimistic projections of tax-buoyancy, the Finance Minister has declared that he would reduce the fiscal deficit to 4.7 per cent of GDP in 2001-02. This compression from the fiscal side is to be accompanied, if the Finance Minist er has his way, with a 2 per cent reduction in government employment and a sharp reduction in private employment. That would reduce demand even further. An inherently inflationary budget paves the way for demand compression and slower growth. That is rea son enough to suspect that what is a dream for some can prove a nightmare for others.

C.P. Chandrasekhar is Professor of Economics, Jawaharlal Nehru University, New Delhi.

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